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Why the EUR will weaken further…

No one can quantify the economic impact of the war

The European Central Bank “accelerated” their tightening of policy yesterday by further reducing the amount of bonds they will purchase and revised their inflation forecast for 2022 higher from 3.2% to 5.1%. On the surface, it seems hawkish compared to market expectations but listening to ECB President Lagarde in her press conference after the meeting, it is anything but.

She made it a point to push back every time a journalist tries to characterise ECB’s policy change as “accelerating” the tapering process. To her, it is normalisation and they stand ready to increase the purchases if data should show that their projections are too high. She stressed numerous times that the ECB wants to retain maximum flexibility and optionality to adjust policy as required.

This makes perfect sense as no one knows what’s going to happen with the war in Ukraine. It’s hubris of the highest order to plan a path of rate hikes when Putin could change everything with the press of a button. No one can quantify the economic impact of the war. No one knows how long the war will last. Everyone who has tried to predict anything about the war has been wrong.

If the war gets worse, EUR will bear the brunt of the risk aversion.

If the war resolves in no further damage to the economy, the ECB might get hawkish but, in that world, the US Federal Reserve will likely be even more hawkish or at least, the market will want to price for that outcome.

If the war is protracted, the ECB will want to retain that flexibility and the economy is likely to weaken further.

As such, the risk vs reward profile suggests that the EUR is a sell on rally.


The Value Of Inactivity In Volatile Times

People often associate constant action with progress and profitability while trading, or at least that is the “guru story” retail folks are being sold. In most fields of work, it is indeed true that there is a correlation between activity and productivity.

In addition, since the adoption of the industrial prussian model of education in schools, the act of completing tasks releases dopamine (feel good hormones) which leads us to believe this is what it takes to succeed.

Hence it is not hard to understand why successful investing and trading is counterintuitive to how modern man is shaped to survive.

In its simplest form, to create wealth requires one to ride a long-term trend, and in essence a long-term trend takes a reasonable amount of time to play out without you messing with it. As it is often said: Patience and Volatility is the price you have to pay for outperformance.


Canadian Employment data (Unemployment rate[6.3% expected vs 6.5% prev], Employment change [123k expected vs -200.1k prev]) will be released today. Market impact is likely to be limited.


1. Currencies:
CNH — Keep short USD against CNH. The CNH is going nowhere fast despite the volatility in other asset classes and other currencies. Stay patient and earn the positive carry while we wait for the trend to resume.

EUR — Sell on rally.

2. Commodities: Uranium & Energy — Stay long.

3. Stocks:

US Stock Index: Another volatile day, but remains in range.

Single Stocks: Energy stocks in the TrackRecord Model Portfolio are outperforming. SO when will you join the party?

Key risks: The Ukraine situation is the main focus of markets for now


Market Movement As of New York Close 10 Mar 2022
  • US inflation as measured by the Consumer Price Index (CPI) rose +7.9% year-on-year as expected. The inflation print, the highest in 40 years, will strengthen the Federal Reserve’s hawkish stance, giving it more conviction for their rate hikes this year. The US 2-year Treasury bond yield rose by 4 basis points while the 10 yr yield rose by 4 bps. The US Dollar rose by +0.56% as well as a result of the high print.
  • Despite the ongoing war in Ukraine, the ECB has decided to continue phasing out their bond buying programme in the third quarter, earlier than expected. This increases the likelihood of a rate hike this year. However, markets took this decision negatively, worrying that the Eurozone may face slow growth over its decision.
  • The stock market fell as peace talks between Russia and Ukraine failed again. The S&P 500 dipped -0.43%, Dow Jones fell by -0.34% while the Nasdaq saw a steeper decline of -1.1%.
  • Oil prices weakened slightly as Russia said it would fulfil its current contractual obligations on energy supplies. Brent oil spot slipped -3.03% on the news
  • The crypto market came back down again as Russia continued its offensive against Ukraine. Bitcoin came below the psychological level of 40,000, dropping -6% to 39,411. Ether fell -4.4% to 2,606.


There’s more inflation coming, as the Federal Reserve starts raising interest rate

Notable Snippet: February’s consumer price index was up 7.9% year over year, the hottest since January 1982 and just above a Dow Jones estimate of 7.8%. The gain was due to broad-based price jumps in areas of basic needs for consumers — food, fuel and shelter — and it comes as the war between Russia and Ukraine rages on, continuing to drive energy prices higher. Some economists expect inflation to rise even more going forward.

But, even with the uncertainty surrounding the war, the Fed is expected to move forward with its first rate hike next week in a bid to curb inflation before it becomes too entrenched. The Fed took its fed funds target rate to zero in early 2020 to fight the pandemic.

Thematic Context: “The question now is how is Biden going to “reverse inflation”, if it’s purely through raising interest rates without any stealth liquidity intervention like Standing Repo Facility or Swap Lines (ie just paying lip service to the idea of “raising rates”, but backstopping it from another angle), we believe that he will find out very quickly and painfully that it is the wrong decision with the Debt/GDP ratio at 130% (unless his idea is to kill the patient and implement policies that are out of anyone’s expected outcome). We suspect the amicable way to resolve it at this point is to subsidize the cost of living by going direct with fiscal policy, just like what they are already doing with the unemployed and stay home mothers.” — 11th Nov 2021

WHAT WE THINK: It will be interesting to see how the Fed can continue its hawkish trajectory given the economic tightening that we are about to experience is mostly due to Energy, Food & Supply-Chain bottlenecks, which are not only translating to higher prices but also slower economic output.

One problem is that inflation components are widening to cover more areas as almost two thirds of the components of the Index rose 4% or more. Less than half of the components rose that fast in January. Broadening inflation could mean that it would be harder to blame inflation on energy price spikes and “transitory” supply chain issues.

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U.S. VP Harris supports call for a war crimes investigation against Russia

Notable Snippet: Vice President Kamala Harris on Thursday offered U.S. support to calls for an international war crimes investigation into the Russian invasion of Ukraine, noting the United Nations had already started a process to review allegations.

“Absolutely there should be an investigation and we should all be watching and I have no question that the eyes of the world are on this war and what Russia has done in terms of this aggression and these atrocities,” Harris told a news conference in Warsaw after meeting Polish leaders to discuss next steps against Russia.

WHAT WE THINK: The West will continue to ratchet up tensions as Putin will do a tit-for-tat. The following snippet further elaborates the thoughts and consequences of this.

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Putin says Russia will emerge stronger, sanctions will rebound on West

Notable Snippet: President Vladimir Putin said on Thursday that sanctions imposed against Russia would rebound against the West, including in the form of higher food and energy prices, and Moscow would solve its problems and emerge stronger.

Putin said Moscow — a major energy producer that supplies a third of Europe’s gas — would continue to meet its contractual obligations even though it has been slammed with comprehensive sanctions including a ban on U.S. purchases of its oil. “They announced that they are closing the import of Russian oil to the American market. Prices there are high, inflation is unprecedentedly high, has reached historic highs. They are trying to blame the results of their own mistakes on us,” he said. “We have absolutely nothing to do with it.”

Thematic Context: “As the sanctions on Russia continue, expect retaliation from Putin, he very well understands that commodities are a form of “currency” and collateral in the age of shortages. The West controls the purse strings, but Putin and the Soviet Bloc holds a large part of what’s in it; we believe these will be weaponized, and inflation will be exported to the West on a lagged basis. The following snippet is an example of the trajectory we are already in.” — 10th Mar 2022

“We suspect that governments will refocus their efforts toward national security, and these will be directed by unprecedented fiscal measures that draw parallels to the Marshall Plan and Manhattan Project. This urgency is exacerbated by the Russian-Ukraine conflict, whose effects have yet to materialise. The Cold War 2.0 that ensues will ensure that the deglobalization track will be deeply entrenched and economic factions will become much more definitive; this will mean that commodity exports will likely circulate within a closed-loop economic system. Say goodbye to the Just-In-Time manufacturing process and profit optimization schemes because building robust redundancies into systems will be a matter of survival for countries and organisations. At the moment, there is a massive spread between Optimization (current system) and Redundancy focused systems. This spread is where we want to be heavily invested in and positioned for the next decade.” — 3rd Mar 2022

WHAT WE THINK: Putin just said the quiet part out loud. He will weaponise commodity and energy exports. The West can do nothing about it except to massively build out redundancies that can make them independent of Russian supplies. The entire process is inflationary, and we suspect that markets have not digested the scale of events unfolding.

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Phan Vee Leung
CIO & Founder, TrackRecord

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