The Morning Hark - 12 Oct 2022

Today’s focus ……3 days to Armageddon or is it? UK Pension’s Market Oliver Twist moment and the Fed minutes

Oct 12, 2022

All prices are at 7.35 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December had been trading softly down in Asia before the European open was met with news that Polish pipeline operator PERN had detected a leak in a pipeline which carries oil from Russia to Europe. Oil spiked on the news with futures turned positive with them now currently trading at 95 and 88.40 respectively. Overall oil has continuing to struggle with the lower demand side still dominating trader’s minds and we were pretty much back to the levels we were at around the OPEC+ decision before this news. Usual China covid woes whilst the IMF’s warning of an increased chance of a global recession did little to help the mood in the oil sector.

EQ - A mixed bag for equity markets in Asia with the Nikkei and Hang Seng lower at 26,427 and 16,826 respectively whilst the Kospi close to one percent higher at 287.

The Nasdaq and S&P have stabilised a touch in Asia up close to one percent at 10,952 and 3627 respectively after another tough day yesterday. Key level on the downside remains for S&Ps 3565/70 with upside contained for now around 3630/40.

Gold - Gold Dec down smalls in Asia at 1680 but remains in a holding pattern ahead of Thursday’s CPI. Support remains around the 1670 level but if that were to go then would open up the downside to the year’s lows near 1620. Topside for now 1700 the obvious resistance.

FI - US yields have backed off smalls in Asia trading with the US2y and 10y currently at 4.28% and 3.91% respectively.

European yields reversed their previous day’s decoupling on the back of the denials, from sources, of support from the Germans for a joint EU bond issuance with the German 10y yield selling off to close at 2.303% having touched a 10 year high on the day whilst the Italian 10y yields closed higher at 4.696%.

UK gilts had a similar pattern to German yields closing lower after earlier spiking close to recent highs the 10y closed at 4.439%.

Whilst the European markets’ volatility has shown one side of dysfunctional markets the Japanese have taken it to the other extreme where the 10y has not traded for 3 consecutive days something which hasn’t happened this century. Each to their own I guess.

FX - Spicy stuff in FX. USDJPY has hit new highs with a little jawboning to go with it but very little else currently trading at 146.14. Finance Minister Suzuki’s comments were far from reassuring but interesting he talked about “speed”; “we have not changed our stance and are closely monitoring FX moves with a sense of urgency. What matters is the speed with which the FX moves”. GBP has bounced off the lows after the “3 days” to Armageddon Governor Bailey comment seems to have been walked back in reports in the FT. GBP now back around 1.10 after touching 1.0925 earlier. The USD is flat with the USD Index at 113.12 and the EUR currently at 0.9728. USDKRW is lower after the BoK’s repricing of their expected terminal rate with it currently trading close to one percent lower at 1423.

Others - Back in that sleepy backwater of crypto Bitcoin and Ethereum are still trading but going nowhere fast at 19,183 and 1300 respectively.

UK soap opera continues

Yet more drama in the soap opera that is the UK financial markets. Yesterday morning, as we spoke about, the BoE stepped in to support the index linked gilt market. Their first auction saw them accept just shy of £2bn worth of offers as well as £1.3bn in the normal gilt emergency auction. During the day the UK’s pension trade body pleaded for more help like an Oliver Twist requesting an extension “to the next fiscal event on 31 October and possibly beyond” or if not extended then additional measures should be put in place to “manage market volatility”.

Oliver got a swift rebuke from BoE Governor Bailey however as he stated that “the rebalancing must be done and my message to the funds involved and all the firms involved managing those funds: you've got three days left now. You've got to get this done.” Perhaps somewhat overlooked by this headline was his remarks that there are “serious risks to financial stability in the UK” and potentially this had more of an impact on GBP as it dropped close to two big figures on the news.

So that’s them told then however a subsequent article in the FT this morning seems to have walked this back as its reported that there have been private discussions that the Bank’s buying programme may be extended and the Bank will show flexibility in the face of market volatility. So that’s them in for the duration then.

Just to leave everyone feeling a lot warmer inside the UK’s business minister Rees-Mogg stated that he has full confidence in the BoE governor and claimed that “there doesn’t seem to be a systemic problem in pension funds” despite the government’s best efforts!

OPEC+

The saga continues with broadsides from both sides. Biden said that there would be “consequences” for Saudi Arabia in light of the OPEC+ decision. The White House would work with Congress on future relations with the state.

On the Saudi side, after news broke that the state had rejected US requests for a one month delay to their decision, the foreign minister claimed that the OPEC+ decision was “unanimous”, they had acted “responsibly” and it was a purely “economic” decision.

There were also reports that the Saudis were going to ramp up production by 500,000 bpd via OPEC+ after Biden’s trip to the state but this was overruled by Prince Mohammed directly and reduced to the paltry amount of 100,000. This show will run.

Central Bank Speakers

Although we had a large number of central bank speakers yesterday there was little new of note to report other than of course Bailey who we’ve already highlighted.

The Fed’s Mester banged the drum claiming that there had been “no progress on inflation” and reiterating that there would be no Fed cuts next year. Let’s see.

The ECB’s Villeroy was hawkish advocating taking rates not restrictive territory after taking rates first to neutral “close to 2%”.

The excellent FXMacro Guy’s daily tweet at the bottom has a more comprehensive round up of all the central bank speakers from yesterday. Also for a longer look back I’ve included his weekly, which is a great read for a round up of the recent speakers and the week gone by. Huge amount of essential market intel packed into a super readable format.

The Day Ahead

Overnight poor data out of Japan with the Tankan for October coming in at 5 vs 10 expected and machinery orders falling off a cliff for August with the MoM falling 5.8% vs an expected decline of 2.3% and a previous reading of up 5.3%.

UK GDP MoM for August came in much worse than expected down 0.3% on the month. Weakness in manufacturing and maintenance in the oil and gas sector contributed to the month’s slowdown. Adding to the gloom industrial production for Aug fell 1.8% much worse than expected.

Later in the morning, we have the EU’s industrial production for August

Highlight for the afternoon is the US PPI report for September as a precursor to tomorrow’s main CPI report. Finally the Fed minutes from the September meeting. We can’t imagine anything new from the minutes with a continued commitment to fight inflation and no pivot in sight. Any chatter on November hike magnitude and balance sheet run off will garner most market attention.

As ever the three major central banks have a number of speakers with ECB’s Lagarde being the pick of the bunch that was before BoE’s Bailey’s comments last night so it will be all eyes on the BoE speakers and if they confirm/deny the FT’s talkback story.

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Wednesday

EU Industrial Production MoM Aug consensus 0.6% vs previous -2.3% (10.00 BST)

US PPI YoY Sept consensus 8.4% vs previous 8.7% (13.30 BST)

US PPI MoM Sept consensus 0.2% vs previous -0.1% (13.30 BST)

US Core PPI YoY Sept consensus 7.3% vs previous 7.3% (13.30 BST)

US Core PPI MoM sept consensus 0.3% vs previous 0.4% (13.30 BST)

US FOMC Minutes (19.00 BST)

BoE Speakers

Haskell (09.00 BST)
Pill (12.35 BST)
Mann (18.00 BST)

ECB Speakers

Lagarde (14.30 BST)
Knot (16.00 and 19.30 BST)
de Cos (22.00 BST)

Fed Speakers

Barr (17.45 BST)
Bowman (22.30 BST)

Good luck.

Prometheus Research - The Observatory
Saxo Markets - This chart tell us more about what is happening in financial markets than any other
The BondBeat - (what JPM said and BoE DID)while WE slept; fx-hedging, an update; got3s?
The Gryning Times - U.S. Housing
ING - Rates Spark: the never-ending gilt calamity

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