Three important things to watch

day 08.11.2021 * Reading time: 5min.

 
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Three important things to watch

 

  1. #USD – The value of the US dollar is important since the globe is short the currency it requires to make business. Oil is traded in US dollars. Furthermore, the worldwide stock of debt denominated in US dollars is massive and continues to rise, so every increase in the USD tightens financial circumstances. Emerging countries with current account deficits are especially vulnerable to any USD appreciation, but the globe as a whole does not function well with the big dollar booming.

The current US debt level is around 27 trillion, so 1% increase in interest rates means extra costs of 270 billion a year additional mandatory interest payment.

  1. #US 10year yields — It is significant because no other interest rate serves as the foundation for present value discounting models of the world’s assets. No other rate is more influential in establishing the global standard for term finance. As it rises, asset prices become more fragile. Furthermore, in a society drowning in debt, the higher nominal rates increase, the higher nominal income must grow simply to maintain debt serviceability. And, of course, the US dollar is not only the most widely used money in the world, but it is also the most borrowed-in currency. With interest rates being relatively low, the 10-year US Treasury note indicates that all is okay for the time being.

At the moment, markets aren’t buying into the media-driven inflation , which is dominated by click-bait about minor shortages that appear to be resolving slowly. If they did, we would see a jump in expectations for higher interest rates, which would likely drive 10 year yields higher and boost the US currency as the chance of the Federal Reserve raising rates rapidly was priced in.

 

  1. #Oil– in a world that is preparing to decarbonize and move its energy sources away from fossil fuels, the truth remains that the world is still hugely reliant on carbon-based energy sources. Rising energy costs impose a significant economic burden on businesses and consumers, and while end prices and wages will eventually adapt, this will take time. In short, this growth, at least initially, functions as a tax. Brent crude is up more than 20% in two months and is at its highest level in seven years. Natural gas prices have risen by more than 80% this year and, although still well below their recent highs, point to a perfect storm for gas-dependent regions facing a winter with low storage levels and dwindling supply.
Rafal Ciepielski

Rafal Ciepielski

CEO RCieSolution

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The views expressed in this document do not constitute research, are not investment or commercial advice, and do not necessarily reflect the views of all management teams. They change over time.