ALFONSO PECCATIELLO: Welcome to the Real Vision Daily Briefing. It's Tuesday, February 8th, 2022. This is Alf speaking, the author of The Macro Compass and I'm joined today by Tony Greer, the editor of The Morning Navigator. How're you doing, Tony?
TONY GREER: How are you today, my man?
ALFONSO PECCATIELLO: Good. Nothing to complain about, and some interesting moves in the market too. We have bond yields again trying to test the upside of their ranges. We have frontend bond yields, we're going to talk about that, which are pricing some meaningful probability or even seven or eight hikes at this stage by the Federal Reserve all in 2022.
The stock market is moving too, not only in America where it's going up by 1%, 1.5%, depending on what you look at. Commodities are moving too, but coming back to the stock market, it was quite a day as well for stocks in Asia, because some US listed Chinese like Alibaba, for example, they jumped more than 3% on reports that the Chinese state-backed funds are entering the local market to actually buy some shares and to provide a boost to the market. We have the Real Vision's man in Japan, Weston Nakamura, who is breaking it down for us. Hey, Weston.
WESTON NAKAMURA: Hey, guys. So, just quickly on Chinese equities which reopened this week after a week off from Chinese New Year last week, it all started the week off strong Monday. Today, however, we saw a pretty steep plunge from China cash open. CSI index was down over 2.25%, Hang Seng was down like 1.5% by midday.
Then, midday headlines came out that China's state-backed funds were intervening and buying stocks to support the market. And then you saw a reversal to the upside. And basically, all the day's losses were erased, with indices closing closer to flat versus the lows of the day. And you're also seeing US listed ADRs of Chinese stocks strong at US cash equity open. China Golden Dragon Index up over 1.5%. Now, note that these direct state interventions into the onshore equity markets is not new nor unique to China.
Think of the Bank of Japan's 12 trillion yen per year ETF purchasing or say the Swiss National Bank buying direct shares of Apple. So, China did this notably during the chaotic markets of 2015, but state interventions also seem to come around politically sensitive events and moments. We saw this last March 2021, ahead of the National People's Congress. And then this year, perhaps the most politically significant of [?] with Xi Jinping trying to cement his lifetime leadership over the country.
But that comes much later in the year. In the immediate, Beijing Winter Olympics are taking place. And it could not necessarily be about the Olympics themselves, but rather about what may come after the Olympics are done, or what they may perceive may come when everyone is done playing nice. Also note that in the same day today, we saw PBOC officials come down hard, once again slamming Chinese retail brokerage trading apps that allow for cross border trading, calling them illegal.
This is something that's been ongoing since late 2021. So, regarding these market interventions, if indeed the goal isn't so much for the markets themselves as it is just a component of shaping public policy and sentiment both domestically and abroad, that investors shouldn't look through a purely financial lens at this either. And rather, they should look at the broader sociopolitical angle by which the intervening policy directors themselves are viewing it. Alright, thanks.
ALFONSO PECCATIELLO: Thanks, Weston, for the update. And Tony, I want to ask you, Chinese state-backed funds, meaning Xi Jinping is basically propping up the stock market today. And he has decided to do so after actually putting out some few more measures over the last few weeks starting from the PBOC doing some easing, and then basically, officials in China giving guidance to banks, state-owned banks to actually lend certain sectors again and make the credit go to the system. What do you make of all of this and how does this impact your overarching macro thesis here?
TONY GREER: Well, Alf, I'm not a China specialist, but when I look at their posture toward the markets, it makes sense that they want to stem the slide of what's going on in their technology markets for starters. They're plugging holes in the dam, and quite honestly, it's what's worked for them in the past. As much as we don't like centrally planned markets like that, that's their go to maneuver, is to go in and to act in the markets that they don't really like the way they're going and provide support, etc.
And as much as we complain about that over time, it usually works. They came after the explosion in commodity prices, and they cut iron ore in half last year. That was really impressive if you ask me, and so I rather not fight that. But I guess it does go against the flow that I'm looking for, Alf, if it's fair. I've been predicating this year on a big rally in natural resources, and a big selloff in technology. So, seeing China step in here and stem the slide of the QQQs is unfortunate for my position, but it doesn't change anything the way--
It doesn't change really the way I'm looking at US markets. As you said, we keep pivoting to more and more hikes and a more hawkish Fed. And so, that's where I'm watching right now to see where the pendulum finally reaches this far. I was curious to ask you what you think, because you're way better at bonds than I am.
ALFONSO PECCATIELLO: So, first to comment on China as we were touching upon it for a second. I created a metric, which is called the G5 Credit Impulse, and it measures the amount of credit or the incremental amount of credit that gets through the system at each point in time. So, are we accelerating or decelerating the credit creation that goes through the real economy? This is not QE, it's proper credit that goes through the economy.
And China, Tony, China accounted at some point for 60% of the whole credit impulse in the world. That's ridiculous. Like, well, these guys decide to go for it, they can really go for it. So, it's mesmerizing. So, when I see these guys turning and changing their posture, as you say, I need confirmation. So, if I update my credit impulse, which I'm doing, it seems to be slightly reversing a bit. It's not a monstrous uptick, but when these guys change narrative, you got to pay attention to this.
And then of course, it changes a whole lot of macroeconomic forces to asset classes. And let's talk for a second about this commodity, tech trade. So, this duo, it's actually moving in an interesting way in a way we are not used to see over the last, whatever, five to 10 years, at least. Tell us more about this XLE-FAANG situation here.
TONY GREER: Okay, so let's start with the breakout in-- this is the way that I'm looking at the world now, Alf, is that it feels like technology has seen its best days with rates pinned at zero, everybody on lockdown a year and a half ago, and then generating tremendous earnings through that, getting the follow through of all the accommodation, etc.
And when I look back on it, I decide that how could it possibly look better for big cap technology than it just looked over the last year, where big cap technology was distributing a little bit at the highs, and then we come in this year, and it's only February, and we've shot two generals already? Facebook and Netflix, big 25% haircuts, that's a serious move. And I think that those two stocks, in particular, are going to have a really difficult time climbing back up the hill.
And so, I see them as a FAANG complex, there's a lot of technical damage being done. And everything that I look at in natural resources, especially in the oil patch, Alf, is breaking out, and testing old highs and making new headway on the highs and holding the dips. So, I feel like-- people talk about $100 oil as the next barometer. It's like, yeah, that feels like that's happening, but on its way to something else. It feels like we're onto something pretty major here in the oil sector.
And the only thing that we're going to run into now is excess positioning where the trade community gets too long. When we buy it up into rallies, and next thing, there's no incremental buyer and positioning has to get cut down. But other than that, we continue to build a strong fundamental or technical and underlying fundamental picture in the commodity itself. We're going into this year with lower Cushing inventories and above average gasoline demand. So, you put those two things together, and it makes sense why prices are flying off our screen right now.
ALFONSO PECCATIELLO: Yeah, so your take on oil this year has been spot on, oil or natural resources. So, well-done to be honest, also the way you articulated it. There are different timeframes, of course, in every assessment one makes of of asset classes here and there. But the underlying situation of low capex and let's say structural tailwinds for the commodity sector are undeniable I should say on the marginal level. More short term, as you said, already there can be retracements here and there.
And one retracement we saw today when basically Putin and Macron sat at the same table and they chat about out the geopolitical situation between Russia and Ukraine, and apparently, the translation wasn't great enough, because Macron came out saying that he basically got Putin on the wire saying that he's not going to invade Ukraine, and then put incentives of its officials around to say, sorry, what? I didn't say that. So, what's your take on the whole meeting and the reaction of the oil market, which retraced obviously showing that geopolitical tensions play the role in the short-term price upside that oil had?
TONY GREER: Yeah. Well, obviously, there's been some premium, I think, in the last several days, Alf, built into the energy complex due to the confrontation or the confrontation that's being constructed that we're getting through, I'm not exactly sure how that's going to play out. But I would not want to be negotiating against Putin right now who has the world's supply of natural resources under his command, and France/Europe heading into the dead of winter now with limited supply of natural gas on their hands.
So, Macron really can talk as loudly and as strongly as he wants, Putin is going to set the price of energy in Europe for the most part. So, we've got a little bit of volatility, a little pullback from the highs off of the last couple of days in that conversation, but to me, it all seems like very much within the construct of a bull market. When you take a look at the short-term spreads, for example, Alf, in for example, in WTI, front-month spreads have gone from they were around $1-- call it March, April, it was around $1 for the most of last year, it just got sucked into 20 cents, and then rallied to $1.75.
So, we are now widening the calendar out, the curve is getting steeper again. And going to come out of winter and then into the spring where we have seasonal gas demand. And we're going in with depleted gasoline inventory. So, we just continue to set up for higher energy prices and probably leading to higher base metal and green prices along the way.
ALFONSO PECCATIELLO: Yeah, and Tony, because you're talking about basically describing in layman terms and very well, backwardation that we see in not only the oil future curves, but also in a bunch of commodities future curves actually where the spot price is much higher than the back price for contracts. So, let's say one year or two months or three months down the road, which speaks about the premium that traders want to pay to get their hands on the energy prices today, actually.
There are studies out there or let's say research that shows an extreme backwardation, and for extreme, I'm talking about 10% plus of spot price in backwardation that might predict some drawdowns in the energy prices because then it means the markets getting too bullish, positioning is getting too extreme. Do you buy into this thesis, first of all, into let's say pullbacks that we might see or does this backwardation actually has something else behind and you're not that worried about it?
TONY GREER: I think this time around, Alf, that there's more behind it than that age old story that when things get too backwardated, eventually there's a pullback in the spot price. We just did that. We just saw, for example, one year calendar spreads. The last time they went out past $7, $8, they got to $10, $11 in the full year calendar. That's usually when a month or two to three months later, you see lower spot prices improve when the calendar gets stretched out, which is exactly the dynamic you're speaking of.
We just did that exercise where the calendar got blown out to $10, it collapsed into about $5 or $6. And now, it's widened out to $12 again, and it doesn't look like it's having a deleterious effect on price right now. So, I'm nervous for the upside because we just went through that exercise where the last of the longs got washed out, the spreads pulled back, we had this big deflationary scare. And now all of a sudden, the oil market comes barking back in a very short period of time and makes a new high. That's not a market I want to fight, Alf, not for me at all. I think it's still going higher.
ALFONSO PECCATIELLO: Fair enough, Tony, fair enough. So, moving to the guys that can actually spook the party for aggregate demand across the globe by tightening in a very serious way, instead of starting from the Federal Reserve and the move in the bond market there, I'd like to start from the European Central Bank, because that's quite the news. These guys are known to be extremely cautious about hiking cycles, they are known to be very, very, very dovish, generally speaking, and they're very patient.
In the last press conference, Lagarde, the European Central Bank President, she didn't sound cautious, or at least as cautious as we're used to. She went to the wire, and she said that the "hump", as she used to call it, in inflation is apparently lasting a little bit longer. And with 5% CPI, they may be feel quite uncomfortable here, and then therefore, should tighten and the market reacted big time. What do you make of this European paper pivot?
TONY GREER: It sounds a little bit like she saw a ghost. And it feels like the market isn't prepared for that, Alf. It's been 10 years. We've gone through how many cycles where the European banks have been on the lows, and we're starting to X them off of our trading pad because they're about to go under. And so, that's when we've kept rates pinned at zero for those traumatic times for the bank balance sheets, etc. And we seem to have come out the other side.
Now, she definitely is making it clear to the market that rates are going higher, we've got the majority of Germany's curve back in positive yield territory. And I think that's going to be a lot of adjusting for them in the banking system there. And it probably doesn't bode very well in the short term for equities, to be quite honest with you, in Europe. So, we'll see if that finally turns the tide there, but it's still going one way with the commodity trade, and the central banks have got to figure out a way to respond.
My guess is their verbal response is the loudest response and then in actuality, they wind up doing something a little bit less hawkish maybe, or maybe it takes longer to implement hawkish policy, but they are sending the message across very clear, as you pointed out, Alf, their rates are going higher over there.
ALFONSO PECCATIELLO: Yeah, I remember in December on The Macro Compass, publishing an article that said central banks speak, and I translate for you, where I pointed out these guys are changing their narrative. It's pretty clear they are, and the interesting thing is that if you look at the pricing of European Central bank deposit rate one year from now, the bond market is pricing that that rate would be plus 10 basis points from minus 50 today.
So, 60 basis points for Americans might not sound a lot, but for Europeans, 60 basis points in a full year, it's as hawkish as the European Central Bank hiking cycle in the first year can ever get priced. And the reaction is that as the chart shows here, for listeners as well, this chart shows the yield curve slope between 5 Year and 30 Year in Europe, the yield curve is flattening pretty aggressively because all the hikes have been frontloaded into pricing.
So, people expect the European Central Bank to wake up and actually do something. Also following the press conference of Lagarde, she signaled that they are preparing a tightening and they look at that, the long end of the yield curve in Europe cannot keep up the same pace of yield increases. So, the yield curve flattens also here very aggressively. This chart goes all the way back to 2008, and we are basically at the flattest level in the yield curve effectively since the great financial crisis. That's quite staggering, isn't it, Tony?
TONY GREER: That's unbelievable, man. That is a great chart to put up there, Alf, well put.
ALFONSO PECCATIELLO: But the other thing is if we move to the Fed, and also their change of narrative has been pretty impressive since October, November last year. Impressive to the point where the bond market actually is not sure anymore what's possible this year, what are they supposed to price in? These guys don't seem to be drawing a line in the sand literally or as I said on The Macro Compass, they don't cut the hawkish right tail of distribution, so people tend to think of bond markets pricing in a certain outcome.
It's four hikes or five hikes or five and a half hikes. Actually, it's a distribution of probabilities. That's the chart we're showing here. For people who are listening, it shows where according to traders in December 2022, the Fed funds rate are going to end with a certain probability attached to each outcome. So, in the chart, there are three hikes, four hikes, five hikes, all the way to eight hikes.
And the distribution, Tony, is centered around five to six hikes which is quite aggressive, but I want to call the attention of the audience to the fact that the right very hawkish tail distribution, we're talking about seven, eight or nine hikes in a single year. It's now priced to be at 20%. 20% is not a small probability, Tony, isn't it?
TONY GREER: That's the bond market rim shaker. That is serious. Like I said, they saw a ghost, man. They're actively witnessing the commodity breakouts alongside I think the end of lockdowns around the world in different phases. We saw a couple of countries in Europe say they're going to end mandates. We've got a couple of states here that were the last holdouts, and I'm