The Morning Hark - 1 July 2022
Today’s focus ……Risk off to start the new quarter, Atlanta recession warning, the vultures continue to pick over the bones in crypto and the ECB dual speed road to Mark/Lira?
Daily roundup - all prices are at 7.40 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September futures small down on the day at 108.60 and 102.70 respectively. Oil stabilising after its selloff with the general commodity space yesterday. OPEC sprung no surprises at their meeting ratifying their output hikes for August but doubts still very much remain as to their ability to meet these targets. In their statement they alluded to this stating “with most members, besides the Saudis and their neighbours, unable to raise output”. If you add Macron’s earlier thoughts on where the Saudis and their neighbours are in terms of capacity, pretty full, then it’s not a rosy picture as we approach President Biden’s Middle East tour. Elsewhere US officials poured cold water on any prospects of a breakthrough with Iran on the nuclear treaty, which may open up the Iranian supply of oil to the West, when they described it as “getting worse by the day”. So with those two supply side shocks it shows you how much the oil market is fearing a recession with oil having a close to 4% sell off on the day.
The BCOM index, (broad Bloomberg Commodity Index) which we have discussed in the past, we are back at levels last seen back in early March and close to 15% off the highs for the year which were seen only three weeks ago. Worth keeping an eye on especially as the recession fears grow as we are starting to close in towards the 200dma around the 113.70 level (currently trading at a touch over 117).
EQ - Red still seems to be the equity market’s favourite colour just now with the majority of indices down on the session. The exception is the Hang Seng which is holding onto small gains at 21,800 helped by a stronger Chinese manufacturing PMI which posted its highest print in a year. Elsewhere in Asia it’s all gloom with the Nikkei and Kospi both down well over one percent at 25,940 and 304 respectively. The Nikkei wasn’t helped by a poor Tankan headline number (9 vs 14 for the large manufacturing print).
The US indices fairing no better as they start the second half of the year both down over one percent with the Nasdaq now at 11,400 and the S&P at 3,750. Ugly times with yesterday’s close capping an over 8% down draft for the pair in June contributing to the S&P falling 21% in the first half of the year, its worst performance in over 50 years, and the Nasdaq down 30% its worst in 20 years.
Gold - Gold futures continued their decline in Asia with them back through 1800 to 1796. Gold struggled yesterday suffering with the general commodities sell off amidst the strong USD and growing recessionary fears. 1800 becomes a short term trading pivot with support towards 1785.
FI - Global yields continue their sell off with the US 2y at 2.91 and the US10y well through the 3% level we’ve been flagging of late to 2.97. In Europe the German and Italian 10ys followed the trend with them closing at 1.339 and 3.296 respectively and getting a touch wider again approaching the 200bp mark. Recessionary fears and general central bank tomfoolery seem to be pushing yields lower and as we said previously this week its summer showtime with the markets screaming for cuts sooner rather than later and the Fed looking to have more resolve this time compared to previous market stresses. Let’s see.
FX - The USD has held up in the general gloom. USD Index holding close to 105 at 104.85. USDJPY has seen a decent sell off from its 137 print now trading back a touch lower than 135 as JPY receives some safe haven flows. GBP looking vulnerable yet again as it approaches 1.21 as always what’s to like about that one. The EUR equally back well below 1.05 at 1.0455. Elsewhere risk proxy currencies have suffered badly with the AUD and NZD both down over a percent at 0.6828 and 0.6190 respectively. Similarly KRW and TWD weakening to 1297 and 29.88 respectively versus the USD. NOK has suffered of late on the back of oil’s declines and versus the USD, and its worth keeping an eye on, its getting to extended levels currently trading just shy of 9.91 with the year’s high a touch above 10.
Others - Bitcoin and Ethereum didn’t stay sidelined for long with the break of 20,000 in Bitcoin seeing us accelerate into the mid 18,000s before one of those early Asian candles came to the rescue and we saw a sharp 12% spike to knock on the door of 21,000. However, the fun didn’t last too long with the rally been keenly met by sellers and we revert back to the gloom with us currently trading at 19,400. As seems to be the case of late, FTX, or rather its associated trading shop Alameda, have been cited as the cause of the sharp spike although seems a little too pin the tail on the donkey for me. Ethereum, as has been the case of late, has held up a lot better with the low on the day just pushing its through the 1000 level with a similar spike and reversion now back to 1050. Lots of fascinating press and speculation featuring the names in the frame of late which I post below for those with interest.
Well no sooner had the Sintra Forum finished than the ECB launch their great idea to fight anti-fragmentation in the Eurozone. I post some articles below for greater detail but the gist of it is they will split the countries into three buckets; the donors, recipients and neutrals for reinvestment of funds from the pandemic scheme proceeds. In effect, the proceeds it receives from maturing German, French and Dutch bonds can be reinvested into the weaker Southern European countries in attempt to suppress their yields and hence lower borrowing costs in those countries. An illustration of this was all too clear to see this week with the Italians having to offer yields for their 5 and 10 year bonds last seen back in the years of the Eurozone debt crisis. It does beg the question why Lagarde couldn’t have announced this at Sintra or perhaps she was too aware of the scorn and difficult questions she would face and at least now this gives her time to prepare more speeches with central bank buzzwords to defend the policy. We did say earlier in the week “do we go to a two speed EUR with a two speed monetary policy? I’d like to see them try or why not go the whole hog and get Mark/Paris and Mark/Lira back in play?” although we definitely didn’t think it would come this fast. Roll on Mark/Paris and Mark/Lira!!
Not much light out there with markets trading in full recessionary mode with stocks, commodities and yields all lower. The data continues to tip over with the Chicago PMI two points lower than expectations and US consumer spending falling in May for the first time this year. One bright spot was the inflation indicators which all came in a touch softer for May. The real shocker was the Atlanta Fed’s latest GDP forecast for q2 which saw a decline of one percent following on from the -1.6% we saw for q1 and, if so, heralding a recession. All eyes on the 28th July when we get the preliminary numbers for q2 US GDP. It feels like it’s going to be a pivotal month ahead. Today’s focus will be EU inflation, the PMIs out of Europe, UK and the US with lastly the US ISM print closing the day as we go into the July 4th weekend. Happy Independence Day for all those that celebrate.
Let us know if you found today’s post useful by hitting the ‘Like’ button at the bottom. Thank you!⠀
📅⠀The main highlights for the day ahead in terms of data and speakers:
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Friday
German S&P Global Manufacturing PMI Final Jun consensus 52 vs previous 54.8 (08.55 BST)
EU S&P Global Manufacturing PMI June consensus 52 vs previous 54.6 (09.00 BST)
UK S&P Global Manufacturing PMI June consensus 53.4 vs previous 54.6 (09.30 BST)
EU Inflation Rate YoY Flash June consensus 8.4% vs previous 8.1% (10.00 BST)
EU Core Inflation Rate YoY Flash June consensus 3.9% vs previous 3.8% (10.00 BST)
US S&P Global Manufacturing PMI June consensus 52.4 vs previous 57 (14.45 BST)
US ISM Manufacturing PMI June consensus 54.9 vs previous 56.1 (05.00 BST)
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Saturday
ECB Speakers
Schnabel (14.15 BST)
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Good luck and a good weekend to one and all.
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🔥⠀Top 5 trending links on Harkster yesterday:
Alhambra Partners - Eurodollar Futures Interpretation Is Everywhere
The Technology Letter - Welcome to downgrade season
Mish Talk - Powell: "We understand better how little we understand about inflation”
Forward Guidance with Jack Farley - The Central Bankers' Toolkit Is Empty | Ronnie Stoeferle & Mark Valek 🎧
📚⠀Further reading on the current key macro themes:
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Oil
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Crypto Woes
Coindesk - Genesis Faces ‘Hundreds of Millions’ in Losses as 3AC Exposure Swamps Crypto Lenders: Sources
The Block - FTX walked away from a deal with Celsius after seeing state of its finances: sources
Bloomberg - Blockchain.com Cooperating With Investigations Into Three Arrows
Bloomberg - Crypto Lender BlockFi, in Talks With FTX, Also Gets Ledn Offer
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ECB/Anti-Frag
ZeroHedge - ECB Will Buy Italian, Greek Bonds Using Proceeds From German, French Bonds To Avoid Crash
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Mark/Paris
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