Read on the Trading Floor - 15 Jan 2024
Today’s focus… Iowa and Holzmann
Macro Themes At Play
Theme 1 - USD performs on MLK day
Theme 2 - Iowa Caucus is finally here
Theme 3 - ECB hawks stuck on repeat...
Further reading and listening of note
Theme 1 - USD performs on MLK day
Crude and Brent over 1% lower at $71.75 and $77.50 respectively. No further escalation on the Red Sea whilst non-OPEC oil production has increased as demand worries from China consumer also remains.
Gold is unchanged ~ 2055 and XBT "only" down 60bps as it "consolidates" after last week's 9.5% slide
Bloomberg - Bitcoin’s ETF Hangover Saddles the Token With its Worst Streak in a Month
The Wolf Den #883 - Not All Ships Sail - Will Vanguard Sink?
BoC Business Outlook - "FIRMS EXPECT SIZE OF PRICE CHANGES TO CONTINUE TO MODERATE OVER THE NEXT 12 MONTHS" which along with the dip in oil has USDCAD drifting towards a 4-week high of 1.3450
Theme 2 - Iowa Caucus is finally here
Does anybody have a chance outside of Trump? It is a crucial test for the other Republican candidates, early favourites (e.g. Elizabeth Warren) have lost larger advantages than Trump currently holds. In particular the market will be watching for Hayley and DeSantis performances. According to Politico, "Iowans will give us a pretty good idea about whether the former president can lock up the nomination in mid-March" (Playbook: Iowa enters the spin zone)
Bloomberg - The Iowa Caucuses Are More Important Than Ever, Thanks to Trump
The New York Times - This Again? In Frozen Iowa, the Press Corps Ponders a Slog of a Campaign.
Axios - Iowa caucuses day arrives with sub-zero temps and Trump a big favorite
FT - US election 2024: can any Republican hope to defeat Donald Trump?
Theme 3 - ECB hawks stuck on repeat...
A quiet Monday session has allowed Holzmann's comments to dominate. Along with Lane and Nagel, Holzmann has pushed back against a March cut. Lane over the weekend (interview link) focused on a summer cut, which was reiterated by Nagel today as he emphasises that it is premature to contemplate rate cuts at this time given the persistently high inflation prints. Nagel echoed Lane's proposed potential summer reduction.
Holzmann, a known hawk went a step further and said there is no guarantee of cuts this year. With 6 already in the Eurozone curve that's some bid offer for us to trade around in 2024...
Bloomberg - ECB’s Holzmann Warns Rate Cuts Aren’t Guaranteed This Year ..... "Threats stemming from lingering inflation will prevent the European Central Bank from lowering interest rates AT ALL this year — even as a recession can no longer be ruled out, according to Governing Council member Robert Holzmann."
Econostream - They Said It - Recent Comments of ECB Governing Council Members
Econostream - ECB’s Nagel: Should Wait for New Data; Maybe We Can Wait for Summer Break
Steno Research - ENERGY CABLE: 4 CHARTS THAT SHOULD KEEP LARGARDE UP AT NIGHT
Tweet of the Day
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Top Pieces
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Further reading and listening of note
Oilprice.com - A Houthi Retaliation Could Send Oil Prices Soaring
Steno Research - POSITIONING WATCH – WHERE TO FIND VALUE CURRENTLY
Macro Hive - Markets to Watch: Key Clues on the DM Cutting Cycle
A Wealth of Common Sense - Talk Your Book: Building Portfolios with AI
The MacroTourist - SCARCE TO ABUNDANT RESERVES
Odd Lots - The Massive Economic Impact If China Invades Taiwan
DB - All eyes on earnings
JPM - US Rates: Takeaways from December inflation and Red Sea trade disruptions
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Regarding Holtzmann and the euro rate curve, similar to the US, I don't think it is a proper reading that the market is anticipating 6 cuts. I think a better way to consider it is that there is a probability of 0 or 1 cut and a much lower probability of 300bps or more of cuts if Europe falls into a sharp recession. it just looks like this smooth curve of one cut per meeting, but that makes no sense. the same is true in the US I believe. I would argue the least likely outcome is 6 cuts. either one or none, if the economy continues to perform reasonably well, or 6 50bp or 75bp cuts if we fall into recession.