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Mining and banking stocks lead FTSE rebound

The FTSE 100 bounced back to record its strongest session in over a week,…
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The FTSE 100 bounced back to record its strongest session in over a week, with precious metal, base metal miners and banks leading the gains

The FTSE 100 rebounded on Tuesday helped by miners and bank stocks after surging coronavirus cases and fears of an economic slowdown pushed the index to a two-month low in the previous session.

After dropping 0.25% in afternoon trading, the FTSE 100 bounced back to record its strongest session in over a week, up 0.5%, with precious metal, base metal miners and banks leading the gains.

This feels more like a dead cat bounce rather than a healthy rebound as all the arguments behind yesterday’s sell-off remain today, said Russ Mould, investment director at AJ Bell.

Banks climbed 1.1%, after Catherine Mann, who will soon join the Bank of England’s (BoE) rate-setting committee, joined interest-rate setter Jonathan Haskel to say cutting stimulus support too early was not the right option.

Two BoE monetary policy members last week said the time might be nearing for the BoE to rein in its huge stimulus programme.

The FTSE 100 has advanced 6.4% so far this year on record low interest rates. But a jump in inflation above the BoE’s 2% target in May, along with risks arising from a rise in local Covid infections have slowed the rise of the blue-chip index.

Inflation is still a major threat and there are plenty of reasons to expect the global economic recovery to slow down, Mould added.

The domestically-focused mid-cap index gained 0.8%.

Among stocks, global miner Anglo American gained 0.7% after it said its production increased by 20% in Q2, driven by strong diamond and platinum output.

Carnival Corp advanced 3.3% after it said it expected to have resumed cruises with 65% of its total fleet capacity by the end of 2021, betting that worries over a resurgence in coronavirus infections will not deter holidaymakers.

Unilever Plc declined 0.6% after Israel warned the consumer goods group of “severe consequences” from a decision by subsidiary Ben & Jerry’s to stop selling ice cream in Israeli-occupied territories, and urged U.S. states to invoke anti-boycott laws.

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Economics

Canada’s economy desperately needs investment dollars

The government isn’t making it easy to do business in Canada. It needs to minimize restrictions, regulations, red tape and time delays Gross domestic product (GDP) is what economists call the totality of goods and services Canada produces. It’s often…

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The government isn’t making it easy to do business in Canada. It needs to minimize restrictions, regulations, red tape and time delays

Gross domestic product (GDP) is what economists call the totality of goods and services Canada produces. It’s often referred to as the economic pie. We all want a share of the pie.

Most of us think it’s only fair that all Canadians should be able to enjoy at least a basic level of income. Therefore, much of the attention around GDP goes to how it’s divided. Who gets too much, and who doesn’t get enough? How can we use taxes and transfer payments to smooth out the distribution?

There are two ways most Canadians can get themselves a bigger piece of the pie. One is to try to take some pie from people who have more. That’s a zero-sum game; any increase in pie for some is exactly matched by a reduction for others who won’t be enthusiastic about the change.

A better way to provide more for all is to increase the size of the pie. We increase our GDP by investment – by providing capital. Investment is the spending businesses use to produce more of the goods and services we enjoy and trade with other countries. That’s making the pie bigger.

Investment dollars, once put to use, become capital. Capital can take many forms. It can be buildings and infrastructure, machinery and equipment, software or other forms of technology, or even human capital – the skills and abilities people acquire from training or experience.

Strong investment and a growing capital stock increase our GDP and get us out of the zero-sum game. Now everyone can have a bigger piece of the pie, and no one has to cut back.

Alas, that’s not happening in Canada.

In 2015, investment in the private sector was growing at a four per cent rate. But it has been declining since.

As a stream fills a lake, investment flows maintain our stock of capital. Capital depreciates over time. Unless new investment more than compensates for this deterioration, our stock of capital is reduced, leaving us less able to produce goods and services, and seeing our economic pie shrink instead of grow.

Statistics Canada has released data that show an absolute reduction in Canada’s stock of capital in 2020, the first time such a drop has occurred since records were kept. This drop can’t all be blamed on the pandemic since it reflects a trend that started several years earlier.

The traditional energy sector – oil and gas – has been hard hit. Other things being equal, this should be good for the environment. However, there hasn’t been a compensating increase in investment and capital stock in alternative energy sources such as solar, wind or small-scale nuclear power. Nor have we seen investment in natural gas or other less polluting carbon energy sources.

Reducing investment in old energy without increasing it in cleaner energy sources will reduce total energy output, reduce exports and raise prices for Canadians.

The energy sector is not the only one losing capital. The stock of capital in the manufacturing sector is at its lowest level in 35 years. Optimists have been saying that Canadian manufacturers could expand by taking advantage of goods shortages generated by COVID-19-related supply chain problems. With capital stocks at the level of 1986, manufacturers are unlikely to be able to do so.

We can’t rely on foreign investors to deal with our depleting capital stock. This year, Canadian pension funds bought more investments from foreign countries than foreigners bought from Canada.

There are things we can do to encourage more private sector investment in Canada. First, however, there’s one thing we mustn’t do. No restrictions should be placed on the outflow of capital. Such restrictions reduce foreign capital coming into Canada since investors fear they won’t be able to take their money out. And Canadian and other businesses may choose not to operate in Canada for fear of limitations on capital movements.

Governments should make it as easy as possible to do business in Canada by minimizing restrictions, regulations, red tape and time delays.

Individuals can choose saving over spending. Whether they invest the saved funds themselves, use the money to pay down debt or put it in the bank, the dollars not consumed will end up as capital.

Finally, people can invest in themselves through education and training. Human capital is at least as important as the financial kind.

By Roslyn Kunin
Columnist
Troy Media

Troy Media columnist Roslyn Kunin is a consulting economist and speaker.

Courtesy of Troy Media.

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Economics

What’s Tougher: Finding Drivers Or Trailers?

What’s Tougher: Finding Drivers Or Trailers?

By Todd Maiden of FreightWaves,

Supply headwinds facing the trucking industry were front and center at an investor conference on Wednesday and Thursday. While executives said driver recruiting…

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What's Tougher: Finding Drivers Or Trailers?

By Todd Maiden of FreightWaves,

Supply headwinds facing the trucking industry were front and center at an investor conference on Wednesday and Thursday. While executives said driver recruiting and broader supply chain bottlenecks are ever so slightly easing, the procurement of equipment has gotten tougher.

“I would predict at this juncture, in our looking out at the trailer OEMs (original equipment manufacturers) and the tractor OEMs, that it could even be more difficult in 2022 on production and delivery than it was in 2021,” said Mark Rourke, CEO and president of Schneider National, at the Stephens Annual Investment Conference held in Nashville, Tennessee.

Finding trailers won't get any easier in 2022 (Photo: Jim Allen/FreightWaves)

Lack of trailers becoming the new driver shortage?

Equipment purchasing for truckload carriers will be below normal replacement in 2021 given semiconductor and parts shortages as well as COVID-related labor issues that are plaguing the OEMs.

Derek Leathers, Werner Enterprises chairman, president and CEO, said current tractor and trailer orderbooks extend well beyond the OEMs’ manufacturing capacity for all of next year, meaning the industry fleet, which has gotten older and smaller during the pandemic, won’t be increasing anytime soon.

“I think you see continued contraction or at best case stabilization in ’22 but with an older fleet,” Leathers said.

Werner’s average truck age was 1.8 years heading into the pandemic with trailers 4 years old on average. While a recent acquisition skewed average ages slightly higher, an inability to get all of the replacement equipment wanted has really pushed those averages up, to 2.1 years and 4.4 years, respectively.

Leathers said Werner wants to refresh equipment but “there’s no line of sight to when that moment is, it’s certainly not in ’22.”

“The best-case scenario is you may see some return to normalcy by third quarter ’22 and that’s way too late to have any impact on the year in terms of additional capacity. So I think we have a structural cap that’s different than anything we’ve seen historically.”

Eric Fuller, president and CEO at U.S. Xpress, also pointed to the third quarter as the earliest date for relief. He said the OEMs are guiding to “a few more months” for tractors that should have already been delivered.

“A number of the OEMS are going back to some of their larger orders and reducing the amount of tractors they’re actually going to be able to produce in 2022,” Fuller said. “I think the trailer situation is worse. In some cases, to get a significant order we’re being told it could be multiple years … 24 months, 36 months.”

Trailer manufacturer Wabash said it would build only 50,000 dry van trailers next year compared to more than 57,000 in 2019. The company’s backlog, which extends into 2023, has increased to more than $2.3 billion from $1.9 billion at the close of the third quarter. It’s in the process of converting refrigerated manufacturing capacity to dry van production lines but that won’t be completed until early 2023.

Management from J.B. Hunt said delays in equipment deliveries will result in holding onto trade-ins longer than originally anticipated, which will drive its cost of service higher. The increased maintenance expenses associated with running older equipment will be an incremental component of its customer’s rate structure in 2022.

Less-than-truckload carrier Yellow noted a lack of trailers throughout the supply chain as trailing equipment sits longer at shipper facilities that are dealing with issues recruiting and retaining workers.

Yellow CEO Darren Hawkins said he’s most concerned about being able to take delivery of the trailers Yellow has ordered for 2022. He said the company can postpone planned trailer retirements if needed but noted that overall trailer utilization has become a material burden on operations.

“We do not have access to our own equipment as readily as what we’ve seen in the past,” Hawkins said. “And then when you do get that equipment, it’s in the wrong part of the country and we’re having to reposition it.”

Yellow would normally use the rails to reposition trailers but given current network congestion, they have more freight than they can handle.

“I have not seen it ease. I actually feel like demand is expanding for our services,” Hawkins added.

He said Yellow is focused on making timely freight pickups as that is its customers’ biggest concern. “They’re not as focused on transit times as they are getting their freight picked up and getting it into a system and being able to tell their customers that it’s actually in transit.”

Driver hiring issues have eased … kind of

Most trucking executives said that multiple rounds of pay increases and sign-on bonuses, as well as the end of enhanced unemployment benefits in September, have helped driver recruiting, but only on the margins.

Fuller noted that August was the toughest month for driver hiring, with only slight improvement since. “If August was a 10, it’s a 9.5 [now].”

J.B. Hunt said difficulties sourcing drivers have plateaued but at a high level.

“For drivers, we’re at a high watermark and we’re holding,” Shelley Simpson, chief commercial officer and EVP of people, commented. She said driver recruitment hasn’t really kept the company from bringing on new business because it can utilize its digital 360 freight platform for capacity and backfill with permanent resources later.

But she said the labor headwinds extend beyond drivers. Difficulty finding workers throughout all levels, from maintenance techs to office employees, has been a burden for the company.

“In the past, we were able to tweak pay or turn pay and that typically would fix 95% of the problem. Today, that’s not the case when it comes to labor,” Simpson continued.

The American Trucking Associations’ estimate of the current driver shortfall is approximately 80,000. But the organization sees that number moving to more than 160,000 by 2030.

“It’s the most difficult driver market I’ve ever seen,” Leathers said. “Has it stabilized at very difficult? That seems to be the case. So it’s staying very difficult but it doesn’t seem to be worsening.”

Searching for a cure

Werner has been bringing on drivers through its academies. It had four additional driver schools operating at the end of the third quarter, 17 in total. The company will have 22 open by the end of the first quarter. Driver sourcing costs and labor expenses incurred as a result of equipment downtime due to parts shortages led Werner to miss third-quarter expectations.

When asked about potential solutions to the driver issue, Leathers said he sees the most potential in opening the driver pool to include candidates as young as 18 years old. He said the plan to reduce driver ages would be “one of the largest advancements for safety” the industry has seen in a while.

“These are true apprenticeships. This is not, ‘You’re 18 years old and here’s the keys to a truck and good luck.’” He said the current proposal for preparing these individuals would require multiple months of training with experienced drivers as well as curfew restrictions. He believes it would also allow the industry to recruit people “from the front of the class.”

“What do you get at age 21? If you wait to 21 because you think that there’s something magical about the number, you get the people that were unsuccessful as an electrician, a plumber, a roofer or welder versus going to the front of the class and getting the best and brightest and putting them in a multi-month apprenticeship.”

He said relaxing hours of service rules wouldn’t be fair to the driver. “They should not bear on their backs our inefficiencies,” Leathers said, referring to the increase in the amount of dwell time drivers are experiencing due to congestion throughout the supply chain.

Leathers doesn’t think increased vehicle or cargo weights will help either “at a time when our nation’s infrastructure is already crumbling.” He said it will take at least a decade until recently approved infrastructure money results in material improvements to the highways.

Rourke said a new rule for entry-level candidates, requiring training from a certified institution listed on an approved provider registry, will further limit driver resources.

“For the state licensing, you have to then verify where this schooling took place and the accreditation of that school, which has a minimum number of hours, a minimum curriculum. It isn’t just, ‘I just took the written test, let me go out and take a test and I get a CDL.’ So it radically changes that entry point into the industry.”

Tyler Durden Wed, 12/08/2021 - 15:25

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Spread & Containment

SocGen Is Telling Its Nervous Clients “Don’t Leave The Party Yet” – Here’s Why

SocGen Is Telling Its Nervous Clients "Don’t Leave The Party Yet" – Here’s Why

A surge in cross-asset volatility over the past two weeks has left investors with many questions about its nature and implications and whether it is safe to buy…

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SocGen Is Telling Its Nervous Clients "Don't Leave The Party Yet" - Here's Why

A surge in cross-asset volatility over the past two weeks has left investors with many questions about its nature and implications and whether it is safe to buy the dip (technically there is no longer a dip).

In a note seeking to ease client concerns, SocGen strategists Jitesh Kumar and Alain Bokobza say "don’t leave the party yet" because they found that the main trigger for the recent market turmoil has been "investors seeking to deleverage their more illiquid/expensive assets to protect profits as the year ends." And while the market may be shaken by residual liquidity tremors over the next couple of weeks, "recent trends nevertheless underpin our recommendation to remain invested and stay overweight in equities, real assets (including commodities), and the dollar."

Drilling down on the increasingly nervous market since the Fed’s recent hawkish turn and the move higher in rates since the September FOMC meeting, SocGen points to several other catalysts that have kept investors on their toes, including:

  1. collateral scarcity in Europe, fueling very high demand for ‘safe’ assets, wider asset swap spreads and a wider cross-currency basis swaps due to a drop in ECB net issuance;

  2. the threat of COVID Delta-variant related lockdowns in Europe (Austria, Germany) even before the emergence of Omicron;

  3. the 6%+ CPI print in the US, followed by the re-nomination of Jerome Powell at the Fed, enabling him to signal scope for a faster taper and earlier rate hikes, stoking policy error fears;

  4. credit spread widening against plummeting German bond yields, while corporate bond issuance has remained robust; and

  5. high pension funding ratios fueling demand for ‘safer’ assets (bonds) to rotate into.

One read of the above is that these combined pressures have increased demand for bonds, while Omicron spooked some investors into cutting over-extended positions on the Friday following Thanksgiving amid low market liquidity. These pressures triggered very sharp moves in some widely owned illiquid assets, including:

  • rotation from high beta stocks into quality stocks;

  • a shift in preference to US equities/large cap tech from small caps/other overseas investments;

  • increased hedging to lock in gains before year-end, triggering higher equity/credit volatility;

  • a sharp rise in funding currencies at the expense of high yielders/EM, leading to a weaker dollar.

Additionally, as the SocGen duo notes, some highly extended inflation plays have been among the most impacted, e.g. both crude oil and breakeven inflation linkers saw substantial one-day drops on 26 November as shown below (the French bank is quick to note that it remains overweight on both commodities and inflation-linked bonds as they provide protection against higher inflation prints and a Fed tightening cycle over 2022).

The market turbulence also took an already extended VIX complex up to the highest levels since the March 2020 crash. So illiquid was the market that the VIX bid/offer spread exploded to 4 vol points, but here too SocGen thinks the Left Tail risks are in fact a manifestation of a lack of liquidity in downside hedges

But how does the sharp risk off episode square with dollar weakness - after all the dollar usually surges when there is a dump in risk.

According to SocGen, dollar weakness coinciding with broader market weakness "was unusual but makes sense when seen through the deleveraging lens." The chart below left shows that during the turmoil on 26 November, the typical funding currencies (EUR, JPY, CHF) strengthened while EM currencies (most of which are high yielders) weakened. This had the overall effect of weakening the broad dollar, especially in the G10 space. However, this trend is expected to reverse and take us back to a strong dollar environment given that we see a full Fed hiking cycle ahead of us (unless of course Omicron or whatever variant comes next ruins these plans).

Looking at actual stock positions, SG’s derivatives team notes that options positioning on US small caps had been increasing throughout October. Therefore, it says, "the risk-off episode came at an inopportune moment for some well invested market participants, who likely had to reduce risk in US small caps faster than they would have preferred." As can be seen in the chart above right, Russell 2000 index turnover in the cash market was overwhelmed by the futures market on 26 November, triggering large intraday moves.

Separately, SocGen also points to the combined position changes visible in the CFTC data for hedge funds and asset managers which it says provides further evidence of the pressure on Russell 2000 futures, which in aggregate saw $5.4bn in selling in the holiday-curtailed last week of November (23-30 Nov data). This was the largest weekly sale of Russell 2000 futures as per CFTC data in more than four years.

In contrast to small caps, positioning on large cap equities has not been under the same pressure. Asset manager + hedge fund flows in S&P500 e-mini futures totalled -$6.4bn in the last available dataset, a relatively small amount for the S&P500. More tellingly, the overall flow on the Nasdaq 100 was slightly positive over this period at +$0.8bn, as shown in the right-hand chart above.

Generally speaking, short-term repo is also a useful indicator of the demand/supply profile of major equity indices. A sharply negative repo rate usually signifies very high demand for balance sheet exposure relative to supply, while a very positive repo rate signifies risk aversion. The chart below shows the 1-month repo rate on S&P500, while the balance sheet pressures faced by banks during the fourth quarter of every year are well known. That said, the current quarter, despite recent weakness in broad equities, has not seen positive repo levels, indicating that US large caps have not been hit by material drawdowns according to SocGen (and their price).

So what should traders do?

In a word, nothing, at least that's the recommendation of SocGen. The bank continues to believe that tightening spells are flattening, and thus recommend being positioned for a flattening of the yield curve, which also supports US stocks that are longer-duration assets and are tilted toward quality. In terms of sectors, long Information & Technology against the financial sector is very well correlated with the trend in the yield curve and is one of our key sector calls linked to the Fed tightening cycle.

Sure enough, the curve has not only flattened at the very long end, but market pricing of the total number of hikes from the Fed over the next few years has also reduced. Hikes previously priced for 2024 and  2025 have all been brought forward to 2023, as the chart below shows. Indeed, as we first showed a week ago, the market is now pricing a small probability of a rate cut in 2025.

One take on these moves is that i) either inflation is not going to be a longer-term problem, and that longer-duration assets should therefore continue to do well, or ii) inflation will be a problem but the Fed will be powerless to do anything about it without blowing up the entire market in the process. Our money is on the latter.

Last but not least, SocGen continues to see support for broader financial markets going into next year as private-sector balance sheets remain strong. To wit, US corporates hold close to $7 trillion in liquid assets and US households have $17 trillion tucked away in deposit and money market funds post the pandemic (then again most of this cash belongs to the 1% with few benefits trickling down to the lower 90%). In short, the French bank believes that there is still plenty of cash on the sidelines and investors will sooner or later need to move away from cash in a 6%+ inflation environment.

In conclusion, SocGen's remains alert to the risks that would flare up in the event of more hawkish central banks as well new COVID variants, but for now it recommends its playbook for 2022, "which is working well so far."

Tyler Durden Wed, 12/08/2021 - 13:46

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