The Morning Hark - 08 Mar 2022
Today’s focus …….. Market liquidity strains, nickel squeeze and food commodity turmoil
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures consolidate their recent gains up 2% at 126.20 and 121.80 respectively.
EQ - All equity markets in the red with Asian stock markets down between 1/2% and European markets down on the open with the Dax leading the way down close to 4%.
Gold - Futures up 1% at 2023 after yesterday’s big gains on the back of continued conflict, weakening equities and doubts over the path of central bank tightening. The August 2020 highs of 2075 are certainly within reach.
FI - all FI futures prices flat on the day with the US10y future at 127.80 consolidating after yesterday’s sell-off from 129 level.
FX - The FX market is slightly off from the extended levels we saw at the European open yesterday. However CE3 currencies remain at extended levels and very close to their recent/all-time highs. The EUR remains under pressure versus the CHF. All of these markets remain vulnerable to intervention by their central banks as they try to smooth the path of their respective currencies. The AUD gave up some hits recent gains as a very long market pared back positioning. Price action around 1.50 in EURAUD could prove to be key to whether we get some refreshed selling or see some weaker hands stop out.
Others - Bitcoin continues to trade softly below the 40,000 level but seems somewhat sidelined compared to other markets. The VIX continues to climb the wall of worry now at 35.40 up 1.5% but more worryingly MOVE (the US interest rate volatility measure) closed above 140 a level last seen in mid-2009. Suffice to say the market is at extreme levels of worry.
Unsurprisingly little progress from the peace talks held yesterday although some more concessions on humanitarian corridors were made. Although it seems that the Russians continue to bomb these corridors with reports of casualties on routes in Irpin near Kyiv. The US reports that all Russian troops who had massed on the borders have now been deployed as Putin desperately tries to achieve the gains he had long hoped for. The Russians did show their cards yesterday by stating their terms for a cease in operations. Ukraine must amend their constitution and reject claims to enter any bloc, Crimea returns to Russian rule and the Donetsk and Luhansk areas to remain independent. Extremely unlikely to be palatable to the West and especially the Ukrainian people.
Markets wise the overnight session was a lot calmer than what we’d seen earlier in the day as markets consolidated albeit at ugly levels. In the FX vol space, EUR 1m remains at elevated levels at 12.3% although EURUSD risk reversals still heavily favour puts over calls. Equally USD funding continues to show strains with the June FRA/OIS (spread between the 3m Libor used in the interbank lending market and the effective fed funds rate) widening in Asian hours 3bps. Equities equally continue to grasp records they’d rather not with the Nasdaq now 20% off its record high seen back in November and the S&P having its worst day in 18 months. Another point of stress which may be worth keeping an eye on is the CDS of European banks (see the tweet below from Bitcoin magazine for the detailed table) where we saw huge moves in those with particularly large exposure to Russia (Unicredit, CS, Soc Gen).
Finally, Nickel had a classic short squeeze as margin calls were triggered and failed to be met. However, the move of 80% far exceeded anything seen before and just illustrates the pressures on the financial markets and liquidity. We flagged this yesterday in particular in terms of collateral in the commodities market in an article by ZeroHedge (which I have reposted today below along with another one surrounding the margin calls in Nickel) although I don’t think anyone expected the move to happen that quickly!
Some other points of note. I attach a piece by Duncan Weldon explaining the effects he sees the war having on the global economy and he touches on some of our thoughts from yesterday on the price of food commodities and the potential repercussions across the globe. Peter Zeihan touches on this subject in his interview with RealVision at the tail end of last week albeit in a much more dramatic fashion with his view on the ramifications for China particularly interesting. Finally Julian Brigden and Jesse Felder question upcoming Fed decisions in light of the Ukrainian conflicts effects on US operating margins.
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📅 The main highlights for the day in terms of data and speakers:
Very little on the slate today with generally second-tier data. In light of the situation with CE3 currencies the Polish National Bank’s rate decision at 15.00 GMT will be worth taking note of. Market expectations are for a 50bp hike to 3.25% but with the currency knocking on 5 versus the EUR, a bigger hike may be on the cards.
📚 ARTICLES ON HARKSTER AND FROM OUTSIDE EXPLORING IN MORE DEPTH SOME OF THE THEMES ABOVE:
The Fed and Inflation genie
Arthur Hayes - Annihilation
ZeroHedge - Powell's Pivot To Nowhere
Pantera Capital - The Next Mega-Trade
Effect of the war on the global landscape
Duncan Weldon - The War in Ukraine: an economics reader (2)
Real Vision - Energy, Food, and War in Eastern Europe
Liquidity issues and commodities
ZeroHedge - Pozsar: "We Could Be Looking At The Early Stages Of A Classic Liquidity Crisis
ZeroHedge - One Of China's Largest Banks Fails To Pay Margin Call After Today's Monster Nickel Squeeze
🔥 Top 5 trending links on Harkster yesterday:
Lyn Alden - What is Money, Anyway?
Fed Guy - Breaking The System
The Macro Compass - The Bears are Knocking at The Door
Pinecone Macro Research - Commodity Shock
Duncan Weldon - The War in Ukraine: an economics reader (2)
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