The Morning Hark - 16 Aug 2022
Today’s focus ……The FOMO Express, Iran will they/won’t they and regional surveys back in focus after a NY shocker
All prices are at 7.35 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures continue their slide in Asia off close to one percent at 93.90 and 88.00 respectively. Oil continued its decline on demand side concerns on global recessionary fears driven by the recent China data. In addition the market has started to get ahead of itself on the proposed reinstatement of the US/Iran nuclear pact which could potentially see Iranian oil start to flow back to the West. A lot of conflicting reports overnight around what the Iranians are demanding and when an answer is due but it seems things will become clearer one way or another in the next couple of days. The news seems to be well and truly baked in the price.
EQ - Equity markets a mixed bag in Asia overnight, the Nikkei flat at 28,848, the Hang Seng down close to two percent at 19,730 and the Kospi up smalls at 332. China growth remains the main drag in Asia as the latest poor data and rate cut news continues to be digested. Some press reports have hinted that the rate cut will be the first in a series in addition to more proactive policies to help boost growth. In addition, reports have indicated that a state run insurance company has been instructed to provide bond guarantees to privately held property developers in a measure to support the fast sinking housing sector.
The Nasdaq and S&P down smalls at 13,658 and 4291 respectively. The runaway train continues to climb the wall of worry exerting more pain on the large community of under weight investors stood helplessly on the platform as the FOMO Express presses ahead. In the last month alone CTAs have bought $130bn worth of equities which in the main has been purely a short covering exercise. It feels like the pain trade will continue for now in what will be deteriorating liquidity as we head into Jackson Hole next week and the run up to month end and the Labour Day weekend the week after. Remember seasonally September is historically a poor month for equity returns but at present September feels a lifetime away. For now, the levels on our radar are topside 4300, 4325 and 4350. Indeed the zone between 4300/50 has a good deal of levels to tick off including the 200dma, May’s high, and a 61.8% fibonacci resistance so it could be a tad stodgy up there. Whilst 4270 ideally would hold on the downside.
One thing to note is pre opening today we get Walmart and HomeDepot reporting earnings. Remember Walmart had a recent earnings warning so the numbers should give us more clarity on the general health of the US consumer.
Gold - Gold Dec futures flat in Asia at 1796. The 1800 pivot which had held eventually gave way as the upside was showing no signs of garnering market interest. As it was on the topside 1800 now seems to be the significant level for the downside as we await clearer direction. The USD’s bid tone and general recessionary fears around China growth look set to way weigh on the precious metal.
FI - US yields continue to back off from their recent highs overnight with the US2y and 10y yields currently trading at 3.17% and 2.78% respectively. Yields started to soften yesterday reacting to the poor Chinese data and continued the move post the NY Fed survey.
European yields similarly softer yesterday closing lower with the German and Italian 10y yields at 0.90 and 2.975 respectively.
FX - The USD flat overnight with the USD Index at 106.54 after yesterday’s return to prominence of the USD with global recessionary fears pushing money back into the USD. 106.70 is the month’s high but a break would open up 107. All the majors suffered versus the USD with the JPY, EUR and GBP currently trading at 133.37, 1.0161 and 1.2048 respectively. The EUR suffered the most as some the market’s attention has refocused on the dire situation the Eurozone finds itself in. Not surprisingly with the backdrop in China CNH has come under renewed strain hitting a three month lows close to 6.82 before settling down and currently trading at 6.8055.
Others - Bitcoin and Ethereum slightly weaker after some recent enthusiasm. They currently trade at 23,995 and 1880 respectively.
Couple of interesting points to note in the crypto space. As we close in on the merger date for Ethereum open interest in ETH options has risen again to an all time high and remains above the levels seen for the equivalent BTC contracts. The general sentiment around the merger still remains a buy the rumour (well news hopefully this time) sell the fact.
Also yesterday the US Federal Reserve published guidance for “novel” financial institutions to access its master accounts. This has the potential to give certain crypto institutions access to the global payment system without having to go through an intermediary bank. A further acceptance of the space into the mainstream. I post a link to the article at the bottom for those that want to go further into the weeds.
Yesterday’s NY Fed survey for August had some stark reminders for the Fed that all is not well. The headline number printed at -31.3 vs estimates of +5 which takes us back to GFC levels. Unsurprisingly the underlying measures were far from rosey with new orders their weakest since 2008 and the employment measure weak and declining. One bright spot for the Fed was a further reduction on the prices paid component. NY is the first of the big regions to report so let’s see how the other regional Fed’s report in the coming days with Philly up next on Thursday.
RBA minutes overnight had little market impact although there seemed to be more of a hawkish tilt to the minutes than had been anticipated at the margin with upside risks to inflation causing concerns.
UK employment report offered little respite for the BoE. The unemployment rate remained steady at 3.8% however the employment change missed estimates on the downside and average earnings at 5.1% were higher than estimated although in some good news were lower than the previous month’s print.
The Day Ahead
The day ahead has a fair amount of interest with German and Eurozone ZEW surveys where we anticipate further deterioration. Further afield we have Canadian CPI which looks to follow its US equivalent and show signs of slowing again on a decline in gas prices. In the US its industrial production and capacity utilisation numbers which are expected to show a small improvement. However, the housing data may garner more interest given what we have seen of late. Overnight a report pointed to US homebuilders optimism dropping for the eighth straight month the largest fall since 2007. The numbers today should be consistent with that general mood with both housing starts and permits continuing to decline.
Early doors tomorrow looks out for Japanese data and an anticipated RBNZ rate hike.
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EU ZEW Economic Sentiment Index Aug previous -53.8 (10.00 BST)
German ZEW Economic Sentiment Index Aug consensus -53.8 vs previous -53.8 (10.00 BST)
German ZEW Current Conditions Aug consensus -48 vs previous -45.8 (10.00 BST)
Canada Inflation Rate YoY Jul consensus 7.6% vs previous 8.1% (13.30 BST)
Canada Core Inflation Rate YoY Jul previous 6.2% (13.30 BST)
US Building Permits Jul consensus 1.65M vs previous 1.696M (13.30 BST)
US Housing Starts Jul consensus 1.54M vs previous 1.559M (13.30 BST)
US Industrial Production MoM Jul consensus 0.3% vs previous -0.2% (14.15BST)
US Manufacturing Production MoM Jul consensus 0.2% vs previous -0.5% (14.15BST)
US Capacity Utilisation MoM Jul consensus 80.1% vs previous 80% (14.15BST)
Japan Reuters Tankan Index Aug previous 9 (00.00 BST)
Japan Machinery Orders YoY Jun consensus 7.5% vs previous 7.4% (00.50 BST)
RBNZ rate decision 50bp hike expected (03.00 BST)
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