The Morning Hark - 16 Mar 2022
Today’s focus ……..FOMC, Commodity funding, Russia default?
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures up 2.5% in the session at 103 and 98.70 respectively with a risk on vein prevailing across the markets.
EQ - Equity markets a sea of green with better risk sentiment. Hang Seng up 9.2% to 20,000 close to regaining all its weekly losses after the earlier Covid news. The move was helped by Chinese authorities vowing to keep the market stable helping the overall pre FOMC risk-on tone.
Gold - Futures flat at 1920.
FI - all FI futures prices flat overnight but the US10y future at 124.44 continues its relentless move lower pushing yields higher pre FOMC.
FX - In the FX markets a much calmer look to prices across the board. USHCNH has come off its highs and is steady around the 6.36 level. USDRUB is lower at 108.40 with the EUR at 1.0965. Unsurprisingly USDJPY continues on its way higher at 118.30 following the US yields move. The options market is pricing in 60bps in USDJPY with 120 an obvious target.
Others - Bitcoin it would appear that there’s not much afoot with it trading around 39,400. However, that’s not the whole story as we saw a spike to 41,700 before dumping back to 38,800 and continuing back to the 39 handle. The move is being blamed on a whale in Binance trying to push stops in thin Asian hours with little success. As we know these things happen in the world of Bitcoin.
The measures of volatility have continued on their divergent paths with the VIV lower at 29.83 and the MOVE steady at 105.
Overnight President Zelenskyy confirmed that Ukraine would not seek membership of NATO and he suggested peace talks sounded “more realistic” but that work was needed on a deal “in Ukraine’s interests”. However, from the Russian side, the Kremlin insisted that they see no “serious commitment” from Kyiv for “mutually acceptable solutions”. Zelenskyy will address the US Congress today appealing for additional help. Biden will be in Brussels next week for an extraordinary NATO summit so let’s see if any further measures are forthcoming. There is more press coverage of reported Russian losses as their assault stalls further on the back of a lack of personnel. Further reports out of the US suggest that the Russians are running out of time and could run out of equipment and personnel in under two weeks. If true this sadly begs the question what measures will Putin resort to as he gets ever more desperate?
One further point on the conflict from a markets viewpoint. It has become ever clearer over the last few days that Russia could default on its debts. There are two $ denominated bonds with $117m worth of interest payments falling due today. Obviously part of the sanctions imposed by the West has frozen the Russian’s access to their foreign currency reserves. There have been suggestions that they could meet these liabilities in RUB but there is no provision for this and in effect such actions would place them in default. One to watch and I post below a deeper dive from the FT.
We spoke last week about commodities and the stresses that could play out in terms of collateral and posted an excellent ZeroHedge article on the subject which I repost below for your reference. Yesterday we saw further strains in the market with crude open interest at yearly lows and volumes at recent lows with the obvious effect on the bid/offer spreads and general liquidity. Furthermore, news of Trafigura, a huge commodity trading house with revenues of $230bn, seeking a PE investment of up to $3bn reputedly from Blackstone added to the general nervousness in commodity markets. The funding is deemed to be a longer-term strategy as the company divests its sources of funding to meet margin calls. However if indeed a company of this size is in need of additional funding it’s yet another illustration of the strains that have been placed on the markets by the Ukraine conflict. I post below an article on sub stack from Marc Ruby on the company and today’s FT article on the funding.
FOMC day arrives where the Fed are expected to deliver a 25bp hike the first since the ill-fated December 2018 hike. In addition, Chair Powell is expected to be hawkish and signal further hikes in the coming months. Furthermore the projections will be revised and here we see a downgrade of growth but an upward revision of inflation projections. Can the dots match the 7 that the market is seeing for the remainder of the year will be one of the key market movers and seems a stretch for the Fed to get this far? Any indication of a future 50bp hike will also be a point of note given the dislocated nature of the inflation curve and current levels for US rates. Overall we expect an emphasis that they are determined to get inflation down whilst noting the huge geopolitical risks that exist in the world at present. The market is certainly long USDs and as we have seen from the move in the 10y is definitely looking for higher rates. I post below a couple of previews that go into the meeting in more depth.
A couple of lighter thoughts. I post below a Twitter thread from Sam Bankman-Fried the founder and CEO of FTX the crypto exchange. In it, he argues that the debacle seen in the nickel market last week would not happen on crypto exchanges as margin is a factor of price not time in crypto. He also argues that the 24/7 nature of the new world takes the gap risk out of markets, especially over weekends. In addition, the other key difference is the real-time liquidation of positions that crypto exchanges carry out as markets start to move against inadequately margined positions. These are valid arguments. Indeed the funding of positions and the capital intensive nature of crypto are some of its biggest challenges for trading crypto. He, however, fails to mention that these “liquidation” events in times of stress, and let’s face it the two go hand in hand, can cause huge price dislocations which we have seen back in May and December of 2021. In any case an interesting debating point between the two worlds.
The interesting point overnight was the US Senate passing legislation to keep daylight savings time (which started this week in the US) permanent. The bill very cheerily called the “Sunshine Protection Act” will come into effect next year to allow airlines and other companies to adjust their schedule. The bill still needs to pass through The House and be signed by the President but seems likely to pass given the unanimous vote. Will the UK follow suit?
📅⠀The main highlights for the day in terms of data and speakers:
FOMC at 18.00 GMT followed by Chair Powell’s press conference at 18.30 GMT.
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📚⠀ARTICLES ON HARKSTER AND FROM OUTSIDE EXPLORING IN MORE DEPTH SOME OF THE THEMES ABOVE:
ZeroHedge - FOMC Preview: The First Rate Hike Since 2018
Employ America - March FOMC Preview: Two Cheers For The Fed's Commitment To Its Liftoff Guidance
Nickel versus Digital
Twitter thread from Sam Bankman-Fried 👇
Commodities and collateral
Net Interest - Commodities Trading
FT - Trafigura and Blackstone discussed investment of up to $3bn
ZeroHedge - Pozsar: "We Could Be Looking At The Early Stages Of A Classic Liquidity Crisis"
Russian debt default?
FT - What to expect as Russia warns of historic debt default
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
Alex Domash - History Suggests a High Chance of Recession over the Next 24 Months
🔥⠀Top 5 trending links on Harkster yesterday:
Alhambra Partners - Another One Inverts, The Retching Cat Reaches Treasuries
Yardeni Research - The Fed Is Way Behind the Curve
Doomberg - Nickel In Front of a Steamroller
Cheap Convexity - Fed Preview: A Hawkish Trifecta
Saxo Markets - Fixed income market: the week ahead
Discover more on harkster.com
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