The Morning Hark - 10 Oct 2023
Today’s focus...Middle East tensions continue to simmer, Fed speakers give a nod to long term yields and Day 5 Ellison is up.
Prices are at 7.10 BST/2.10 EST, with changes reflecting movement from midnight BST
Oil - Brent and Crude December futures both off smalls in Asian trading backing off from their knee jerk highs on the open yesterday but still remaining bid with tensions still at heightened levels in the Middle East. The pair are currently sitting at 87.60 and 84.10 respectively. After the sharp four percent rally yesterday its unsurprising that we have paused and with the involvement, or not, of Iran still uncertain the market remains nervous. As we said yesterday confirmation of their involvement would probably escalate into further US sanctions and subsequent rally for oil. Let’s see.
EQ - Asian equity markets all retracing their loses from the previous day and more with them taking their lead from the recovery in the US indicies yesterday after the Fed speakers’ comments. The Nikkei, Hang Seng and Kospi all higher at 31,720, 17,710 and 322 respectively.
The US indicies have held onto their gains from yesterday’s session in Asia with the Nasdaq and S&P futures up smalls at 15,200 and 4370 respectively.
Remember its about now that seasonality normally starts to kick in for equities and given the shops are full of Christmas stuff already is this the beginning of the Santa Rally?
Gold - Gold Dec continues with its safe haven bid in Asia up close to half of one percent at 1872.
FI - Global yields continued lower overnight after yesterday’s reversal on the back of the Fed speakers with the US2y and US10y currently trading at 4.97% and 4.65% respectively.
European yields closed lower and as they do followed the US lead with the German 10y yield closing at 2.77% and the Italian 10y yield at 4.84%. Note we are back above the 200bp spread between the two. Yesterday the Italians were looking for more flexible budget rules. The ECB pushed back and claimed that the rise in Italian yields were justified and are being determined by deteriorating budget fundamentals hence no need to trigger any special measures.
UK gilt yields similarly at 4.48%.
FX - The USD stabilised after yesterday’s sell off on the back of the Fed chatter and lower yields. The USD Index currently flat at 106.13. The JPY, EUR and GBP all a touch stronger with them currently at 148.90, 1.0560 and 1.2225 respectively.
USDILS continues with a bid tone sitting at 3.9310.
FX expiries wise not a huge amount on the go. USDJPY sees $1.1bn around 148.50/60 whilst the AUD sees 1.35bn rolling off at 0.6350
Others - Bitcoin and Ethereum trading little changed at 27,630 and 1587 respectively.
Recap
Obviously the main focus of the day was the human tragedy unfolding in the Middle East with hundreds of innocent lives being lost in the conflict around Israel and Gaza. Let’s not forget too we are well over 18 months into the conflict in Ukraine and the thousands of lives that have been lost there. Sometimes you have to wonder.
Coming back to the markets which whenever we have conflict in the world with innocent people being killed always puts things in prospective; its just always two numbers and does it really matter.
Anyway the initial risk off safe haven plays; oil, gold, USD, JPY and US yields up, equities down slowly fizzled out and the market’s focus, as so often happens, shifts. As we highlighted yesterday the Fed speakers were key on the back of Mester’s nod to higher long term yields last week. They didn’t disappoint with both Logan and, more importantly, Jefferson name checking them as factors in future rate setting. There definitely seems to be a shift by the Fed speakers to give a nod to this factor to the market both in terms of lessening the likelihood of a further hike, November seems set for a pause again, and to take the steam off the long end yield rally.
Nevertheless the higher for longer theme was still in their remarks just tempered a touch with the reference to the long end. CPI later in the week should help put the final nail in the coffin of any November hike but careful what you wish for Fed, if yields tip over aggressively the Fed could be heading over the other side of the ship again!
Central bank speakers
ECB’s Kazak stated that the rapid rise in interest rates is behind us and any future hikes would be relatively small. Indeed we can currently count on the fact that we may pause. Cuts can only begin when inflation outlook is permanently below 2%.
de Guindos reiterated these points claiming that rates are likely to remain at current levels for some time. He saw inflation continuing to cool over the coming months and saw economic growth in h2 at close to zero. However we must watch oil, prices and labour costs closely.
Knot pointed to the elevated oil price due to the conflict in Israel being a potential new shock to inflation but as things stand he is comfortable with the level of rates.
Villeroy see no further rate hikes at this point and sees them at a good level.
The Fed’s Logan emphasised the need for continued restrictive financial conditions to bring inflation down. As we spoke about yesterday she gives a namecheck to the higher yields in financial markets and stated that if they remain then there will be less need for the Fed to raise rates. However it is important that the Fed stays focused on restoring price stability. This comes on the back of Mester at the tail end of last week so significant that there seems to be a clear signal coming from the corridors of power at the Fed.
Jefferson continued the theme later in the day giving a nod to rising long term yields in the context that investors were anticipating stronger economic growth but more importantly the need for a higher for longer rate path. He pointed out that, now rates are in restrictive territory, the Fed needs to move nimbly with regards to the economy and they need to balance the risks of tightening too much or too little. Most specifically he noted that he “will keep higher bond yields in mind in assessing future rate path”.
On the economy he expected a further gradual easing of the labour market and is aware of the lagged effect of past rate rises.
Japan’s finance minister Suzuki lightened the mood by saying that the “current Yen weakening caused in part by interest rate differentials”.
SBF Trial
Day off for the trial yesterday but Ellison is up today!
Unchained - The Annoying SBF lawyers
The Day Ahead
Again a quiet day data wise. Norwegian inflation report just out and softer than expected across the board. Norges, remember hiked last month and remained with a hiking bias. Rethink potentially?
Rest of the day all eyes on the situation in the Middle East with some Fed speakers in the afternoon and evening. Let’s see if they continue the thread from yesterday.
In addition its the opening day of the IMF/World Bank meeting so expect to see some comments from there. Lagarde is in on some of the sessions today so may come over the tapes.
Early doors tomorrow we have the Japanese Tankan report and German inflation just as we go to the press.
FXMacro Guy’s excellent “lite” piece this week was on charts and the common pitfalls when we use them for trading. Well worth a read as is his subscriber offering which is packed with key data to help your trading week.
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All times in BST (EST+5 / CEST-1 / JST-8)
The main highlights for the day ahead in terms of data and speakers:
Tuesday
US Wholesale Inventories MoM Aug consensus -0.1% vs previous -0.2% (15.00 BST)
World Bank/IMF annual meeting
Fed Speakers
Bostic (14.30 BST)
Waller (18.30 BST)
Kashkari (20.00 BST)
Daly (23.00 BST)
Early Wednesday
Japan Reuters Tankan Index Oct consensus vs previous 4 (00.00 BST)
German Inflation Rate MoM Final Sept consensus 0.3% vs previous 0.3% (07.00 BST)
German Inflation Rate YoY Final Sept consensus 4.5% vs previous 6.1% (07.00 BST)
Good luck.
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Fantastic work as always!
Thank you for the shout-out!