Thursday, June 24, 2021

Morning Note: It Can Pay to Raise Interest Rates, for Some Countries

As we've reported, lip service aside, U.S. central bankers (as a voting majority) have zero desire -- or room, frankly -- to tighten monetary conditions for far into the foreseeable future.

Well, it appears -- at least from a desire standpoint -- the same can be said for much of the rest of the developing world. Certainly the bank of England.

Here's from the horse's mouth (courtesy of Bespoke Investment Group) this morning:

“...until there is clear evidence of progress towards [our] goals” for the UK economy; it would be “wrong” to “undermine the recovery with premature tightening” and the MPC is comfortable allowing inflation “to exceed 3% for a temporary period”

As for some emerging nation' policymakers, on the other hand, there appears to be a willingness to actually conduct themselves like responsible central bankers, believe it or not. One example comes from Chile, whose minutes (released today) from their latest central bank meeting says they're seriously considering a rate hike.

The latter, while recognizing inflation risks, also, I'm thinking -- intentionally or otherwise -- serves to quell the elephant-in-the-room risk we continue to harp on herein; which is the mammoth pile of US dollar-denominated debt sitting on emerging market corporate balance sheets. I.e., a stronger local currency (helped higher by higher local interest rates) -- read weaker dollar (read inflation) -- will serve to alleviate the pressure of those interest and principal payments going forward.

Here's the 3-day chart of the dollar in Chilean Peso terms:

I.e., it takes fewer pesos today to pay down a US dollar of debt than it did yesterday.

Asian equities leaned red overnight, with 9 of the 16 markets we track closing lower.

Norway's market is shuttered this morning, while the rest of Europe's having a nice go of it as I type: 16 of the open 18 we follow are presently in the green.

U.S. equities are in rally mode to start the day as well: Dow up 238 points (0.70%), SP500 up 0.56%, SP500 Equal Weight up 0.31%, Nasdaq 100 up 0.86%, Nasdaq Comp up 0.81%, Russell 2000 up 0.54%. 

The VIX (SP500 implied volatility) is down 5.09%. VXN (Nasdaq 100 i.v.) is down 3.13%.

Oil futures are down 0.53%, gold's up 0.54%, silver's up 1.17%, copper futures are down 0.99% and the ag complex is down 1.96%.

The 10-year treasury is up (yield down) and the dollar is down 0.08%.

Led by uranium miners, MP (rare earth miner), Eurozone equities, silver and healthcare stocks -- but dragged by ag futures, energy stocks, water infrastructure stocks, base metals futures and bank stocks -- our core mix is up 0.30% to start the session.

“Successful investing is having everyone agree with you………..​later."

--Jim Grant 

Have a great day!


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