The Morning Hark - 15 Mar 2022
Today’s focus ……..China Covid, commodities recovery
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures down a further 5% in the session at 100.60 and 97.00 respectively with the OVX following the pattern at 65.42. Concerns surrounding China demand after the Covid outbreak we mentioned yesterday and continued hope for a ceasefire in Ukraine as peace talks continued to weigh heavily on oil throughout the day yesterday and in the Asian session overnight
EQ - Equity markets big mover was the Hang Seng unsurprisingly down 5% at 18,500 driven by Covid concerns.
Gold - Futures down 2% at 1930 again softer on China Covid and Ukraine peace talks.
FI - all FI futures prices again relatively flat overnight with the US10y future at 125 continuing its relentless move lower off the recent 129 levels. With FOMC tomorrow several of the banks have been revising their dots and pricing in 7 hikes this year pushing yields ever higher.
FX - In the FX markets, the EUR continues to edge higher with the better news out of Ukraine. EURAUD moved higher again with the combination of a steadier EUR and lower AUD following in step with lower commodities. USDJPY continues on its way higher at 118.00. US yields pushing higher is certainly underpinning the move. Finally, USDCNH remerged onto the radar with the Covid news and has weakened close to a percent from yesterday’s open. 6.41 is a key level to watch on the topside. The market spiked close to this overnight but corporate selling and a slew of good economic data brought us back off the level.
Others - Bitcoin nothing to see here ……..39,000.
The measures of volatility we have been monitoring unsurprisingly, given the backdrop of the Fed and analysts’ revision of their US rates outlook, have diverged. The VIX somewhat stable in the context of recent ranges at 31.77 but the MOVE index broke step and moved higher to just above 105.
Peace talks are ongoing between Ukraine and Russia with the Ukrainian side saying they are going “pretty well”. President Zelenskyy tempered expectations with a “but let’s see” caveat. Overnight China responded to the recent speculation surrounding their involvement in the conflict with a terse denial saying we are “not a party” to Russia’s war. However, the FT who broke the story yesterday seems to differ saying that the US has told allies that China responded positively to Russia’s requests. Rome was the venue for talks between the US And China which lasted an intense seven hours. The China readout from the talks was supportive of the promotion of peace talks in the region although somewhat surprisingly they claimed that Ukraine was only mentioned in the passing. On the ground a relatively quiet night by all accounts although there was more shelling near the Polish border.
In other news, China has been front and centre after the Covid outbreaks in several key provinces. The outbreak is seeing cases at its highest levels since the Wuhan outbreak in early 2020. Local cases have reached levels already this year that are higher than the whole of last year however some level of context here case numbers still remain low compared to numbers seen in the US and especially Europe where numbers are starting to spike in several countries in particular Switzerland, Austria and Germany. What’s probably troubling the markets, as they try to look through the Ukrainian conflict and envision an end game which sees a world starting to reflate and spend again, is that Shenzen is one of the provinces hit by this outbreak. Already Apple, VW and Toyota have suspended some of their operations with the obvious concerns for the supply chain. Unsurprisingly China stocks have been hit hard and added to that uncertainty has been China’s somewhat ambiguous relationship with Russia and what that means in terms of Western sanctions. One plus was a slate of positive Chinese economic data with retail sales, industrial production and fixed asset investment all coming in double expectations.
Commodities with the Covid backdrop and continuing Ukrainian peace talks all took a tumble. WTI back through the $100 and approaching the $90 level from the start of the conflict. It’s interesting to look at the other commodities and their price action. Metals seemed to have retraced fully or close to their breakout points with copper and palladium sitting on the levels and gold just $20 shy. However wheat and other food futures remain a long way off their breakouts (wheat around $800). I’m not going to mention nickel although it is opening its doors to trading tomorrow with several restrictions.
RBA minutes we flagged as something to watch in the week ahead and their release overnight was somewhat of a damp squib in terms of new news. Patience is obviously an Aussie virtue with regard to rate hikes despite acknowledging the upside risks in inflation and the obvious knock-on effects to energy prices due to the Ukrainian conflict. Ukraine was mentioned twelve times in the minutes which we would imagine will become a feature of central bank minutes going forward although hopefully not for too long. Very little change in the rates outlook with the market’s aggressive stance of 150bps for the curve still in place.
📅⠀The main highlights for the day in terms of data and speakers:
Second-tier data remaining on the day
German ZEW at 10.00 GMT looking for a big drop to 5 from previously 54.3 with investor pessimism over the Ukrainian conflict
US PPI at 12.30 GMT Core YoY consensus at 8.7% vs 8.3% previously
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
ZeroHedge - "Suffocating" Impact From Higher Rates Will Force The Fed To Ease Much Sooner Than Expected
🔥⠀Top 5 trending links on Harkster yesterday:
Spyglass Macro - The curve is already very flat
Pinecone Macro Research - Walk in the Pines #60
Macrodesiac - 🔔 Munger's Bad Alibaba Bet
Compound Advisors - 7-Chart Monday (3/14/22)
The MacroTourist - BUYING THE ROBOTS
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