The Morning Hark - 17 Aug 2022
Today’s focus ……The FOMO Express gets fuel from the memes, over to you US on the nuclear pact and FOMC minutes are they stale post NFP/CPI prints?
All prices are at 7.35 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude October futures had a much needed bounce in Asia as they rally one percent to 93.10 and 86.80 respectively. Despite the rally the general theme in the oil sector is negative with genuine concerns on the growth outlook for China and Germany weighing on oil. In addition more positive noises from the US/Iran talks on the resumption of the nuclear deal have also led to selling pressure. The latest is that the US has received Iran’s response to the proposal and is considering its reply. Seems that a stalemate and slow response suits both sides but I’m not sure Biden can kick the can down the road until the mid-terms in November. The EU hailed Iran’s response as “constructive” so let’s see. The Asia rally is being pinned on a much bigger than expected draw on crude inventories from the API data but the move just feels like an opportunity for the market to sell into.
EQ - Equity markets a mixed bag in Asia overnight again with the Nikkei and Hang Seng in positive territory at 29,163 and 19,965. However, the Kospi is off a touch at 330.
The Nasdaq and S&P flat on the session at 13,644 and 4307 respectively. The FOMO Express continues to run away leaving many in its wake and much angst along the way. Retail was the big theme yesterday as the so called meme stocks took centre stage with BedBath&Beyond at one point up 75% and had its trading halted. Similarly, the other old favourite GameStop came along for the ride too. And if that wasn’t enough to get the juices going, Musk is going to buy Man Utd! All the fun of the fair I guess unless you’re short of course. Again liquidity is poor so the moves are certainly extended. As we discussed yesterday in the 4300/4350 we expect things to be stodgy with all the various technical levels and especially the 200dma which comes in around 4320. 4270 still the level for now that feels like the fun will stop.
Walmart’s earnings report, which we flagged yesterday, was much better than expected with revenue and profits up as the US consumer seemed to be seen paying more for less. Home Depot showed a similar trend too to reinforce the move. The results, unsurprisingly, helped the bid tone for stocks. Target report their earnings on Thursday.
Gold - Gold Dec futures flat in Asia at 1793. Little to report in the gold sector since we have dipped back below 1800 the precious metal has been happy to mark time awaiting further direction. 1800 still looks a decent level to lean into but other markets currently are a lot more interesting.
FI - US yield curve has flattened with the US2y and 10y yields currently trading at 3.29% and 2.84% respectively. The inversion has again widened out to 45bps retracing a good chunk of the steepening we saw at the tail end of last week. Interestingly the 2y has revisited this 3.27 level on several occasions over the last few weeks each move has failed but the level still attracts. If we were to close above this level then that should open up a move through the June highs and beyond towards 3.75% perhaps the Fed minutes will be the catalyst?
European yields rose sharply yesterday closing up with the German and Italian 10y yields at 0.972 and 3.145 respectively. European yields followed the US move higher with the spread widening again in the respective countries’ borrowing costs.
FX - The USD flat overnight with the USD Index at 106.51 after yesterday’s sell off from the highs seen in the morning above 106.90 but shy of our 107 target. USDJPY remains elevated on the back of higher US yields currently trading at 134.50. The EUR and GBP have regained some of their poise at 1.0167 and 1.2113 respectively. After a couple of days of pressure the CNH has recovered a touch with USDCNH back down to 6.7843. Post the RBNZ the NZD having been up around half a percent is back to smalls down at 0.6340.
Others - Bitcoin and Ethereum still marking time currently trade at 24,355 and 1945 respectively.
Couple of interesting articles which I post at the bottom. One from Imran Lakha from Options Insight where as ever he gives an excellent roundup of what is going on in the crypto space. This week I think is particularly interesting as he digs into the landscape of the underlying positioning in crypto especially as we head into the ETH merge. Top analysis as ever.
Secondly on the merger, Arthur Hayes who I have posted many times on these pages has written another fascinating piece on the ETH merge and how he believes the market will play out. He is a great believer in ETH but whether you are or not his thought processes and mechanics around his trading thesis are a worthwhile read in themselves.
RBNZ delivered, as expected, their 50bps hike taking rates to 3% a level last seen back in 2015. The Bank also raised their terminal rate forecast to 4.10% and also brought it forward a quarter to q2 2023.
In Japan, some mixed data with the Tankan survey coming in stronger than expected at 13 vs 9 expected but machinery orders were worse than expected at 6.5% YoY for June vs 7.5% expected.
Boom! We got the double digit print for inflation in the UK as YoY for July blew away estimates and came in at 10.1%. I can only imagine the headlines in the red tops tomorrow! New 40y high for headline and core too is now at 6.2% and that excludes energy. Another revision up from the BoE forecasts?
The Day Ahead
For the US today, retail sales are the early focus where we expect a flat print with activity remaining subdued. However, the main focus will be on the FOMC minutes for the July meeting where, as I’m sure you remember, we saw rates rise again by 75bps and the forward guidance mechanism jettisoned for a more data dependent meeting by meeting approach to rate decisions. The market had a very much dovish interpretation of the meeting but Fed speakers since the announcement have been hawkish and to a person pushed back on the market’s interpretation. We would expect the minutes to show consistency with the hawkish chat with a continuing commitment to tackle inflation with higher rates.
Given the disconnect between the market and the Fed on the terminal rate and when rate cuts may appear back on the agenda any clarity on what the terminal rate may look like will be useful. However given the disparity we saw last week amongst members, with Kashkari looking for close to 4% but Evans in the 3.25%+ area, it maybe wishful thinking on our part.
Remember too since the meeting we have had two key data points with the blockbuster NFP print which was followed by the slowing and potential peaking of the CPI report so the market may choose to look through the minutes as “stale” especially if the FOMO Express is gathering steam again!
In Europe, we have employment data and GDP estimates for q2 which are both expected to show slowing signs for the Eurozone. In addition early doors tomorrow we have the Australian employment report.
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EU Employment Change YoY Prel q2 consensus 2.5% vs previous 2.9% (10.00 BST)
EU GDP Growth Rate YoY 2nd Est q2 consensus 4% vs previous 5.4% (10.00 BST)
US Retail Sales MoM Jul consensus 0.1% vs previous 1% (13.30 BST)
US Business Inventories MoM Jun consensus 1.4% vs previous 1.4% (15.00 BST)
FOMC Minutes 75bp hike, forward guidance gone and an alleged pivot (19.00 BST)
Bowman (14.30 and 19.20 BST)
Australia Unemployment Rate Jul consensus 3.5% vs previous 3.5% (02.30 BST)
Australia Employment Change Jul consensus 25k vs previous 88.4k (02.30 BST)
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