The Morning Hark - 17 June 2022
Today’s focus ……BoJ hold steady but mention currencies and Powell on the tapes as broken markets limp into Juneteenth US weekend
Daily roundup - all prices are at 7.35 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August both flat on the day at 119.70 and 115 respectively.
A spate of interest rate rises yesterday saw oil sell off three percent before recovering again on supply side fears as the US introduced new sanctions on Iranian firms that help to export the country’s oil supplies. This is potentially seen as a ratcheting tool to raise the pressure on the Iranians to come back to the table on the nuclear deal. If oil remains in the “doldrums” Brent could be in for a losing week for the first time in five weeks with Crude breaking an even longer run of eight weeks. The gap in the charts between oil and the S&P is getting somewhat extended for what its worth although its hard to see which of these two characters will help to fill it in the current circumstances.
EQ - Another mixed bag again in Asia with the Nikkei and the Kospi both down. Nikkei leading the way down close to two percent at 25,960 with the Kospi down a percent to 318 both following the US indicies sell off from yesterday. However the Hang Seng, which seems to have a life of its own at present, is up over a percent to 20,980. The rally was fuelled by growing optimism for a monetary easing and fiscal support package from the authorities in the coming days. Worth noting that in the early hours of Monday the Chinese will announce their 1 and 5y loan prime rates.
The US indices both bounced close to a percent in the Asian session with the Nasdaq and S&P at 11,230 and 3,700 respectively. This after the big sell off in the US session yesterday as the market started to digest the Fed’s rate hike coupled with other central bank hikes which lead to a surge in global yields but a reality check caused a swift reversal and saw the Nasdaq and S&P plunge more than 4%.
Gold - Gold futures flat overnight at 1849. Gold has been impressive to say the least in the face of rising yields and in these crazy markets its maybe taken on its safe haven role for now. Its recaptured the 1845 level we spoke of yesterday and indeed had a couple of bounces off it so we would use this as a good short term trading pivot.
FI - Yields selling off across the board in Asia to continue the PnL destruction that’s been going on in the rates space of late. US yields saw a round trip yesterday on an unprecedented scale with the 10y yields starting the day around the 3.30% almost getting to the recent highs towards 3.50% before selling off to the 3.20%. Brutal move and its hard to conclude anything other than these markets are broken. The up move was generated by the SNB surprise 50bp rate hike which took the market by surprise when most analysts had thought they would remain on hold. The down move was a reality check on where we actually are in terms of recessionary fears with poor US housing data and a shocking Philly Fed manufacturing print. The European space had a similar round trip with the German 10y bund opening around the 1.65% level rallying into a 1.94% peak before closing at 1.71%.
FX - Similar scenes of carnage in the FX space. With the USD following stocks and rate yields lower throughout the US session with the USD Index selling off from the 105.30 level to close to the 103.50 before retracing somewhat to stand currently at 104.30. USDCHF, as you can imagine, post the SNB surprise was the leader in the clubhouse in terms of volatility. We had been trading close to parity versus the USD prior to the announcement before plunging below 0.9650. Similarly versus the EUR the CHF strengthened two big figures from 1.04 to 1.02 with little in terms of quotes in-between. USDJPY ran it close as we saw the pair plunge 3 big figures to post a low to 131.65 again recovering to now trade at 134 post the BoJ announcement of them holding steady with their yield curve controls. The EUR in the same period had a two big figure rally and although giving up some of its gains remains back above 1.05. GBP is looking soggy again at 1.2260 after a rally close to 1.24 post BoE which although only hiking 25bp did point to larger hikes in the future having posted a new 11% plus inflation print, in their projections, at some point later this year with the added tagline of “with upside risks”.
Others - Crypto on the back foot again with Bitcoin and Ethereum currently trading at 20,600 and 1,100 respectively. The charts aren’t looking too clever and with weekend trading on the horizon and the whales smelling blood it wouldn’t be a huge shock to see 20,000 and 1000 tested at some point soon.
Fed Fever has taken a grip on the market. The SNB blew the market away yesterday first thing with a 50bp hike out of nowhere. Consensus had been for no change with some street analysts looking for 25bp but 50bp wow. This is the first move in rates by the Swiss in almost fifteen years and sent the CHF rallying over 2% versus the EUR. In addition to the hike the central bank adjusted its language on currency intervention by dropping the one sided commitment to defend currency depreciation. Indeed SNB Chair Jordan claimed that the CHF is “no longer highly valued”. As a large holder of US stocks this may cause increased market stress as, if it wished to support CHF, then the funds to do so could be procured from sales of these stocks. The move caused another major ripple effect across the rates markets with the sell off in yields reversing sharply and more hikes across the major countries getting priced in whether the countries like it or not! However, the froth of that move was soon blown away with yields reversing and some with stocks plummeting pointing more to the recessionary worries than the inflation fight. One pointer from Latam which is of interest when we look at the relationship between rate hikes and CPI. Brazil has hiked rates by 1125bp in sixteen months and real rates turned positive at the tail end of last year yet CPI still remains elevated and sticky. Hard to compare a Latam country and the g10 space I know but its worth bearing in mind given the dynamics whereby global central banks have little control of the current CPI profile when we have a war between a large oil producer and a big agri producer.
The BoJ held steady with all policy settings and maintained their 10y bond purchasing line in the sand at 25bp. Somewhat of a surprise as markets had thought they may concede some ground. The vote on the yield curve control was the same as the last meeting (8/1). One small tweak was a mention of currencies, for the first time, where they said “ it is necessary to pay attention to developments in financial and FX markets and their impact on Japan’s activity and prices” which seems to me to be straight out of the central bankers’ manual but significant that FX was included. Unsurprisingly the JPY weakened sharply and, as we discussed yesterday, it does seem that the market will test its resolve on the line in the sand, especially with yields across the world remaining at elevated levels in the context of recent years. BoJ Governor Kuroda will be speaking from 7.30 BST although often the timing can be “flexible”.
Main highlight today will be Chair Powell’s speech in the afternoon with some secondary US data just after that. Powell may save his remarks for next weeks semiannual testimony to Congress. Also we have a couple of BoE speakers post hike yesterday and they will be closely monitored.
Couple points to note for the weekend and early Monday. US Juneteenth holiday on Monday so we may have a quietist late session today and I think the market needs it. Fed Waller speaks on Saturday (21.40 BST), RBA Governor Lowe on Monday (00.10 BST) and we have China prime rate announcements early Monday (02.15 BST).
📅⠀The main highlights for the day ahead in terms of data and speakers:
EU Inflation Rate YoY Final May - consensus 8.1% vs previous 7.4% (10.00 BST)
US Industrial Production MoM May - consensus 0.4% vs previous 1.1% (14.15 BST)
US Manufacturing Production MoM May - consensus 0.4% vs previous 0.8% (14.15 BST)
US Capital Utilisation May - consensus 79.2% vs previous 79% (14.15 BST)
Powell (13.45 BST)
Pill (09.30 BST)
Tenreyro (09.30 BST)
Good luck and a good weekend to one and all.
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
TS Lombard - FOMC Commits To Recession - Are They Late On This Too?
ZeroHedge - Lagarde Capitulates As The Euro-Zone Divides
Stephen Kirchner - BoJ policy board maintains steady policy 8-1, dovish dissent from Kataoka
ZeroHedge - Yen Tumbles As BoJ Refuses To Change Ultra-Easy Monetary Policy
ING - Rates Spark: riding the perfect storm
Duncan Weldon - 5 Takeaways from the Bank of England
🔥⠀Top 5 trending links on Harkster yesterday:
Alhambra Partners - A Triple Dose of the Real Fed
The Macro Compass - Stop Fooling Around, J-Pow
Topdown Charts - Recession Watch 2022: global growth outlook + market moves
Blain's Morning Porridge - Prepare for Upside – but find it first!
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