The Morning Hark - 10 May 2022
Today’s focus ……..UST peg in tatters and listening ears on for the Fed speakers
Daily roundup - all prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Both Brent and WTI futures down a percent on the day at 105 and 102.20 respectively. Weakness yesterday was pinned on the continuing threat to demand from the China Covid lockdowns and of course the general weakness in all markets. The European situation with regard to the banning of Russian oil imports did not help the backdrop with continuing bartering over extensions for specific country deadlines and threats to veto the embargo.
EQ - Asian indices playing catch up with the US move lower yesterday with the back from holiday’s Hang Seng leading the way down a percent at 19,500 and the Nikkei and Kopsi down around half a percent at 26,170 and 343 respectively. The US futures have seen a bounce and some small relief after yesterday’s general carnage. The Nasdaq up over a percent to 12,380 and the S&P sneaking back above 4,000 at 4,022.
Gold - Gold flat on the day at 1860. In all the carnage around it gold held up reasonably well. It managed to hold the 1850 level we spoke about yesterday and given what happened elsewhere, especially in its “digital cousin”, I’d say that’s a result.
FI - The extension in the US yield rally has fizzled out for now. The 10y reached 3.20 yesterday, a four year high, before dipping back below 3% in early Asian trading and then recovering to the 3.06 level. Remember back in early March the 10y was around the 1.67 level so to almost double in yield terms in little more than two months is an astonishing move. As we said yesterday the move feels extended but stepping in the way takes some courage.
FX - With US yields on the backfoot the USD has also taken a step back, albeit still at extended levels, with the USD Index back to 103.65. USDJPY still trades in the mid 130’s, EUR is still on a 1.05 handle and GBP likewise on the 1.23 big figure. Equally, USDCNH remains above 6.70 so all in all its far from a USD sell off.
Others - If you think it was bad in other markets you ain’t seen nothing yet with Bitcoin and Ethereum both down 13% from their opening levels to the lows we saw early in Asian time this morning at 29,750 and 2,200 respectively. Total panic in the space although interestingly the Asian candles that we often talk about were buyers of the dips from the lows rather than forcing it lower. A very small light in what’s been a very long dark tunnel for the crypto space this year with both coins down around 40% from their year’s highs in the early days of 2022.
A large contributing factor to the sell off was the breaking of the peg of the algorithmic stable coin UST. We spoke back in March about how the Terra foundation was the purchaser of bitcoins in large quantities to build a war chest to defend the UST peg and subsequently Luna. For context, there are around 18.5Bn UST in circulation. The stable coin is supposed to work whereby if the price of UST dips below $1 traders are incentivised to swap their UST (which gets burnt) for the related Luna token (newly minted). In general, the arbitragers will trade this movement (and the opposite direction) hence keeping the peg in line. The other incentive to hold UST was the high above market interest rates on offer for holding the stablecoin. Yesterday saw the peg go as well as Luna selling off.
There is a lot of speculation in the market as to what happened and no doubt the exact story will emerge with fingers being pointed at the TradFi space who have vast experience in putting pressure on and subsequently breaking pegs which tend to be red rags to the bull. The upshot was UST hit a low of 0.60 to the USD. At previous times of stress the peg has worked maintaining the 1 for 1 peg versus the USD in relative terms but yesterday it seems that the apparent selling of Bitcoin to defend the UST level only compounded the Bitcoin move and put additional pressure on the peg. One of the largest crypto exchanges suspended trading in both USDT and Luna due to congestion on the network. Something had to give and the result was a chart similar to an FX peg breaking. I post below one of the original articles on the Terra purchasing from back in March and some more analysis of the mechanics of what happened in yesterday’s rather sorry tale. As for downside levels in the pair some support in Bitcoin comes in at 29,000 and the year’s low in Ethereum is at 2,150.
The general market sell off continued yesterday with the S&P dipping below 4,000 its lowest level in a year and its 16% decline this year make it the second worst start to the year for the index in its history. From a technical perspective, it feels like we could be nearing an inflection point. The weekly close will be crucial with 4,025 being key for the downside and if we close below that level this opens up the mid 3,000’s. If we can scrape above 4,300 then we should see some relief back into the mid 4,000’s. The topside looks a long way off in current market conditions and there’s a long way to go before we get to the safety of Friday’s close.
Today the focus will fall on the 5 Fed speakers later in the day and we shall see what colour they can throw on their market and their subsequent forward guidance views. The main theme markets will hone in on will be any talk of the possibility of a future 75bp hike. Williams will probably be the pick of the bunch given his closet Chair Powell.
📅⠀The main highlights for the day ahead in terms of data and speakers:
German ZEW Economic Sentiment Index May - consensus -42.5 versus -41 previously (10.00 BST)
EU Area ZEW Economic Sentiment Index May - -43 previously (10.00 BST)
Fed Speakers - Williams (12.40 BST), Barkin (14.15 BST), Waller and Kashkari (18.00 BST) and Mester (20.00 BST)
ECB Speaker - Nagel (15.00 BST)
📚⠀Articles discovered on Harkster exploring some of the current key macro themes in more depth:
Coindesk - What Is LUNA and UST? A Guide to the Terra Ecosystem
The Block - Binance suspends LUNA and UST withdrawals amid market turbulence
ZeroHedge - Did The Biggest Recent Buyer Of Bitcoin Just Become A Forced-Seller?
🔥⠀Top 5 trending links on Harkster yesterday:
Prometheus Research - Week Ahead
Doomberg - Double Down!
UniCredit - Sunday Wrap
Unchained - Here’s What the UST Drama Is All About
Pinecone Macro Research - Slowdown Gaining Steam
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