The Morning Hark - 12 July 2022
The Morning Hark - 12 July 2022
Today’s focus ……Nord Stream experts all, EUR parity time, and not so platinum sales for the Jubilee
Daily roundup - all prices are at 7.45 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September down close to two percent on the day at 105.40 and 99.50 respectively on renewed China Covid fears as more Chinese cities adopt fresh restrictions raising global recession fears. Worries of a disruption to the Caspian pipeline, a major artery of oil supply, have been allayed by a Russian court overturning a previous ruling to suspend operations. All eyes on Biden’s Middle East tour which starts tomorrow with his first stop Israel.
Yesterday saw the now famous, Nord Stream 1 pipeline, shutdown as expected for annual maintenance. Whether it returns to full production is another matter and one that has caused much consternation in the market. Always amazes me how quickly we market’s people become “experts” so quickly in such random things which after a few days or weeks disappear from our minds forever. Anyway for now it’s front and centre and having the obvious volatility effect on natural gas prices. Goldman’s research has estimated that if the pipeline remains closed this would cause a 35% supply side shock for Europe another potential huge hit for households. If it doesn’t rain it pours!
EQ - Sea of red for the equity sector with Asia leading the way following the US session sell off and especially the Nikkei after yesterday’s positive outlier day we now see it down close to two percent at 26,335 with the general risk off sentiment across all markets. The Hang Seng and Kospi also down but to a lesser degree at 20,900 and 305 respectively.
The US futures also lower on the general mood music with the Nasdaq and S&P trading at 11,800 and 3833 respectively.
Gold - Gold futures flat at 1733. Gold bounced a couple of times off our lower tight range bottom at 1730 before taking it out in Asia as the USD continued to press ever higher. It has subsequently regained the level but is hostage to the USD. If the USD continues to press higher then 1700 is easily within sight.
FI - US yields backed off again smalls overnight with the US2y and 10y yields remaining inverted just at 3.03% and 2.96% respectively. Our 10y rough and ready pivot at 3% is well in play again as the NFP rally faded and we are back on recession watch. Again we can’t stress enough how illiquid markets are and flows tend to dominate the price action more and more. As an aside, the US 3y auction overnight printed the highest yield for such an auction in 15 years.
European yields followed in step yesterday with the German and Italian 10y yields selling off to close at 1.249 and 3.208 respectively.
FX - Front and centre FX is top dog just now and especially the USD which continues its rise to another new high for the move at 108.50. There is no place to hide for the other majors as they all suffer with USDJPY at 137.40, the EUR a hair’s breadth away from breaking parity and GBP in the mid 1.18’s. USDCNH is on the march again too at 6.7425 and may be worth keeping an eye on as it has somewhat lagged the recent move and hasn’t even captured the year’s high we saw back in May. Let’s see if it plays catch up or is the canary in the coal mine that the move has run its course for now. USDNOK continues to perform well over 10 currently sitting at 10.2250.
EUR 1m vols are trading close to 11.5% getting to levels last seen back in the financial crisis days. The Nord Stream news (there we go again!) seems to have been the catalyst of yesterday’s sell off as the market contemplates the Eurozone’s multitude of problems from inflation to energy crisis to deteriorating PMI’s pointing to an ever weakening economic outlook. Add to that an ECB about to, tentatively, embark on a hiking path whilst trying to control borrowing costs in the weaker countries with its anti-fragmentation tools. I wish you luck. The big question remains once we capture the 1.00 level with all its barrier protection where does the EUR go from there? Yes the USD has come a long way but, similarly to the JPY, the rates differentials will continue to weigh heavy on the EUR let alone all the other issues it faces. Potentially we see a relief rally after taking out parity but surely that will just offer better levels to sell. Do we see them soften on Russia and at least attempt to try to force the Ukraine into a cease fire? Desperate times and all that. A quick look back at the last time we took out parity back in Jan 2000. The EUR fell sharply to 0.97 before taking out 0.90 in May and eventually 0.80 in September.
US officials remain calm on the USD push higher but that may change if we see earnings season highlight USD strength having a detrimental effect on the bottom line of US corporates. If we look at the YoY change chart for USD strength we see that we are already above previous crisis levels such as the US housing bubble and the sovereign debt crisis and fast approaching the tech bubble and GFC levels. Perhaps a warning sign to heed.
One note of caution is the old “turnaround Tuesday” trade that is much fabled in the FX world. If it does occur then it would merely offer better buying opportunities for USDs.
Others - The continuing pattern of Asian timezone selling of Bitcoin and Ethereum continued with the pair lower to 19,800 and 1080 respectively. Little to add on the price action other than to say the gap remains between the Nasdaq and Bitcoin. How will it close?
Fed Talk
Fed speakers yesterday saw Bostic looking at 75bp hike at the end of the month and seeing nothing to worry the Fed in the employment report in contrast to market chatter regarding the household employment survey. George spoke earlier and remember she was the dissenter in the pack in June when the Fed hiked 75bp. She continued her theme claiming that the pace of rate hikes could “affect balance sheet run off” and raise “oversteering prospects” although she did counter by stating that she finds talk of recession after 4 months of hiking “remarkable”. Some sense in some of her words but they look to be drowned out by the majority. Quick note on the NY Fed inflation expectations which saw 1y print at their highest ever at 6.78% but the 3y tempering to 3.6% from 3.9%. Already much chatter in the market that tomorrow’s CPI will be an upside surprise.
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UK Data/Politics
UK retail sales were again poor falling at a rate last seen in the pandemic days and this print included the “bumper spend” extended long Jubilee weekend. Worrying times for the UK to add to the woes of the Conservative leadership race which appears to be ripping the party to shreds. The rules were tweaked to try to eliminate some of the 11 candidates early with 20 MP endorsements needed to get on the ballot in the first round and 30 in the second. The first round comes tomorrow with the next on Thursday and then weekly until the two final candidates are announced and handed to the membership for the final selection. For those with a strong disposition, there will be a TV debate on Sunday. Well done Ben Wallace for not standing! For want of stating the obvious GBP is a sell on rallies.
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Day ahead has the ZEW sentiments which look like pouring more gloom onto the Eurozone and a few central bank speakers with all the usual topics of inflation, recession and anti-fragmentation tools up for grabs.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
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Tuesday
EU ZEW Economic Sentiment Index Jul consensus vs previous -28 (10.00 BST)
German ZEW Economic Sentiment Index Jul consensus -38 vs previous -28 (10.00 BST)
Fed Speakers
Barkin (17.30 BST)
ECB Speakers
Villeroy (11.15 BST)
BoE Speakers
Bailey (18.00 BST)
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Early Wednesday
Japan Reuters Tankan Index Jul consensus vs previous 9 (00.00 BST)
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Good luck.
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
Fed Guy - Don’t Fight The Fed
The Commodity Report - The Commodity Report #59
Pinecone Macro Research - Walk in the Pines #75
Cornerstone Global Commodities - Oil Spreads at Record Highs: However, Time is Running Out
Physik Invest - Daily Brief | July 11, 2022
Discover more market commentary & research from 450+ curated sources on Harkster.com.
📚⠀Further reading on the current key macro themes:
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Crypto Woes
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UK Politics
Politico - London Playbook: Screaming blue murder — Tough at the top — Balls, balls, balls
The Guardian - Tory leadership race: who’s standing, what are they promising and who’s backing them?
The Telegraph - Runners and riders: The Tory contenders battling to become the next Prime Minister
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Nickel
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US NFP
ZeroHedge - Goldman Repeats ZeroHedge Analysis, Concludes "A Labor Market Slowdown Is Well Underway"
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