The Morning Hark - 13 May 2022
Today’s focus ……..Small relief rally but the Fed pain trade remains in place and did Powell open up the 75bp question again?
Daily roundup - all prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Both Brent and WTI futures up around a percent on the day at 108.80 and 107.20 respectively. Again the market is caught between the push me pull me of China Covid lockdowns and a strengthening USD versus the EU bans on Russian oil imports. The supply side seems to be in the ascendancy today.
EQ - Asian indices ending the week on a positive note with good gains seen across the board with the better risk sentiment. All majors are up over 2% with the Hang Seng, Nikkei and Kopsi trading at 19,750, 26,430 and 345 respectively. Interestingly they are all around their closing levels of last week. On the US side, we are also seeing decent gains of around a percent. The Nasdaq leading the way at 12,100 and the S&P to 3,960. However, both are still well down on the week unlike their Asian counterparts.
Gold - Gold flat on the day at 1823. Hovering near a three month low after its sell off in yesterday’s US session. Its push through its support around the 1835/36 level added momentum to the move and with the USD continuing to strength and concerns on what Fed tightening will do to the global economy it looks set to remain on the back foot. 1800 and 1780 are the next key supports of note.
FI - Decent gains for the US rates curves in Asia with US futures across the curve up close to 3%. The late Fed speakers yesterday have given the US curve the bid tone and we discuss more below. The 10y now at 2.90.
FX - The USD is still the darling of the market as it remains at elevated levels albeit a touch softer with the USD Index off smalls to 104.70. Little of note with USDJPY closing back in on 129, USDCNH solidly above 6.80, the EUR at 1.04 and GBP knocking on 1.22 again. Some relief for the AUD and NZD which on the better risk sentiment but still remain on the backfoot at 0.6880 and 0.6245 respectively. One currency pair we don’t talk about too much here is worth highlighting today with the volatility we have seen in EURCZK. Last week the prospects of the new appointment of a new central bank head, Ales Michl, saw the CZK weaken given his dovish preferences. His subsequent appointment was confirmed and the currency hit a two month low versus the EUR to 25.47. The move lead to intervention by the central bank and a statement confirming support for the currency in a high inflation environment. We are currently trading at 24.94. The bank faces a host of issues not least double digit inflation which shows no signs of slowing anytime soon.
Others - Quite a move in the major two in crypto world yesterday as the forced liquidation sent them to extreme levels with Bitcoin and Ethereum touching lows of 24,500 and 1,630 respectively. For perspective, we haven’t seen such levels for Ethereum in over a year and the last time Bitcoin was that low was back at the end of 2020. Since then we have seen a decent bounce with them now trading at 30,500 and 2,100 respectively.
A couple of observations to the move and what has happened this week:
As we spoke about previously Bitcoin had been sitting in a fairly tight range of roughly 41,500/38,000 for around a month from early April to the start of May whilst in the meantime the Nasdaq had already sold off close to 10% in that period. Potentially this is Bitcoin’s catch up time as it was late to the party and if so 15,000/20,000 would seem the more likely end game.
The other point is that the extreme liquidation we have seen this week has had all the similarities of an Asian currency crisis when the peg goes and the subsequent ripple effect and then what essentially was a bank run. The only difference being that unlike in the TradFi space there was no government bailout to support said bank. Whether you like/believe in the crypto space at least we won’t have to “pay for” bailout through higher taxes or the artificial propping up of the financial system through QE and all the knock on effects that has had/will have on the wider economy as it unravels. One very small crumb of comfort as we head into the weekend.
The “Fed hurt” trade is well and truly in full swing and the “Fed put” seems to be consigned to history at least for now. Fed’s Daly reiterated this yesterday in her speech with the standout line being that she “would like to see a continued tightening of financial conditions”. Chair Powell even used the “p” word when he stated that controlling inflation would “include some pain”. These comments echo ex Fed’s Dudley article on Bloomberg from earlier in the year which we have highlighted several times that ultimately the Fed wants to ramp up the tightening to hurt the markets which they hope will have the subsequent effect of choking off consumer spending and hence create another tool to tame inflation. Given what we have heard this week from the Fed speakers there seems to be no sign yet of them feeling that pain trade is anywhere near finished. Indeed going back to Powell’s speech it appeared that he put the 75bp hike back in play. He mentioned that the Fed would be flexible around rate hikes and if conditions worsened or looked brighter in terms of inflation they would act accordingly. Directly asked if “doing more” in the event that inflation conditions worsened meant 75bp he answered “you’ve seen this committee adapt to the incoming data and the evolving outlook. And that’s what we’ll continue to do”. Today sees Mester speak and let’s see if we get more clarification of his earlier statement “we may have to speed up” especially on the back of what Powell said yesterday.
📅⠀The main highlights for the day ahead in terms of data and speakers:
University of Michigan Sentiment May - consensus 64 versus 65.2 previously (15.00 BST)
Fed Speakers - Kashkari (16.00 BST) and Mester (17.00 BST)
ECB Speakers - de Guindos (08.00 BST), Centeno (09.10 BST), Nagel (16.00 BST) and Schnabel (17.00 BST)
Good luck and a good weekend to one and all.
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📚⠀Articles discovered on Harkster exploring some of the current key macro themes in more depth:
The Defiant - Terra’s LUNA Crashes 95% As Investors Mull Recovery Plan
Bloomberg - ‘Everything Broke’: Terra Goes From DeFi Darling to Death Spiral
Coindesk - What Is LUNA and UST? A Guide to the Terra Ecosystem
The Block - Binance suspends LUNA and UST withdrawals amid market turbulence
ZeroHedge - Did The Biggest Recent Buyer Of Bitcoin Just Become A Forced-Seller?
🔥⠀Top 5 trending links on Harkster yesterday:
Alhambra Partners - Peak Inflation (not what you think)
The Macro Compass - What If?
Prometheus Research - The Observatory
Mauldin Economics - Chickenhawks
Brent Donnelly - Trade 14: BTC Slingshot
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