The Morning Hark - 11 Mar 2022
Today’s focus …….. Reflections on US CPI and ECB. Final Nickel say …. for now
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures up 2/3% in the session at 112.20 and 108.30 respectively. The OVX, which we discussed this week continues to calm after that first down candle on the charts since the conflict started off 22% from its highs at 67.34.
EQ - All equity markets softer in Asia markets with the Nikkei off 2%. European and US futures up smalls.
Gold - Futures stable at 1997.
FI - all FI futures prices again relatively flat overnight with the US10y future at 126.25 continuing its grind lower off the recent 129 levels.
FX - The FX markets following the subdued nature of other overnight markets. The EUR stable after yesterday’s selloff as are the CE3 EUR crosses seen consolidating at the lower of their recent ranges. EURAUD is back through the 1.50 pivot we’ve spoken about but EURCHF has not followed and seems, for now, reluctant to push through 1.02.
However, the one standout has been USDJPY which has reached 5-year highs at 116.80. Supposed interest from real money type accounts in Asia has been the main driver with the obvious interest in topside USDJPY option strikes adding to the rally in again poor liquidity conditions. It would appear that the market is looking for a continued grind towards 117.20 and then 118 but as ever with the JPY it won’t be quick.
Others - Bitcoin remains moribund around the 39,000 level.
Both measures of volatility we are monitoring continue to calm, reflecting the overall smoothing of the markets’ price action, with the VIX and MOVE at 30.23 and 105.31 respectively.
The spectre of chemical warfare in Ukraine hangs heavy this morning with continued warnings from the West that this policy is next in the Putin playbook as he tries to break the will of the Ukrainian people. The UN Security Council will convene today at the behest of the Russians who claim that the US has been using Ukraine for military biological activities. The fear is that the Russians will use this as a further false flag tool. On the ground, another nuclear reactor has come under attack this time in Kharkiv and in Kyiv, the pincer movement of Russian troops to the northeast and northwest of the city seems to have got closer with reports of advancements of 2/3 miles. The EU have acknowledged Ukraine’s request for fast track membership to the EU but with little enthusiasm stating they acknowledge their aspirations and agree to support their pursuit of the European path but stopping short of any promise of fast-tracking the application.
US CPI was as expected with the headline rising 7.9% yoy the biggest 12-month rise in 40 years and core at 6.4% yoy. The 3-month rates are more explosive at 8.4% and 6.8% annualised showing that inflation accelerated over the winter (I guess unsurprisingly given what has happened to the energy component). Scarily a lot of the Ukrainian conflict spikes in oil, wheat and other commodity prices didn’t materialise until late February which points to further upside in the coming months. Double-digit inflation anyone?
The other main event was the ECB where we saw a hawkish decision with a dovish Lagarde slant. The ECB decision to accelerate normalisation took the market by surprise given the backdrop of the Ukraine conflict. Q2 asset purchases will be reduced month on month with a view that if data (ie inflation) allows the ECB it will end its program in Q3. On rates, they gave themselves some flexibility replacing “shortly” with “some time” with regard to the timing of the first rate hike. ECB sources claim to the FT that hawks outnumbered doves 15 to 10 with the outlook for inflation dominating the meeting over all other topics including the war in Ukraine. The quote from the two people involved in the meeting is forthright “only a major escalation of the war in Ukraine, cutting off the supply of Russian energy to Europe and causing significant disruption to financial markets, would deter the ECB from stopping net asset purchases as planned”.
The EUR after an initial rally has slipped in what looks like very tired markets after the rollercoaster week. It seems that the post ECB spike was used as an opportunity for fresh selling of EURs with the focus still on the geopolitical landscape and the economic fallout both in terms of sanctions and energy prices which leaves Europe remaining the most vulnerable.
RBA Lowe was back on the tapes for his second speech of the week. As we spoke about earlier he pointed to the possibility of a rate hike later in the year although this time there was Q&A and in that he somewhat contradicted this by stating that he could see a situation where rates did not move until next year. Little change in the markets on the back of the speech and as previously there is still quite a gap between the RBA’s take on the rates outlook and the markets which sees 150bps priced in for 2022.
One final point on Nickel which we spoke about earlier in the week after its dramatic spike, the subsequent halting of trading on the LME and then the unprecedented cancellation of 9,000 trades worth approximately $4bn. I post below a very good article by the Wall Street Journal offering a very good summary of the whole sorry tale. I also post for reference the Bloomberg TV interview with the LME’s CEO as he explains the reasoning behind their decision.
📅⠀The main highlights for the day in terms of data and speakers:
Nothing of major note today. Canadian payrolls data at 13.30 GMT and University of Michigan sentiment data at 15.00 GMT. EU heads of state meet in France and Biden is due to speak on Russia at 15.15 GMT.
Good luck and a good weekend to one and all.
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📚⠀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
Ukrainian conflict and peace talks
Timothy Ash - Russo-Ukraine war: is peace coming?
WSJ - The Moral Hazard Lessons From Nickel Market Disaster
Bloomberg - LME CEO: Suspending Nickel Trading Was Right Decision
🔥⠀Top 5 trending links on Harkster yesterday:
Doomberg - A Serious Proposal on US Energy
TS Lombard - Don't bet on a soft landing
Andreas Steno Larsen - Stenos Signals #5 – How do you trade stagflation?
Notayesmanseconomics - The ECB now faces a severe burst of stagflation as PPI in Italy rises to 32.9%%
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