Financial Market Notes

Full Library of Financial Market Notes

The Macro View (bonds) – “Not at all curvaceous”

The Macro View (bonds) – “Not at all curvaceous”

If a week is a long time in politics, then the same could be applied to bond markets. Our recent note “Plane crash on the Hudson Mk II?” was well timed. Now, with U.S. CPI at 7.5%, has anything changed? The answer is no. Interest rates are heading north but economic growth is heading south. There is no navigating through things without serious policy errors by central banks, whose track record is already abysmal.

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The Macro View (hedging strategies) – “Any value in derivatives overlay trades?”

The Macro View (hedging strategies) – “Any value in derivatives overlay trades?”

Following on from “The tail hasn’t been wagging the dog” and “Tail unhedged” this latest note in our hedging series takes the practical examples one stage further. In turbulent markets a carefully constructed hedging strategy beats not being hedged. Here we further examine our testbed portfolio to see how its doing and what there is to learn as time goes by.

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The Macro View (monetary policy) – “Threading a camel through the eye of a needle?”

The Macro View (monetary policy) – “Threading a camel through the eye of a needle?”

Today, raising key policy rates off the zero bound leaves as much room for error as threading a camel through the eye of a needle. As we have seen in January, U.S. equities have taken fright. We have little confidence in the Fed. Stay tuned though for our forthcoming note which against the backdrop of this latest context will update readers on our two inhouse hypothetical investment portfolios.

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Mining Monitor (Rio Tinto) – “Lithium blush but copper lush”

Mining Monitor (Rio Tinto) – “Lithium blush but copper lush”

Serbia is in the news again, this time it’s not directly Novak Djokovic. Rio Tinto has had its Jadar lithium-borates project permits annulled. This leaves the miner with the Rincon lithium project in Argentina. But there could be a twist to this tale. The good news is that the Mongolian Oyu Tolgoi copper mine will now move ahead. It’ll become the fourth largest copper mine in the world.

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The Macro View (banking) – “Goodbye LIBOR”

The Macro View (banking) – “Goodbye LIBOR”

A momentous change has occurred in the world’s capital markets, almost without mention. The setting of the sun on LIBOR was inevitable and will be replaced by SOFR which will become the key benchmark determining the cost of borrowing between global commercial banks. As we explain, this won’t be without potential snags but better to have rates coming from disinterested third parties.

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U.S. Equity (Alibaba Group) – “Ecommerce bargain”

U.S. Equity (Alibaba Group) – “Ecommerce bargain”

Ecommerce behemoth Alibaba will report Q3 results early February. Whilst we expect a solid performance the run rate on earnings growth is slowing as the Group reinvests. The balance sheet is prodigious. We highlight our expectations for the quarter and the earnings outlook through F2024. An improvement in sentiment on the macro front would be a stimulant for a rerating.

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The Macro View (bonds) – “Bond-doggle”

The Macro View (bonds) – “Bond-doggle”

We expect the U.S. yield curve to get much flatter over the next six to nine months. Inflation is less of an issue than most think whilst nobody, not even China, is putting up a hand to be the global economic locomotive. On a theme we’ve addressed from time to time we explain further and bring in an ocean analogy.

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U.S. Equity (Sea Limited) – “Tencent takes a dip in the Sea!”

U.S. Equity (Sea Limited) – “Tencent takes a dip in the Sea!”

Tencent is the largest shareholder in digital entertainment, e-commerce and digital financial services group Sea. It has sold down in a block trade to 18.7% arising from a corporate action applicable to Sea announced this week. The share price of Sea, indeed Tencent, has had a torrid time of late. Are there overhang implications for the remaining Tencent stake in Sea? Is Sea, operating in seven Southeast Asian countries, offering value?

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The Macro View (foreign exchange) – “TRY this for a new wheeze!”

The Macro View (foreign exchange) – “TRY this for a new wheeze!”

The Turkish lira is a fascinating case study of how not to manage your monetary affairs. Just as you may have thought things couldn’t get crazier, along comes a ‘hard currency’ equivalent scheme. We assess the technical intricacies, and pitfalls. If nothing else, our scenarios will be of practical importance to one’s knowledge of foreign exchange and related matters.

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The Macro View (U.S. financial markets strategy) – “Storm in a teacup or a raging tempest?”

The Macro View (U.S. financial markets strategy) – “Storm in a teacup or a raging tempest?”

In “Deflated” and “Inflation brouhaha – a storm in a price teacup?” we said panic over inflation was overdone. As we approach the end of 2021, we revisit our take on inflation, looking again at lumber, oil, natural gas and U.S. Treasury yields. The panic on consumer price inflation is overdone. Economic growth expectations too need tempering. Our strategic position is unchanged.

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Mining Monitor (Rio Tinto) – “Lithium rush”

Mining Monitor (Rio Tinto) – “Lithium rush”

Rio Tinto has faced some opposition to the Jadar lithium-borates project in Serbia but undeterred the company is now pressing on with a binding agreement to acquire the Rincon lithium project in Argentina. Being in the battery materials business is essential. The share price is now fairly pitched, having retreated from a 52-week high of over £67.

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The Macro View (Asset management) – “A South African portfolio review for 2021”

The Macro View (Asset management) – “A South African portfolio review for 2021”

We turn our attention to asset management in the South African context through the Johannesburg Stock Exchange (JSE). A hypothetical composite portfolio of 30 stocks is presented. The hard statistical analysis presents some surprising, and perhaps worrisome, conclusions. The analysis will be helpful in guiding construction of an optimum JSE portfolio for 2022 at lowest possible risk.

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U.S. Securities Strategy – “Margin madness?”

U.S. Securities Strategy – “Margin madness?”

In a week in which the real interest rate in the U.S. was the most negative since records began, we now reveal latest data that is even more frightening – record high levels of deposits in margin accounts at U.S. security brokers and dealers, underpinning highly leveraged trades by individuals and hedge funds.

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Mining Monitor (BHP) – “Collapsing DLC”

Mining Monitor (BHP) – “Collapsing DLC”

The unification of the London listed PLC/Sydney listed Limited shareholding structure has been approved by the BHP Board. We unpack the intricacies of deal that is likely to get approval from shareholders. An historic price discount between the two has already closed.

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Alibaba – “Slap”

Alibaba – “Slap”

Our model references Alibaba to Tencent and on this basis we have fair value based on an exit PE of HK$265 with a twelve-month rolling forward value of HK$372 on a roiling exit PE ratio of 30x.

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