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flag ★ Wall Street and the real economy: no longer together; supply problems are on the rise

Analysis News:::2021-10-20T21:09:29

Wall Street and the real economy: no longer together; supply problems are on the rise

The world is facing "very long" disruptions in cargo flows, according to the head of the leading port operator ICTSI. US stock indices rose on Wednesday

Wall Street and the real economy: no longer together; supply problems are on the rise

Wall Street and the real economy: no longer together; supply problems are on the rise

Cargo transportation will become even more difficult and more expensive

The world is facing "very long" interruptions in cargo flows, according to the head of the leading port operator ICTSI. Logistics problems, such as truck shortages and delays in shipments at ports, affect the supply chains supported. As the resumption of the economy increases volumes, the pressure on the logistics sector and suppliers of raw materials and components is also growing.

In recent months, the economies of many countries have been suffering from bottlenecks caused by a surge in demand for retail goods from people stuck at home due to restrictions and congestion associated with the pandemic. This swerves to the offer of container ships and crates for the transportation of goods.

At some points, the situation was particularly difficult in large retail markets, such as the United States, where dozens of ships were stuck at the West Coast ports of Los Angeles and Long Beach, unable to unload.

"I see this as a very protracted crisis, at least in port and on land, especially in places like the United States. It will be difficult to cope with it," said Christian Gonzalez, head of corporate governance at International Container Terminal Services (ICTSI), headquartered in the Philippines.

"In terms of Pacific shipments, it's going to be pretty messy for a while, and it's not something that can be solved by adding more ships to the system. This will only lead to an increase in the backlog."

According to Gonzalez, the heavy cargo activity has also affected other regions, including Iraq, where ICTSI operates the Basra Gateway Terminal in the south of the country.

According to him, international shipping companies redirect containers to routes with large volumes of traffic. In recent months, they have recorded record high chartering rates.

"There are small disruptions in Iraq, mainly due to a shortage of containers and people who simply do not want to send containers along these routes," he said.

ICTSI, which has container ports in a number of regions, including Asia, the Middle East and South America, and is one of the ten largest container terminal operators in the world, handled a consolidated volume of 5.45 million TEU (twenty-foot equivalent) in the first half of the year. This is 14% more than in the same period of 2020, which amounted to a volume of 4.79 million TEU.

Gonzalez is optimistic about the prospects of his company, but at the same time expects that cargo volumes will remain unchanged. That is, the company does not plan to increase the volume of traffic, and this is not such good news.

It seems that, like the manufacturing sector, carriers are afraid to add more ships and trucks, because if inflation and/or another Covid-19 strain weighs down economic growth, their capacities will be idle. Even if we get loans at the current rates, many shipowners will not cope with the blow if the price of transportation decreases along with demand, and inflation rises, forcing employees to raise salaries.

It cannot be said that they have absolutely no grounds for concern.

Americans will save

Despite the assurances of the US government that ordinary residents have cunningly hidden more than a trillion dollars in the pots, the forecast data so far show the opposite trend. Apparently, the savings are hidden very deeply, because the data published on Wednesday show that Americans are going to buy less on Christmas Eve.

Holiday spending in the U.S. is expected to grow at its slowest pace in at least eight years as food shortages, higher prices and ongoing pandemic-related uncertainty threaten to worsen the shopping season.

The data comes from Adobe Analytics, which forecasts an average online sales growth of 10% or $207 billion in November and December, compared with a record jump of 33% in 2020, when people preferred to shop from home rather than go to the shops during the pandemic.

After battling viral store restrictions for much of the past year, retailers are now facing a host of pandemic impacts, including a global supply chain crisis that could lead to shortages of everything from Nike shoes to Apple iPhones during the holiday months.

The lack of clarity on expected inventories makes it even more difficult to determine whether a shortage of products could push consumers to shop online or in-store, lead analyst Vivek Pandya said on Wednesday.

The expected shortfall and the risk of renewed COVID-19 cases are also one of the reasons for Adobe's wider range of spending forecasts, from 5% to 15%, Pandia added.

The increase in 2021, which is expected to be driven in part by rising product prices, will be the smallest increase since Adobe began tracking holiday spending data in 2014.

According to an Adobe representative, due to the fact that companies are raising product prices due to a sharp increase in goods and transportation costs, consumers are expected to pay 9% more between Thanksgiving and Cyber Monday this year.

It says that out-of-stock reports on retailers' websites were up 172% from pre-pandemic levels at the end of July, with clothing stocks depleted the fastest, followed by sporting goods, children's goods and electronics.

To cope with potential inventory shortages, retailers are offering fewer discounts and looking to boost the sales season by encouraging shoppers to start their holiday shopping earlier this year.

There are indeed many unknowns in this equation. So, inflation can spur buyers to buy goods earlier. Scarcity also stimulates demand. There is also the factor of impulsive purchases, which grows the more the holiday date is closer.

However, some buyers are simply not willing to pay too much. Perhaps this will shift the demand for cheaper goods, which will also become more expensive due to increased demand.

The real economy and unrealistic difficulties

All this suggests a not too rosy idea that inflation is largely provoked by the fact that everyone is too afraid. Governments in Europe were afraid to conclude futures contracts for the supply of gas, and now Russia can dictate its prices and its terms to them. Carriers are afraid to increase the fleets of trucks and the number of ships, although the latter factor really won't help much, because ports in China and exporting countries are often quarantined, stopping shipping.

As a result, Chinese manufacturers are also afraid to increase production volumes, because their goods will lie unloaded for months. They are also hindered by the strict policy of the state in the field of the spread of coronavirus.

Manufacturers in Europe and the USA are reducing the volume of output, because they do not receive raw materials and energy carriers on time.

Thus, prices for dairy products and pet food have increased this year. Coffee prices are also projected to rise in 2022.

Nestle SA, owner of Nescafe and Nespresso, said coffee will become more expensive as the company begins to feel the pressure of higher production costs in this category.

The world's largest food company, which also produces Purina pet supplies and Carnation condensed milk, has joined its peers in adding price increases to their strategies as they struggle with accelerating inflation, which they predict could intensify in 2022.

"It has more to do with specific categories that have been affected by production cost inflation," Chief financial officer Francois-Xavier Roger told analysts. In 2021, it was more about dairy products and pet care. "But we can expect to have more coffee prices next year."

As a result, prices are rising, and ordinary people are worried... and only Wall Street feels great.

The stock market has risen again

U.S. stock indexes rose on Wednesday, helped by strong quarterly reports from healthcare companies including Anthem and Abbott, while concerns remained about the impact of supply chain constraints and inflation on corporate earnings.

Abbott Laboratories rose 4.2% after raising its annual profit forecast amid a recovery in sales of test products for COVID-19.

Anthem Inc shares gained 5.7% and Biogen Inc 2% after both medical companies raised their profit forecasts for the year.

Of the 11 major S&P 500 industry indexes, eight rose after sagging on Monday.

Economists expect S&P 500 earnings to grow 33% year-on-year, according to Refinitiv data, while keeping a close eye on the growth prospects of companies facing rising costs, labor shortages and supply chain disruptions.

"Investors are digesting profits and the impact of supply chain disruptions on corporate America," said Fiona Cincotta, senior financial markets analyst.

"Recent releases have helped to distract from concerns about stagflation, but have diverted attention to bottlenecks in the supply chain, which are likely to have a negative impact on third-quarter earnings."

Netflix's global sensation "The Squid Game" has helped attract more customers than expected, the world's largest streaming service has said, predicting that the saturated membership will further increase the number of registrations by the end of the year. The series was watched by more than 142 million households.

However, its shares fell 2.3% after a record high earlier this month due to an incorrect statement by one of the company's employees, adding 18.2% overall this year.

Other names of mega cap technologies and communications were mixed in pre-market trading. According to Verge, Facebook, which has gained 0.2%, plans to rebrand with a new name focused on the metaverse. However, a fine of 50.5 million pounds from the British regulator for violations committed during the purchase of the Gif Giphy platform may negatively affect the company's quotes today and tomorrow.

"People are waiting to see what the big tech companies will report. This is probably the real reason why we see individual stocks reacting more than the market as a whole," said Peter Cardillo, chief market specialist.

In quarterly reports, Verizon Communications Inc gained 2.1% due to an increase in the number of postpaid telephone subscribers in the third quarter than expected, while oil producer Baker Hughes Co fell 4% due to low profits.

The benchmark S&P 500 index is just 0.3% below its record closing level in early September, while the Dow Jones Industrials average is 0.3% below its record high reached in mid-August.

The Dow Jones Industrial Average rose 83.61 points, or 0.24%, to 35,540.92, the S&P 500 rose 10.73 points, or 0.24%, to 4,530.36, and the Nasdaq Composite index rose 9.87 points, or 0.07%, to 15,138.96.

Ford Motor shares gained 2.3% after Credit Suisse upgraded the rating of shares of the US automaker to "better" in connection with the transition to an electric car.

On the NYSE, the number of issues sold exceeded the number of those that fell in price by 1.46:1. The number of falling issues exceeded the number of those that rose in price by a ratio of 1.01 to 1 on Nasdaq. The S&P index recorded 38 new 52-week highs and no new lows, while the Nasdaq recorded 48 new highs and 12 new lows.

Tesla Inc fell 0.6% ahead of quarterly results after markets closed as investors await details on its results in China.

The trading volume due to the "cheap" dollar is so intense that it creates collapses in the execution of real contracts.

London Metal Exchange is devastated

So, the London Metal Exchange has run out of copper - literally. Available copper stocks in LME warehouses have fallen below 20,000 tons - less than Chinese factories consume in one day. Now traders are struggling with the possibility that the metal simply will not be available for delivery.

The sharp drop in inventories, which began in August and accelerated this month, led to a sharp jump in the nearest LME contracts to record copper premiums for subsequent delivery. This is especially painful for copper producers - companies that turn the base metal into things like wires, plates and pipes, and which tend to sell LME futures to insure against their price risks.

But the emptying of warehouses has also helped to raise benchmark prices, and the ubiquitous role of copper in the world means that a jump in costs will increase the widespread impact of inflation on manufacturers and builders. And while the growing threats to global economic activity raise questions about the prospects for copper demand, stocks of Chinese and American competitors on the LME are also low.

Only a small fraction of the world's copper ever enters the LME warehouse, and copper users tend to enter into long-term contracts with producers and traders, rather than looking for supplies on the stock exchange. However, the fact that stock holdings are so low - and not just on the LME - shows that the market buffer is dangerously depleted.

The exchange introduced emergency measures Tuesday evening to remedy the situation. Among them was a temporary rule change allowing any trader with a short position who cannot deliver copper to postpone fulfilling their delivery obligations for a fee.

"This is an unprecedented situation and we haven't seen anything like it in the recent history of the copper market," said Robin Bhar, an independent consultant who has been analyzing LME metals markets for more than 35 years. "These market actions are harsh, but they are necessary."

The LME has also launched an investigation, requesting information from banks and brokers about their activities and the activities of their clients in the copper market over the past two months. Trafigura Group trading house has recalled a significant part of the copper that was removed from LME warehouses in recent months.

In response, Trafigura stated that LME stocks were needed to deliver to end users, emphasizing that there is high demand for copper, which is crowding out the available supply. "Trafigura's role is to ensure the security of the supply of goods for its customers," said a representative of the trading house.

Today, copper prices have slightly decreased due to the intervention of the exchange. However, this is not the first time the LME has intervened in its markets. In 2019, the exchange conducted a similar investigation when the flow of orders for the withdrawal of nickel provoked a jump in the price of nickel. The market calmed down and the LME took no further action.

Pay attention to the dates: both cases of overspeculations occur during the years of the greatest economic growth. We can assume that this is directly related to the formation of bubbles in the relevant sectors.

Undoubtedly, the super profits that bankers and hedge funds demonstrate are directly related to the cryptocurrency market, which allows you to achieve a good profit due to strong volatility.

At the same time, financiers are less willing to get involved with lending to the real sector, which is experiencing enormous difficulties. If you need my opinion, this is what will eventually provide us with the strongest stagflation. No matter how important bitcoin is and its role as the flagship of the new era of digital money, the production of goods should not have difficulties with financing.

It may be especially difficult even for non-large companies that are able to issue their own corporate loan bonds, or to borrow against fixed assets. A small producer is the one under attack. It is private production that will lose in the battle of raw material prices with large producers. It is medium and small enterprises that will face the greatest pressure from employees demanding a salary increase.

Large enterprises can create a certain debt limit, for example, for electricity without fear that they will be turned off, because jobs are at stake. Private producers are deprived of these privileges.

Alas, the National Banks, in an effort to save the financial sector in the first place, have finally forgotten what the financial system exists for. The excess profits of individuals are more important than the financing of producers.

Therefore, yes, we are waiting for stagflation. So now, while inflation has not yet reached double digits, you should think hard about what you will spend when hard times come. And perhaps you will think about trading as a way to earn a living, if you are not with us yet. After all, the market does not sleep, it always digests money. And in the most difficult days for the economy, the volume of transactions only increases, because this is its nature.

Perhaps this is the most important lesson that Wall Street financiers are teaching us right now: in difficult times, take care of yourself first. And now is the time to create a "pillow" for yourself. It may be cruel, but that's the reality.

Analyst InstaForex
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