The Morning Hark - 14 Nov 2022

Today’s focus …Wallers not “softening”, FTX saga gets curiouser and curiouser and The Week Ahead

Over the next few days I shall be attending Token2049, the Fintech Talents Festival and Digital Asset Week all happening in London. Given the current environment, it should be an interesting time to be part of the conversation. Please bear with us if TMH is a touch shorter than normal, but I shall aim to provide as comprehensive coverage as possible. Thanks as ever for your continued support.

All prices are at 7.45 GMT, with changes reflecting movement from midnight GMT

Oil - Brent and Crude January futures flat in the Asian session currently trading at 95.80 and 87.90, respectively.

EQ - Mixed bag in Asia in subdued trading overnight with the Nikkei and Kospi futures currently down close to half a percent at 27,993 and 322, respectively. The Hang Seng however, boosted by the weekend’s reports of property sector reforms out of China and is up close to one percent at 17,663. 

The Nasdaq and S&P giving back smalls overnight in Asia trading now at 3992 and 11,800, respectively - not enjoying Waller’s comments.

Gold - Gold Dec currently trading at 1765 right where we were on Friday morning and since the subsequent rally post CPI its been scared to pretty much do anything else. 200dma comes in just above 1800. Short term downside pivot at 1750.

FI - US yields boosted by Fed Waller’s comments in Asia with the US2y and 10y both up close to two percent at 4.40% and 3.88%, respectively but still well below the levels we saw pre-CPI. 

European yields have opened slightly lower after their rally on Friday with the German 10y yields trading currently at 2.146% and the Italian 10y yields at 4.199%. 

UK gilts similar story on Friday rallying with the 10y yield closing at 3.351%.

FX - The USD taking its lead from Waller in Asia and getting some welcome relief after its recent rout. The USD Index currently trading at 106.81. All the majors taking their share of the losses with USDJPY, EUR and GBP currently trading at 139.56, 1.0315 and 1.1768 respectively. The big mover overnight was the CNH which saw close to a one percent gain versus the USD. The PBOC lead the charge with a 1.4% firmer fix than previously its biggest one day strengthening since the currency reforms of 2005. It is currently trading at 7.0350.

Others - Bitcoin and Ethereum had been looking sick after a weekend of negative press however, a green candle on the European open has relived some pressure with them currently trading at 16,755 and 1249 respectively.

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Fed’s Waller

As we mention below, in the week ahead, Fed speakers will have quite a say in market direction this week or at least they will try to. Waller, Powell’s closest confidante, was on the tapes overnight and was pretty forthright in what he was trying to communicate to the market. He said that yes the Fed might consider slowing the pace of rate hikes, but this should not be seen as them “softening” their stance on inflation. On the equity rally, he exclaimed that the market had got “way out in front” post CPI, and he couldn’t stress enough that this is “one data point”, and there is a “ways to go”. HE admitted that the Fed have a communication challenge going forward, but the market has gotten itself into the “exact situation” as back in July, and we all remember the short, sharp rebuke from Powell at Jackson Hole the market got.

All much of what we have been saying in TMH. The Fed doesn’t like the market reaction and will do everything in its power to temper the rally so as not to let financial conditions loosen too much and undo all their “good work”. Brainard is later today and indeed, Waller is up again later in the week. If Powell rolls himself out, then duck under the desk as we know what’s coming!

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US Mid-term Elections. 

Little change in the overall landscape of the elections with the Republicans likely to win the House albeit not as emphatically as they’d have hoped for. As things stand they lead 212/203 (218 to gain a majority) with a further 20 results to come but the democrats are closing in on them slowly. 

The Senate has gone with the Democrats the split 50/48 after they won Nevada in a tight contest. There remains a further 2 results to come. Georgia, one of the key swing states, has to go to a run off on 6 December as no candidate reached the 50% mark and that could hold the key to power. The remaining state is Alaska which will go with the Republicans. Even if the Democrats lose the run off in Georgia they will still have the casting vote through Vice President Harris’s casting vote.

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SBF/CZ/Alameda

Where do I start? If it wasn’t true, it would be funny!

Well, let’s start with the hack which compromised the FTX platform over the week with between $300m-$2bn in funds seemingly drained off the platform. Naturally, a lot of fingers pointing in the direction of the top brass in the defunct organisation although naturally they deny it with a collective shrug of their shoulders. 

The Chapter 11 bankruptcy papers laid bare the extent of the collapse with over 130 affiliated companies in the group being listed for bankruptcy proceedings. Much conjecture about the whereabouts of the main protagonists in the story with rumours of a private jet taking off from the Bahamas to Argentina that have since been denied. By all accounts, SBF, Gary Wang, co-founder and the director of engineering Nishad Singh are supposedly under house arrest in the Bahamas. The Bahamas Security Commission is now working with the Financial Crimes Investigation Branch to substantiate if any criminal misconduct arose. Think we could all hazard a guess at that question. 

Remember that SBF has done “a lot” for the Bahamas and seems to have garnered a lot of favour with the police, politicians and other powerful people on the islands so nothing would surprise me.

Meanwhile, the CEO of Alameda, Caroline Ellison, is trying her best to get herself over to Dubai on a non-extradition basis! For a young lady who doesn’t believe in stop losses she sure seems to be applying that trading strategy now! 

Some fascinating but sad facts from the various investigations into the assets and liabilities of the FTX empire have come to light. In a document which was supposedly shared with potential investors, there’s a reason why no one took the bait, it shows that the exchange had as little as $900m of easily sellable assets versus $9bn of liabilities. Of that $900m half was in RobinHood shares which were claimed to be owned by SBF himself and do not appear in the bankruptcy papers. In addition, up to last Sunday, they had already seen $5bn worth of withdrawals. 

On the semi-liquid assets, by far, the largest portion is Serum. This is listed as $2.1bn even though the market cap is under $100m and in addition, there is a thought that FTX had some influence on the supply of the token having increased by 60% this year. There’s also a great one liner “Trump to lose” which accounted for $7.3m and presumably is some sort of spread bet. 

One last point is the new accounting rules that SBF has seemingly implemented called “back door accounting” whereby he managed to remove funds from the FTX platform to prop up loses sustained at Alameda. The “mechanism” was built in such a way that no red flags were raised by accounting or internal compliance at FTX. 

I post at the bottom much more insight below for your perusal if you wish to dig deeper. 

Doug Colkitt has a good thread on his theories surrounding the 3AC collapse and the subsequent demise of FTX. 

ZeroHedge articles on the “balance sheet” and Binance’s dominance.

Another great thread from Lucas Nuzzi on the Serum theory we mention above.

A sad thread from an ex-employee at FTX.

Element’s take on Microstrategy and how their bitcoin based treasury management theory is playing out. 

Fortune article on Gensler’s involvement or otherwise.

We mentioned MF Global last week and how it co-mingled client funds and the subsequent collapse and financial scandal that followed. I have posted a great piece which goes into great detail that sorry tale for those that are unfamiliar with all the details. 

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The Week Ahead

1. Biden/XI Meeting. Monday is scheduled to see the first face to face meeting of the two most powerful men in the world. The meeting is scheduled to take place in Bali ahead of the wider G20 summit, which is taking place over the next two days. Both have had recent political wins in their homelands with Xi all but confirming his third term as President at the recent Congress and Biden seeing his Democrat Party keeping hold of the Senate and performing better overall in the mid-term elections. However, relations between the two super powers have become strained over the last couple of years and it will be interesting to see if the meeting changes that dynamic in any way. Unlikely when you have such diverse opinions on the main topics on the agenda; China’s aggression towards Taiwan, the Russian invasion of Ukraine and the escalation of North Korea’s nuclear capabilities. We have recently mentioned the slow shift away from the globalisation of trade into a more tribal and politically aligned set of new trade lines. Perhaps the meeting will throw out more clues as to how far down the road we are towards such an outcome. 

2. RBA Minutes. Tuesday sees the release of the minutes from the early November RBA meeting where we saw the central bank dial down their pace of rate hikes from 50bps to 25bps. The accompanying statement left the door open, as have Governor Lowe’s recent comments, to return to higher magnitudes of rate hikes as well as to pause hikes all together. Some further colour on the composition of the debate on this subject would be helpful. It does feel like the path ahead is for 25bps until such time as we get a surprising uptick in the CPI prints or get to a stage where the inflation outlook affords a pause. 

3. China Data. Tuesday also sees the release of some China data which will help us gauge the level of impact the recent covid lockdowns have had on the wider economy. Industrial production for October is expected to slow significantly and from the consumer side retail sales are also predicted to show a further drag on the economy. This comes as the market tries to weigh up whether a relaxing of the zero covid policy is likely anytime soon. The market played a lot of headline bingo last week with continued denials derailing the equity rally’s hopes. The US CPI data has taken over the narrative but for an injection of further impetus the relaxation of the zero policy would help a great deal. We continue to have reservations that, firstly this is a quick-to-implement policy with some talk of a year long process. Secondly, pre/post Ukraine the China growth and trade story we think is a very different beast. For now, the Chinese authorities appear to be concentrating on the property sector and shoring it up as a means to support the economy witnessed by their 16 point plan of action which was reported over the weekend. Let’s see what the numbers tell us as to how the landscape is looking. 

4. UK Autumn Statement. Fiscal package take 2 please arrives on Thursday. The “adults” have been back in the room for a number of weeks now, the spreadsheets have been churned, strategic leaks to the press filtered out and we are all set for the official end to the new government’s honeymoon period. It ain’t gonna be pretty but at least it will have more chance of being balanced and will have the OBR figures to at least make it seem credible. Adding to the credibility stamp will be the fact that Jezza Hunt will be unlikely to be attending any hedge fund sponsored cocktail parties this week to toast his achievements unlike his beleaguered predecessor, whose advisors must live in caves if they thought that would be a good look. Anyway, what to expect? Little on the good news front with what is expected to be between £50/60bn worth of cuts split between spending cuts and tax increases, with a slight leaning on the former as to which will bear the bigger brunt. Hunt was doing the weekend press run claiming that everyone will need to pay in some shape or form, but the richest will sacrifice the most. Remember, over the last few weeks, leaks have pointed to the higher rate of tax, and its threshold, tax on pensions, inheritance tax, taxes on dividends, capital gains and corporation tax have all been touted as sources for funding. Could they even abolish the non-doc rules? From a spending cut perspective, it would seem that pensions and benefits would remain in line with increases in inflation and the NHS would be protected but its fair game elsewhere. Look out for more leaks as we head to the day especially given the horror story that lies ahead. Elsewhere in the UK, we get employment, retail sales and inflation data in the week. Inflation will take most of the headlines, with a further large leap in headline inflation expected in what is being touted as the peak. Let’s see.

5. Fed Speakers. US CPI, as we know, was a welcome boost to the markets keen for a year-end rally but brought headaches and mixed emotions for the Fed. Yes a seeming peak in the series is in, but with it comes the euphoria of the markets assuming that a slowing Fed equals a return to a one way street bull run. Hmm don’t think it works like that. Anyway, the subsequent loosening of financial conditions from the equity rally and the sell off in US yields has put the Fed in a dilemma of how they temper the rally whilst signalling they are slowing the pace of hikes. We’d expect to see more hawkish rhetoric from the speakers this week with “higher for longer”, “50bps is still a significant magnitude of hike”, “a slowing is not a pause” and such like being stressed to the markets. I seem to think we’ll get a belligerent teenager type “I can’t hear you” reaction from the equity sector. 

6. Crypto. Somehow, despite the World Cup starting at the end of the week, I don’t think we’ll get any “they think its all over…well it is now” type conclusion in the crypto sector this week. Indeed the ripples feel like they have only just started with lots of speculation and on-chain investigation into who could be next to fail. Lots of chatter surrounding a large transfer of ETH between crypto.com and gate.io (I post an article below), Jump trading’s tweet of “nothing to see here” is being taken as ‘what have they got to hide’ and many more shadows out there. One thing’s for sure, more will fall. Probably some of the smaller exchanges will be some of the immediate casualties indeed a small one AAX has just announced it is stopping withdrawals. Equally, some big firms will inevitably hit the buffers too. Remember, what seems to have been the cause of Alameda’s decline, and subsequently FTX’s, stems from the Luna/Terra debacle of 6 months ago and we are only getting to the bottom of that now, so these things can take time, but when they do surface, they fall fast. 

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The Day Ahead

Little of note data-wise with only EU industrial production out this morning. However, we get a number of ECB speakers as well as the Fed’s Brainard later in the day.

Overnight look out for q3 preliminary GDP data out of Japan, which is expected to see a significant slowing albeit remaining in growth territory.

I post at the bottom the FXMacro Guy’s weekly newsletter which is an excellent read through of all the major developments we saw in the last week. Plenty to get your teeth into if you have not already digested.

 

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Monday

EU Industrial Production MoM Sept consensus 0.3% vs previous 1.5% (10.00 GMT)

Japan GDP Growth Rate QoQ Prel q3  consensus 0.3% vs previous 0.9% (23.50 GMT)

Japan GDP Growth Rate Annualised Prel q3  consensus 1.1% vs previous 3.5% (23.50 GMT)

ECB Speakers

• Panetta (10.00 GMT)

• Enria (11.00 GMT)

• Guindos and Centeno (16.15 GMT)

Fed Speakers

• Brainard (16.30 GMT)

 

Tuesday

RBA Meeting Minutes (00.30 GMT)

China Industrial Production YoY Oct consensus 5.2% vs previous 6.3% (02.00 GMT)

China Retail Sales YoY Oct consensus 1% vs previous 2.5% (02.00 GMT)

China Unemployment Rate Oct consensus  vs previous 5.5% (02.00 GMT)

Japan Industrial Production MoM Final Sept consensus -1.6% vs previous 3.4% (04.30 GMT)

Japan Capacity Utilisation MoM Sept consensus vs previous 1.2% (04.30 GMT)

UK Unemployment Rate Sep consensus 3.5% vs previous 3.5% (07.00 GMT)

UK Claimant Count Oct consensus vs previous 25.5k (07.00 GMT)

UK Ave Earnings incl. Bonus (3mo/yr) Sept consensus 6% vs previous 6% (07.00 GMT)

EU GDP Growth Rate QoQ 2nd Est q3 consensus 0.2% vs previous 0.8% (10.00 GMT)

EU GDP Growth Rate YoY 2nd Est q3 consensus 2.1% vs previous 4.3% (10.00 GMT)

EU Employment Change YoY Prel q3 consensus 1.8% vs previous 2.7% (10.00 GMT)

EU ZEW Economic Sentiment Index Nov consensus vs previous -59.7 (10.00 GMT)

Germany ZEW Economic Sentiment Index Nov consensus- 50 vs previous -59.2 (10.00 GMT)

US PPI MoM Oct  consensus 0.5% vs previous 0.4% (13.30 GMT)

US Core PPI MoM Oct  consensus 0.4% vs previous 0.3% (13.30 GMT)

US NY Empire State Manufacturing Index Nov consensus -7 vs previous -9.1 (13.30 GMT)

Fed Speakers

• Cook (14.00 GMT)

ECB Speakers

• Villeroy (03.00 and 06.10 GMT)

• Elderson (17.30 GMT)

 

Wednesday

UK Inflation Rate MoM Oct  consensus 1.7% vs previous 0.5% (07.00 GMT)

UK Inflation Rate YoY Oct  consensus 10.6% vs previous 10.1% (07.00 GMT)

UK Core Inflation Rate MoM Oct  consensus 0.5% vs previous 0.6% (07.00 GMT)

UK Core Inflation Rate YoY Oct  consensus 6.4% vs previous 6.5% (07.00 GMT)

Canada Inflation Rate MoM Oct  consensus 0.8% vs previous 0.1% (13.30 GMT)

Canada Inflation Rate YoY Oct  consensus 6.9% vs previous 6.9% (13.30 GMT)

Canada Core Inflation Rate MoM Oct  consensus % vs previous 0.4% (13.30 GMT)

Canada Core Inflation Rate YoY Oct  consensus % vs previous 6% (13.30 GMT)

US Retail Sales MoM Oct  consensus 0.9% vs previous 0% (13.30 GMT)

US Industrial Production MoM Oct  consensus 0.2% vs previous 0.4% (14.15 GMT)

US Capacity Utilisation MoM Oct  consensus 80.4% vs previous 80.3% (14.15 GMT)

ECB Speakers

• Fernandez-Bollo (08.40 GMT)

• Lagarde, Villeroy and Panetta (15.00 GMT)

Fed Speakers

• Williams (14.50 GMT)

• Waller (19.35 GMT)

BoE Speakers

• Bailey testifies to Parliament

 

Thursday

Australia Unemployment Rate Oct consensus 3.5% vs previous 3.5% (00.30 GMT)

Australia Employment Change Oct consensus 15k vs previous 0.9k (00.30 GMT)

EU Inflation Rate MoM Final Oct  consensus 1.5% vs previous 1.2% (10.00 GMT)

EU Inflation Rate YoY Final Oct  consensus 10.7% vs previous 9.9% (10.00 GMT)

EU Core Inflation Rate YoY Final Oct consensus 5% vs previous 4.8% (10.00 GMT)

UK Autumn Statement (12.30 GMT)

US Housing Starts Oct consensus 1.41m vs previous 1.439m (13.30 GMT)

US Building Permits Prel Oct consensus vs previous 1.564m (13.30 GMT)

US Philadelphia Fed Manufacturing Index Nov consensus -8 vs previous -8.7 (13.30 GMT)

US Philadelphia Fed Employment Nov consensus vs previous 28.5 (13.30 GMT)

US Philadelphia Fed New Orders Nov consensus vs previous -15.9 (13.30 GMT)

US Philadelphia Fed Prices Paid Nov consensus vs previous 36.3 (13.30 GMT)

Japan Inflation Rate YoY Oct  consensus % vs previous 3% (23.30 GMT)

Japan Core Inflation Rate YoY Oct consensus 3.5% vs previous 3% (23.30 GMT)

Fed Speakers

• Bowman (14.15 GMT)

• Jefferson (15.40 GMT)

 

Friday

UK Retail Sales MoM Oct consensus 0% vs previous -1.4% (07.00 GMT)

US Existing Home Sales Oct consensus 4.39m vs previous 4.71m (15.00 GMT)

ECB Speakers

• Lagarde (08.30 GMT)

• Nagel (13.00 GMT)

• Knot (15.15 GMT)

 

Good luck.

 

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1. fx:macro
   - Outlook for Week 46/2022

2. 🎧 The Macro Trading Floor - The Real Stress Is Not In The US, But Elsewhere | Brent Donnelly

3. Saxo Markets - Weekly Commodity Update: Metals on top in historic week across markets

4. 🎧 J.P. Morgan - At Any Rate: Global FX—The perfect storm

5. Mauldin Economics - Recession Thoughts

Discover more market commentary & research from 500+ curated sources on Harkster →

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FXMacro Guy Weekly Review and Daily Tweet

• @fxmacroguy - Friday recap thread

• fx:macro
  - Outlook for Week 46/2022

Crypto

• @0xdoug - Very rough and speculative sketch of what I increasingly think happened at FTX

• Paul Peterson, University of Illinois - Behind the Collapse of MF Global

• Zero Hedge - FTX Held Just $900MM In Liquid Assets Vs $9BN In Liabilities As Video Emerges Confirming Alameda Knew It Was Pilfering Client Funds

• @Elementcapl - A thread on $MSTR aka Microstrategy

• Zero Hedge - "FTX Isn't The Canary In The Coal-Mine, FTX Is The Coal-Mine... & It Just Collapsed"

• @vydamo_ - some insight into how funds were succesfully comingled between customer

• Fortune - SBF’s disgrace could make things awkward for Gary Gensler and the Democrats

• @LucasNuzzi - FTX might have minted Serum (SRM) off thin air to prop up its balance sheet

• Zero Hedge - Binance Dominates Crypto Exchange Landscape

• @lookonchain - We did an analysis of wallets of crypto.com

 

Discover more market commentary & research from 500+ curated sources on Harkster.

 

 

 

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