The Morning Hark - 14 Mar 2022
Today’s focus ……..The big week ahead……..FOMC
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures down 3% in the session at 109.00 and 105.50 respectively. The OVX, which we discussed last week continued to remain calmer closing the week around 68.
EQ - All equity markets a mixed bag with Hang Seng down 2.4% at 19,570 driven by new Covid restrictions in Shenzhen and Shanghai. However elsewhere the Nikkei, European and US futures markets are all in the green.
Gold - Futures down smalls at 1977.
FI - all FI futures prices again relatively flat overnight with the US10y future at 125.70 continuing its grind lower off the recent 129 levels.
FX - In the FX markets, the EUR is stable after Friday’s selloff at 1.0940. CE3 EUR crosses continue to consolidate at the lower of their recent ranges. EURAUD continues to play with the 1.50 pivot this time above the level on some AUD weakness overnight driven by commodities move lower on the hope of more positive talks on Ukraine.
However, the one standout again has been USDJPY which has reached 117.70 and made a mockery of our thoughts that the up move would be a grind! Demand for topside options seemed to be the main driver of the move higher again in thin liquidity conditions. Targets ahead 118 and 118.60 the 2016 high.
Others - Bitcoin saw an all too familiar Asian sell-off but has since recovered to around our old favourite the 39,000 level.
Both measures of volatility we have been monitoring continue to remain calm, reflecting the overall smoothing of the markets’ price action, with the VIX and MOVE at 30.75 and 99.03 respectively.
Russian and Ukrainian delegates gave the most upbeat assessment of talks overnight with both sides pointing to positive developments over the next few days. From the Ukrainian side “I think that we will achieve some results literally in a matter of days" and the Russians "according to my personal expectations, this progress may grow in the coming days into a joint position of both delegations, into documents for signing”. In addition, Ukrainian President Zelenskyy has pushed for direct talks with Putin. Time will tell.
On the flip side a worrying development as US officials have told the FT that, since the start of the campaign, Russia has requested military help and other assistance from China. The significance of this is obviously huge with a divided world with NATO and Ukraine on one side and Russia and China on the other. Does the West then impose the same punitive sanctions on China that Russia has suffered? The consequences do not bear thinking about at so many levels.
On the ground, the situation remains grim with a new front opened in the west of the country where a military base in Yavoriv, a city close to Lviv, was hit hard. This is obviously significant as the city is very close to the Polish border and hence a NATO one. The base had indeed been one of the bases where NATO military training had taken place and is also a gateway for NATO military equipment to enter the country.
Given the weekend and overnight news, it is somewhat surprising that the markets are leaning in favour of peace talks rather than an escalation in tensions. Wishful thinking? As an aside, the Fear and Greed Index of market sentiment is at extreme fear at 13. Generally, at such levels, the market is a buy but this time it feels a little different.
📅⠀The main highlights for the week ahead in terms of data and speakers:
RBA meeting notes published 12.30am GMT early Tuesday. Given Governor Lowe’s speeches last week where he signalled the potential for a rate hike in late 2022 but then contradicted that in a subsequent Q&A session it’ll be interesting to see the inner thoughts of the board. With a big gap (150bps) between the market and the RBA in terms of rate profile, the minutes could give some clues as to why we have such a discrepancy.
FOMC rate decision, projections and subsequent Chair Powell press conference on Wednesday at 18.00 and 18.30 GMT respectively. A 25bp hike is heavily priced in after Powell’s recent testimonies but the obvious elephant in the room is the near 8% headline inflation number we saw last week. With the surge in commodity prices from late February due to the conflict in Ukraine persisting into March that figure looks set to rise further. How then will Powell react with the spectre of supply-side shocks and the ever-growing threat of stagflation? Powell will also speak on the balance sheet and how the Fed are expected to shrink it. Asset purchase runoff with no reinvesting seem the most likely outcomes. Most interestingly will be the dots projection. The last release in December showed most participants expected 3 hikes in 2022 with now many analysts expecting 7 hikes for the year. For more details and links to the last projections, I have posted the calculated risk blog which gives some excellent background.
BoE rate decision on Thursday at Noon GMT where again a 25bp hike is expected. However, there had been much talk of March being pencilled in for a 50bp hike as the BoE tries to get the inflation genie not so much back in the bottle but perhaps back in the same room as the bottle. Obviously, the conflict in Ukraine has tempered expectations for a 50bp hike and with the UK press screaming daily about the hikes in people’s living costs politically its hard to see them going for the bigger hike. However, we expect BoE Governor Bailey to signal further hikes coming in the remainder of the year.
Good luck.
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📚⠀ARTICLES ON HARKSTER AND FROM OUTSIDE EXPLORING IN MORE DEPTH SOME OF THE THEMES ABOVE:
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The Fed and Inflation genie
Arthur Hayes - Annihilation
ZeroHedge - Powell's Pivot To Nowhere
Pantera Capital - The Next Mega-Trade
Calculated Risk - FOMC Preview: Liftoff
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🔥⠀Top 5 trending links on Harkster.com over the weekend:
SriKonomics - Stagflation: Prepare for It!
Real Vision - Volatility: The Tail That Wags the Dog
Daniel Lacalle - Europe Energy Independence Is Impossible with The Current Policies
Claus Vistesen - Are you not entertained?
Topdown Charts - Weekly S&P500 ChartStorm - 13 March 2022
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