The Morning Hark - 11 Apr 2022
Today’s focus ……..US yields and the USD continue their rise, Macron relief, Shanghai woes
Daily roundup - all prices are at 7.50 BST with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures down over 2% for the session at 100.85 and 96.20 respectively. Oil still trading heavily with the shadow of the SPR and IEA releases from reserves imminent and the continuing lockdown in Shanghai due to the Covid restrictions with a further city, Guangzhou, reporting school closures. The situation in Shanghai is having a deeper impact with many analysts fearing that the hit in terms of slower growth and higher inflation will be of a much bigger magnitude than that of the 2020 one with the backdrop of already rampant inflation across the world. As we have discussed previously these stocks of oil will have to be replenished at some point but that’s a story for another day. The key support for Brent is seen at $99.
Elsewhere commodities remain bid with the metals sector all showing gains of 2/3% in Asian trading and the agri sector also up on the day. The scenes of rioting in Sri Lanka over the collapse of their currency and food shortages is another sad human cost of the conflict in Ukraine.
EQ - As you’d expect with the restrictions in Shanghai Asian equity markets are lower across the board. With the Hang Seng leading the way down over 3% at 21,200. Adding to the gloom Chinese property developer Zhenro (the country’s 30th largest) said it missed two interest payments on its offshore bonds and expects more defaults in the coming months but claims that it will make good these payments in the near future. The specific reason given was the lockdown in Shanghai. Chinese March CPI also came in stronger than expected at 1.5% YoY versus 1.2% expected and 0.9% previously.
US futures are also weaker with the S&P holding above the key support at 4,400 at 4,460 but the Nasdaq through its support at 14,400 to 14,250. Some research out of Goldmans points to the bid in the equity space being dominated by retail with $18bn of a global inflow last week. However, the institutional side appears to be the offer with 15 trading days in March showing net selling. Cumulatively the second largest MoM selling in the last 5 years. With bond yields continuing their rise and rising inflation expected to impact q1 earnings it seems that the equity space is slowly starting to realise that fighting the Fed could be a costly mistake this time. Let’s see.
Gold - Futures flat on the session at 1942.
FI - Yields continue to push higher another day another new high with the US10y reaching a four year high at 2.78%. The bond market rout continues and surely it can’t be long before we see 3% in the 10y. We had thought the market may take a breather given the extent and speed of the move but that was “a picking up pennies in front of a steamroller” type theory and got what it deserved. With US CPI in the week it does feel like a one way street.
FX - The USD unsurprisingly, with the yield backdrop, remains bid. The USD index has now taken out the 100 level for the first time in 5 years. USDJPY has recaptured 125 after some consolidation last week and trading strongly up nearly a percent to 125.40. 130 still remains a reasonable target for that pair. The EUR has had a rollercoaster ride with a spike on the open up to 1.0920 from the 1.0875 close. The spike was a relief rally on the back of Macron’s first round poll lead in the French presidential elections. He looks set to go onto meet Le Pen in a winner takes all poll on the 24th April. The EUR however has since filled the gap in the face of the rising USD.
Others - Bitcoin nothing to see here at 42,300.
The volatility measures for equities (VIX) and rates (MOVE) again trading with a huge gap MOVE rising again to 124.86 and with yields performing the way they are you’d expect higher prints today as you would with the VIX now given the moves overnight?
Heavy shelling in the East and South of Ukraine over the weekend seemed to usher in the start of the new Russian offensive. The cities of Donbas and Kharkiv seem to be the initial focus of this phase and with peace talks breaking down with little positives and no new ones scheduled sadly it seems the conflict is set to rumble on.
Late Friday S&P downgraded Russia foreign debt to “selective default”. The move came on the back of repayments made by the Russians earlier in the week which were made in Roubles rather than the contractual USDs. There is a 30 day grace period but the agency feels that Russia will be unable to convert the currencies successfully hence placing it in technical default for the first time in over 100 years. In addition, they expect additional sanctions on the country in the coming weeks to hamper Russia’s technical ability to make such payments in a correct and timely fashion.
The French presidential poll was the key event overnight with Macron remaining in the lead. The gap between him and Le Pen in the first round is actually wider than that seen in 2017 (expected 28% vs 24% whilst 2017 was 24% vs 21%). In addition given Melenchon is expected to come in third with 22% and has encouraged his voters to transfer their votes to Macron and to not vote for Le Pen is a positive for the EUR. Still, we have a long way to go with the final poll two weeks away. Opinion polls last week suggested a 52/48 split for a second round match off in favour of Macron so new polls in the coming days reflecting the first round results will be key. Finally, the debate on 20th April will be a key focus with Le Pen hoping for a better performance than her one back in 2017.
The main point of focus for the day ahead is the Fed speakers with Bostic, Bowman and Waller all speaking at an event from 14.30 BST with Evans then up at 17.40 BST. The market’s focus in terms of Fed speak has somewhat shifted, despite the US yields rally, onto the balance sheet reduction program hence any remarks on this will be keenly anticipated.
📅⠀The main highlights for the day in terms of data and speakers:
⠀
Inflation Week for March - China started it off today as we discussed above with Germany and the US on Tuesday followed by the UK on Wednesday. Obviously, the US data (13.30 BST Tuesday) will be the main focus with Headline YoY expected at 8.3% vs 7.9% last and Core YoY at 6.6% vs 6.4%. With three consecutive 50bp hikes being seen by the market as the most likely outcome for the upcoming meetings the expected print, last before the May Fed, will be seen as the final confirmation that this is a done deal.
The Bank of Canada meet on Wednesday (15.00 GMT) with expectations running high that a 50bp hike is in the offing. The recent speakers have emphasised the need for acting aggressively and we see no need for them to disappoint the market, especially with Friday’s employment report holding no real surprises.
ECB meet on Thursday with the announcement (12.45 BST) followed by Lagarde’s press conference (13.30 BST). We still feel it is too early for any policy action other than a further announcement on the reduction to the net asset purchases. A signal as to the intended timing of the conclusion for these purchases will be key to the market’s pricing of the first rate hike. The earliest we feel we could see is a June conclusion with a July hike prior to the summer holiday season. Given the hawkish tone of the minutes as we discussed on Friday we would like to see some follow through in the press conference that a more aggressive stance is justified and will be acted upon sooner.
The UK is data central next week with February GDP on Monday showing a dip to 0.1% MoM vs 0.8 previously and 0.3% expected. Tuesday we have the employment report at (07.00 BST) with the unemployment rate expected to remain steady at 3.9% for Feb. Finally on Wednesday (07.00 BST) we have the inflation report for March. Headline is expected at 6.7% YoY vs 6.2% previously with Core at 5.4% vs 5.2% respectively. Given these will be the last such data prints prior to the May MPC the week’s data will go a long way in determining whether the BoE will pause in May or look to hike again following up their 3 consecutive hikes.
Good luck.⠀
⠀
If you enjoyed today’s piece, please do me a favour by sharing it with any friends or colleagues who you think would also find this newsletter useful! Thank you.
📚⠀Articles on Harkster and from outside exploring in more depth some of the themes above:
⠀
Bitcoin and tax season
MacroTactical Crypto - MacroTactical Crypto #15⠀
Ukrainian Wheat
Commodity inventories
🔥⠀Top 5 trending links on Harkster over the weekend:
⠀
Banking on the Market - The Weekend Edition # 37
Real Vision - The U.S. Dollar Continues To Show Its Strength
Topdown Charts - Weekly S&P500 ChartStorm - 10 April 2022
Stay-At-Home Macro - Rules are made to be broken
The Grumpy Economist - Fed psychology updates
⠀
⠀
⠀
The information provided in this post is for general information purposes only. No information, materials, services, and other content provided in this post constitute solicitation, recommendation, endorsement or any financial, investment, or other advice. Seek independent professional consultation in the form of legal, financial, and fiscal advice before making any investment decision.