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June Monthly

June Monthly

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The investment climate in June will be shaped by forces that emerged in May.  Many countries began relaxing lockdowns and various activity-based alternative data, like traffic pattern, Open Table Reservations showed improvement on the margins.  Sentiment surveys, while mostly still depressed, were better than April readings.  The long slog back has begun.  There was also optimism over several different vaccines that had been initiated or soon will begin human tests.  The hope is that with regulatory forbearance, a vaccine may be ready by year-end.

At the same time, the US-China rivalry escalated.  The novel coronavirus added a new dimension to the older problems.  Restrictions on Huawei were tightened.  Nearly three dozen Chinese entities were sanctioned for human rights violations.  The US may tighten rules on foreign company listings on the US exchanges that may force the delisting of some Chinese-based companies.  The Trump Administration is urging that the government pension fund does allow investments in Chinese stocks or bonds.

China continues to press hard.  It has struck out at Australia for seeking an independent investigation into the origins of the coronavirus.  It successfully blocked Taiwan from being granted observer status at the World Health Organization. Border tensions with India have seen troop movements on both sides.  Beijing also signaled that it would insist on changes to Hong Kong's Basic Law to give local officials greater authority to repress dissent spurring fresh concern.  The US announced intentions to curb Hong Kong's special trade privileges after the State Department questioned its autonomy.

March was when the markets froze up.  Governments and central banks around the world began responding in earnest to the pandemic. The MSCI All Country World Index (ACWI) bottomed on March 23. So did the S&P 500, while Europe's Dow Jones Stoxx 600 bottomed a week earlier (March 16), and the MSCI Asia Pacific Index recorded its low a couple of days later (March 19).

April was about further policy response. Efforts were increased in terms of size, scope, and/or time. Officials were successful in removing the far left-hand tail risk. Punishing volatility in the markets eased. Stress in the funding markets relaxed.  The compression of demand, supply chain disruptions, the contagion in the US meat processing industry, and some peculiarities with the settlement of the deliverable futures light sweet crude oil contract, distorted the commodity prices. The negative oil prices were quickly reversed and were near $20 a barrel by the end of the month.

May was when the high-income economies likely hit a trough as many countries begin relaxing their lockdowns. Part of the rise in the price of some industrial commodities, including gasoline and iron ore, reflects a marginal improvement in demand. Of course, the difference between relaxing lockdowns and economic recovery may be quite stark, but the first thing that happens is that contractions slow and stop.

The lack of a strong EU response and a German Constitutional Court ruling made it more difficult for the ECB to keep the peripheral premium from widening over Germany and throwing a spanner into its transmission mechanism.  However, the ECB is likely to expand its Pandemic Emergency Purchase Progam of bond-buying and is undeterred by the controversial court decision.  The European Commission incorporated that German-French proposal for a 500 bln euro grant facility funded by EU bonds and the desire to appease several Northern European creditor nations, with a 250 bln euro loan facility.  Several countries in eastern and central Europe already had strained relations with Brussels, and they were put-off by all three camps without having been consulted.  A unanimous decision is required and this may difficult to reach next month and investors can be expected to punish Europe by withdrawing savings on disappointment (i.e., selling the euro, equities, and peripheral bonds)

Some countries, central banks that have not adopted negative rates, are explicitly considering them. The Bank of England and the Reserve Bank of New Zealand are the leading contender but will likely explore other policy options first. The Bank of England is likely to expand its bond-buying program in June.  Several facilities that the Federal Reserve announced are beginning to be formally launched, and this will continue into June. The Federal Reserve has pushed back against speculation that it would adopt negative rates.  Targeting a longer maturity than overnight fed funds is under consideration.  In the market's vernacular, this is called yield curve control.  

Several political decisions will be made in June as well that could have a meaningful impact in the months ahead.  These include whether UK Prime Minister makes good on this threat to leave the free-trade talks with the EU if there was no substantive progress by June, or will OPEC+ extend its deepest output cuts or begin relaxing them? In the United States, emergency unemployment benefits expire at the end of July.  Will they be extended?

Dollar:  The early survey data for May showed a definite improvement over April.  While it is commonly recognized that the US economy will contract sharply in Q2, data needs set the stage for a recovery in Q3 to validate expectations. The capital markets have continued to stabilize, and this has seen the Federal Reserve taper its Treasury purchases to $5 bln a day down from $75 bln a day at its peak in late March and early April.  Fed officials have made it clear that there is little interest in adopting a negative target rate.  Besides scaling its programs, a yield curve control strategy, which would entail targeting a longer-dated maturity in addition to the overnight fund's rate, could be the next innovation.  The Bank of Japan, for example, targets the 10-year bond, while the Reserve Bank of Australia targets the 3-year yield.  We suspect that if the recovery disappointed for any reason, it could be adopted by late Q3.  There is some risk that the US trade relations Hong Kong is adversely impacted, and exposed businesses should test contingency plans. 

Euro:  The euro has remained rangebound against the dollar in May, and volatility has eased.  Europe moves to center stage in June.  First, the ECB meets on June 4 and is widely expected to increase its Pandemic Emergency Purchase Plan by 250-500 bln euros.  The modest usage of the Pandemic Emergency Long-Term Refinancing Operation (less than one billion euros), some observers see the terms (-0.25 bp below the zero repo rate) could be made more attractive.  Second, and not entirely unrelated, the ECB's Targeted Long-Term Refinancing Operation, with a rate that could be as low as negative 100 bp if specific lending targets are met, could see strong demand of a billion euros or more.  The amount is likely to be inflated, but the rolling into the new facility some past operations that were made on less favorable terms.  Third, the EU heads of state are expected to decide on the joint effort to promote economic recovery among competing proposals. A compromise between conflicting interests could prevent a unanimous decision and precipitate a crisis.    Even if successful, a joint bond may not be the prelude to a fiscal union as partisans argue.  The European Stabilization Mechanism and the European Investment Bank issue bonds that are collective obligations.  Still, if Europe is the sum of its responses to the crisis, its collective action now is critical.   

(end of March indicative prices, previous in parentheses)

Spot: $1.1100   ($1.0955) 
Median Bloomberg One-month Forecast $1.1075 ($1.0925) 
One-month forward  $1.1110 ($1.0960)    One-month implied vol  6.4%  (6.3%)    


Yen:   The dollar-yen exchange rate was stable in May between JPY106 and JPY108.  Violations were rare and shallow.  Public support for Prime Minister Abe has fallen drop, and this may be invigorating plans for a JPY100 trillion (~$926 bln) economic relief package.  The decline in energy prices, which Japan does not exclude from its core measure that the central bank targets, drove the core CPI back below zero in April.  The BOJ expanded its corporate bond and commercial support efforts,  but the gradual rise in equities allowed it to slow its ETF purchases in May. Interest rate differentials are also low and stable, leaving the broad risk appetites to be the main driver of the exchange rate. 

Spot: JPY107.85 (JPY107.20)      
Median Bloomberg One-month Forecast JPY107.60  (JPY107.10)     
One-month forward JPY107.80  (JPY107.15)    One-month implied vol  5.4% (7.1%)  


Sterling:  Nothing seemed to go in the UK's favor in May, and sterling was dragged lower.  Although sterling recouped some of its earlier losses that carried it to six-week lows in the middle of May (~$1.2075), it was still the weakest of the majors, depreciating nearly 2.75% against the dollar.  The virus has hit the UK hard, and it is slower than many other countries to re-open.  Several Bank of England officials have played up the possibility of adopting a negative target rate.  It seems neither imminent nor inevitable.  At the June 18 meeting, the BOE is more likely to increases is the bond-buying program by GBP100-GBP200 bln. Trade talks with the EU do not appear to be going particularly well, and this may also weigh on sterling. 

Spot: $1.2345  ($1.2590)   
Median Bloomberg One-month Forecast $1.2355 ($1.2375) 
One-month forward $1.2345 ($1.2590)   One-month implied vol 8.9% (8.6%)
  

Canadian Dollar:  The combination of the risk-on attitude, reflected in the continued recovery of equities and the better supply/demand factor that lifted oil prices by 60% in May, underpinned the Canadian dollar.  The US dollar fell to two-month lows in late-May near CAD1.3725.   The Bank of Canada meets on June 3.  There seems to be no urgency to adjust policy at Governor Poloz's last meeting.  Macklem will succeed him, but there is a strong sense of continuity.  Headline CPI fell below zero in April for the first time since 2009, but this was driven by the drop in oil prices and exaggerates the deflationary pressure.  Underlying measures remain steady.  There appears potential toward CAD1.3500-CAD1.3600 if risk appetites remain strong. 

Spot: CAD1.3780  (CAD 1.3945) 
Median Bloomberg One-month Forecast  CAD1.3810 (CAD1.4140)
One-month forward  CAD1.3800  (CAD1.3945)    One-month implied vol  6.9%  (7.4%) 


Australian Dollar:  Since the end of March, the Australian dollar has been the best performing major currency, appreciating about 8.5% against the US dollar.  Australian equities were also a significant beneficiary of the reflation-trade with the main benchmark up nearly 5% in May.  The Federal Reserve had greater scope to approach the zero-bound than the Reserve Bank of Australia and this has resulted in the return of a normal relationship, where Australia offers an interest rate premium over the US.  Meanwhile, Australia's push for an independent investigation of the origins of the coronavirus have earned it the ire of Beijing, with a high tariff (80%) levied on Australia's barley exports to China and a ban on some beef.  While China can find alternative supplies, the same cannot be said Australian's iron ore (at least in the short-run), which may limit the fallout. 

Spot:  $0.6665 ($0.6510)       
Median Bloomberg One-Month Forecast $.0.6575  ($0.6460)     
One-month forward  $0.6665  ($0.6510)     One-month implied vol 10.8%  (11.6%)   


Mexican Peso:  The Mexican peso was the world's strongest currency in May, gaining nearly 9% against the US dollar.  It still is off almost 15% year-to-date, making it the third-weakest behind the Brazilian real (~ -24.5%) and the South African rand (~- 19.5%).  The shift in the peso's fortunes is more the result of the broader risk environment than an improvement in Mexico's economic or political outlook.  The calmer markets and the global liquidity encourages asset managers to re-establish positions to benefit from Mexico's high real and nominal rates that they were forced to cut in the dark days in March.  The peso also serves a proxy for many less liquid or accessible emerging markets currencies.  The JP Morgan Emerging Market Currency Index rose about 3.7% in May, the best monthly performance in more than four years.  The dollar has surrendered around half of this year's gains against the peso. The momentum could carry toward MXN21.00-MXN21.50, depending on the broader environment.

Spot: MXN22.18 (MXN24.15)  
Median Bloomberg One-Month Forecast  MXN22.38 (MXN 24.10)  
One-month forward  MXN22.28 (MXN24.20)     One-month implied vol 18.5% (19.6%)


Chinese Yuan:   At the risk of taking Chinese macroeconomic data at face value, it does appear the economy is recovering.  Nevertheless, more fiscal and monetary stimulus has been signaled.  The year-over-year decline in producer prices warns that a profit squeeze is still materializing.  As US-China tensions escalated, the dollar trended higher against the yuan.  The dollar appreciated against the yuan for four consecutive weeks through the end of May.  It is difficult to see how the tensions will ease in the coming months, especially given the US political cycle.  In late 2019, the dollar rose to nearly CNY7.1850 and stopped just shy in late May.  However, given the tensions, the risk is for additional dollar gains, though tempered by China's other objectives, such as deter capital flight and spur import substitution.  In April, the Hong Kong Monetary Authority was intervening to stop the Hong Kong dollar from appreciating, which appeared to be in demand, given the interest rate pick-up.  However, by the end of May, investors had become more concerned about the future of the peg that the forward points widened to the most in two decades.  

Spot: CNY7.1365  (CNY7.0630)
Median Bloomberg One-month Forecast  CNY7.1150(CNY7.0620) 
One-month forward CNY7.1350  (CNY7.0760)    One-month implied vol  4.7% (4.3%)








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Yom Kippur is coming soon – what does Judaism actually say about forgiveness?

Many religions value forgiveness, but the details of their teachings differ. A psychologist of religion explains how Christian and Jewish attitudes co…

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Two women embrace before a Yom Kippur service held outdoors during the COVID-19 pandemic in Los Angeles. Al Seib/Los Angeles Times via Getty Images

The Jewish High Holidays are fast approaching: Rosh Hashana and Yom Kippur. While the first really commemorates the creation of the world, Jews view both holidays as a chance to reflect on our shortcomings, make amends and seek forgiveness, both from other people and from the Almighty.

Jews pray and fast on Yom Kippur to demonstrate their remorse and to focus on reconciliation. According to Jewish tradition, it is at the end of this solemn period that God seals his decision about each person’s fate for the coming year. Congregations recite a prayer called the “Unetanah Tokef,” which recalls God’s power to decide “who shall live and who shall die, who shall reach the ends of his days and who shall not” – an ancient text that Leonard Cohen popularized with his song “Who by Fire.”

Forgiveness and related concepts, such as compassion, are central virtues in many religions. What’s more, research has shown that it is psychologically beneficial.

But each religious tradition has its own particular views about forgiveness, as well, including Judaism. As a psychologist of religion, I have done research on these similarities and differences when it comes to forgiveness.

Person to person

Several specific attitudes about forgiveness are reflected in the liturgy of the Jewish High Holidays, so those who go to services are likely to be aware of them – even if they skip out for a snack.

In Jewish theology, only the victim has the right to forgive an offense against another person, and an offender should repent toward the victim before forgiveness can take place. Someone who has hurt another person must sincerely apologize three times. If the victim still withholds forgiveness, the offender is considered forgiven, and the victim now shares the blame.

The 10-day period known as the “Days of Awe” – Rosh Hashana, Yom Kippur and the days between – is a popular time for forgiveness. Observant Jews reach out to friends and family they have wronged over the past year so that they can enter Yom Kippur services with a clean conscience and hope they have done all they can to mitigate God’s judgment.

The teaching that only a victim can forgive someone implies that God cannot forgive offenses between people until the relevant people have forgiven each other. It also means that some offenses, such as the Holocaust, can never be forgiven, because those martyred are dead and unable to forgive.

Many people dressed in black and white stand in a courtyard between ancient walls.
Thousands of Jewish pilgrims attend penitential prayers at the Western Wall in Jerusalem ahead of the Jewish High Holiday of Rosh Hashana. Menahem Kahana/AFP via Getty Images

To forgive or not to forgive?

In psychological research, I have found that most Jewish and Christian participants endorse the views of forgiveness espoused by their religions.

As in Judaism, most Christian teachings encourage people to ask and give forgiveness for harms done to one another. But they tend to teach that more sins should be forgiven – and can be, by God, because Jesus’ death atoned vicariously for people’s sins.

Even in Christianity, not all offenses are forgivable. The New Testament describes blaspheming against the Holy Spirit as an unforgivable sin. And Catholicism teaches that there is a category called “mortal sins,” which cut off sinners from God’s grace unless they repent.

One of my research papers, consisting of three studies, shows that a majority of Jewish participants believe that some offenses are too severe to forgive; that it doesn’t make sense to ask someone other than the victim about forgiveness; and that forgiveness is not offered unconditionally, but after the offender has tried to make things right.

Take this specific example: In one of my research studies I asked Jewish and Christian participants if they thought a Jew should forgive a dying Nazi soldier who requested forgiveness for killing Jews. This scenario is described in “The Sunflower” by Simon Wiesenthal, a writer and Holocaust survivor famous for his efforts to prosecute German war criminals.

A color photograph of an older, balding man in a blue shirt and striped tie.
Simon Wiesenthal at the White House during the Reagan administration. Diana Walker/The Chronicle Collection via Getty Images

Jewish participants often didn’t think the question made sense: How could someone else – someone living – forgive the murder of another person? The Christian participants, on the other hand, who were all Protestants, usually said to forgive. They agreed more often with statements like “Mr. Wiesenthal should have forgiven the SS soldier” and “Mr. Wiesenthal would have done the virtuous thing if he forgave the soldier.”

It’s not just about the Holocaust. We also asked about a more everyday scenario – imagining that a student plagiarized a paper that participants’ friends had written, and then asked the participants for forgiveness – and saw similar results.

Jewish people have a wide variety of opinions on these topics, though, as they do in all things. “Two Jews, three opinions!” as the old saying goes. In other studies with my co-researchers, we showed that Holocaust survivors, as well as Jewish American college students born well after the Holocaust, vary widely in how tolerant they are of German people and products. Some are perfectly fine with traveling to Germany and having German friends, and others are unwilling to even listen to Beethoven.

In these studies, the key variable that seems to distinguish Jewish people who are OK with Germans and Germany from those who are not is to what extent they associate all Germans with Nazism. Among the Holocaust survivors, for example, survivors who had been born in Germany – and would have known German people before the war – were more tolerant than those whose first, perhaps only, exposure to Germans had been in the camps.

Forgiveness is good for you – or is it?

American society – where about 7 in 10 people identify as Christian – generally views forgiveness as a positive virtue. What’s more, research has found there are emotional and physical benefits to letting go of grudges.

But does this mean forgiveness is always the answer? To me, it’s an open question.

For example, future research could explore whether forgiveness is always psychologically beneficial, or only when it aligns with the would-be forgiver’s religious views.

If you are observing Yom Kippur, remember that – as with every topic – Judaism has a wide and, well, forgiving view of what is acceptable when it comes to forgiveness.

Adam B. Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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EasyJet share price has collapsed by 53% in 2022. Is it a buy?

The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest…

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The EasyJet (LON: EZJ) share price has hit turbulence as concerns about demand and soaring costs remain. It dropped to a low of 293p, which was the lowest level since November 2011. It has plummeted by more than 82% from its all-time high, giving it a market cap of more than 2.5 billion pounds.

Is EasyJet a good buy?

EasyJet is a leading regional airline that operates mostly in Europe. It has hundreds of aircraft and thousands of employees. In 2021, the firm’s revenue jumped to more than 1.49 billion pounds, which was a strong recovery from what it made in the previous year.

EasyJet’s business is doing well as demand for flights rises. In the most recent results, the firm said that forward bookings for Q3 were 76% sold and 36% sold for Q4. For some destinations, bookings have been much higher than before the pandemic.

EasyJet’s business made more than 1.75 billion in revenue in the first half of the year. This happened as passenger revenue rose to 1.15 billion while ancillary revenue jumped to 603 million pounds. The firm managed to make a loss before tax of more than 114 million pounds. It attributed that loss to higher costs and forex conversions.

As I wrote on this article on IAG, EasyJet share price has collapsed as investors worry about the soaring cost of doing business. Besides, jet fuel and wages have jumped sharply in the past few months. Also, analysts and investors are concerned about flight cancellations in its key markets.

Still, there is are two key catalysts for EasyJet. For one, as the stock collapses, it could become a viable acquisition target. In 2021, the management rejected a relatively attractive bid from Wizz Air. Another bid could happen if the stock continues tumbling.

Further, the company could do well as the aviation industry stabilizes in the coming months. A key challenge is that confidence in Europe and the UK.

EasyJet share price forecast

EasyJet share price

The daily chart shows that the EasyJet stock price has been in a strong bearish trend in the past few months. During this time, the stock has tumbled below all moving averages. It has also formed what looks like a falling wedge pattern, which is usually a bullish sign.

The Relative Strength Index (RSI) has dropped below the oversold level while the Awesome Oscillator has moved below the neutral point.

Therefore, in the near term, the stock will likely continue falling as sellers target the support at 270p. In the long-term, however, the shares will likely rebound as the falling wedge reaches its confluence level.

The post EasyJet share price has collapsed by 53% in 2022. Is it a buy? appeared first on Invezz.

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August data shows UK automotive sector heading for a “cliff-edge” in 2023

With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly…

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With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly towards the tail end of the yield curve (details of which were reported on Invezz here).

Car manufacturing is a key industry in the UK. Recently, it registered a turnover of roughly £67 billion, provided direct employment to 182,000 people, and a total of nearly 800,000 jobs across the entire automotive supply chain, while contributing to 10% of exports.

Just after midnight GMT, data on fresh car production for the month of August was released by the Society of Motor Manufacturers and Traders Limited (SMMT).

Strong annual growth but monthly decline

Car production in the UK surged 34% year-over-year settling at just under 50,000 units. This marked the fourth consecutive month of positive growth on an annual basis.

However, twelve months ago, production was heavily dampened by a plethora of supply chain bottlenecks, work stoppages on account of the pandemic, and a worldwide shortage of microchips. The August 2021 output of 37,246 units was the lowest recorded August volume since way back in 1956.

Although the improvement in output is a good sign, equally it is on the back of a heavily depressed performance.

Source: SMMT

To place the latest data in its proper context, production is still 45.9% below August 2019 levels of 92,158 units, showing just how far adrift the industry is from the pre-pandemic period.

Since July, production in the sector fell 14%.

The fact that the UK is facing a deep economic malaise becomes even more evident when we look at full-year numbers for 2020 and 2021.

In 2020, total output came in at 920,928 units, while 2021 was even lower at 859,575. The last time that the UK automotive sector produced less than one million cars in a calendar year was 1986.  

Unfortunately, 2022 has seen only 511,106 units produced thus far, a 13.3% decline compared to January to August 2021.

In contrast, the 5-year pre-pandemic average for January to August output from 2014 – 2019 stands well above this mark at 1,030,527 units.

With car manufacturers tending to pass price rises on to consumers, demand was dampened by surging costs of semiconductors, logistics and raw materials.

The SMMT noted,

The sector is now on course to produce fewer than a million cars for the third consecutive year.

Ian Henry, managing director of AutoAnalysis concurred with the SMMT’s analysis,

It is expected that by the end of this year car production will reach 825,000, compared to 850,000 a year ago, but that’s 35% down on 2019 and a whopping 50% on the high figure of 2017.

Sector challenges

Other than the obvious fact that the UK’s economic atmosphere is in hot water, the automotive industry (including component manufacturers) has been struggling to stave off the high energy costs of doing business.

In a survey, 69% of respondents flagged energy costs as a key concern. Estimates suggest that the sector’s collective energy expenditure has gone up by 33% in the last 12 months reaching over £300 million, forcing several operations to become unviable.

Although the government enacted measures to cap the price of energy and ease obstacles to additional production, Mike Hawes, the CEO of SMMT, said,

This is a short-term fix, however, and to avoid a cliff-edge in six months’ time, it must be backed by a full package of measures that will sustain the sector.

Due to the meteoric rise in costs across the automotive supply chain, 13% of respondents were cutting shifts, 9% chose to downsize their workforce and 41% postponed further investments.

Bleak outlook

Uncertainties around Brexit and the EU trade deal are yet to be resolved.

Moreover, the energy crisis is poised to get even more acute unless Russia withdraws from the conflict, or international leaders ease restrictions on Moscow. Last week, I discussed the evolving energy crisis here

With global central banks expected to tighten till at least the end of the year, demand is likely to be squeezed further pressurizing British car manufacturers.

Electric vehicles made up 71% of car exports from the UK in August, but robust growth in the sector looks challenging in the near term, in the absence of widespread charging infrastructure, high electricity prices and globally low consumer confidence.

Although energy subsidies could provide some relief in the immediate future, the industry will remain in dire straits while investments stay low and the shortage in human capital persists, particularly amid the push for EVs.

Given the prevailing macroeconomic environment, and severe market backlash to Truss’s mini-budget (which I discussed in an earlier article), the sector is unlikely to turn the corner any time soon.

The post August data shows UK automotive sector heading for a “cliff-edge” in 2023 appeared first on Invezz.

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