The Morning Hark - 17 Mar 2022
Today’s focus ……..FOMC recap, commodity funding and the LME shambles
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures up 3% in the session at 101 and 97.80 respectively. We spoke yesterday about liquidity in the crude market and by all accounts liquidity conditions yesterday remained strained with open interest continuing to plummet. Interestingly the OVX index, the oil volatility index we have mentioned previously, continues to calm to around the 59 level. To put this in context we were trading roughly at the 50 level at the start of the conflict in Ukraine and got to a high of just shy of 80. With liquidity as poor as the data suggests that index may start to pick up with the vulnerable side for crude, from what we can see, being the bid. As an aside, we spoke about Trafigura yesterday and their quest for additional funding. ZeroHedge continues the story today (which I post below) linking back into their piece last week on commodities and collateral. Interesting read although not exactly heartwarming.
EQ - Equity markets in Asia enjoyed a post Fed rally following the sharp rallies seen in the Nasdaq and the broader S&Ps with the Hang Seng up a further 6% to 21,400 regaining all its weekly Covid news losses and some.
Gold - Futures flat at 1935.
FI - all FI futures prices up overnight with the US10y future at 124.50 backing off slightly from its recent low at 124.13 but still in its steep downtrend.
FX - In the FX markets again a calmer look to prices across the board. USHCNH remains steady around the 6.36 level. USDRUB is lower at 104.30 with the EUR at 1.1040. Unsurprisingly USDJPY continues on its way higher at 118.70 post FOMC after breaking the 119 level post FOMC. AUD enjoyed a further boost from its overnight strong employment report this helped it push the gains it received yesterday from the Chinese authorities support for their markets. The AUD is up close to 2% from yesterday’s open at 0.7320. The standout Asian currency was the KRW which saw a 2.5% rise from yesterday’s open versus the USD the largest in 2 years. The KRW is very much a tech play and with the Nasdaq spike helping the sentiment. In addition, the market was overly long USDs, especially in the exporter community and these unwinds helped extend the move.
Others - Bitcoin after yesterday’s spike and quick reversal has held above 39,000 and indeed pushed on helped by the better risk sentiment. One thing I would say about Bitcoin’s recent price action is compared to other markets’ volatility the crypto space has been extremely calm. Famous last words?
The measures of volatility we have been monitoring have started to move together with the VIX continuing lower at 27.70 and the MOVE lower to 100.57 post the FOMC and the guidance given to the markets by Chair Powell.
Overnight President Zelenskyy gave an emotional speech to the US Congress again pushing for a no-fly zone over Ukraine. The US did not grant this but did commit to send $800m worth of military equipment to help their cause. In addition, Biden used his strongest rhetoric yet describing Putin as “a war criminal”. Again the spectre of chemical warfare loomed large with the US and Russian national security advisers holding talks on the matter. This is the highest level of talks between the two sides and obviously raises the urgency of the matter. On the ground, the Russian offensive seems firmly focused on the civilian population as Putin seems determined to break the will of the people. The latest outrage involves the bombing of a theatre in Mariupol where civilians had been sheltering. Peace talks rumble on but gaining any clarity of exactly what is being proposed and how close the sides are is very hard to gauge.
The FOMC produced a hawkish tilt to their announcement with the expected 25bp hike. The two things which we mentioned yesterday that would be monitored closely by the market would be any indication of a future 50bp hike and the dots projection and specifically whether the Fed could get to the seven that some of the market analysts were looking for. On both counts we got a positive outcome. Chair Powell even went further by expressing a 50bp hike or more could be seen at later meetings (indeed Bullard voted for 50bp at this meeting). In addition, the median dot for this year suggests 175bps of hikes. On their inflation projections, they see year-end inflation at 4.3% and 2.7% by the end of 2023. There can be no doubting the intent of the Fed to do what their mandate says and get inflation back under control and whether that hurts markets for now seems to be of no consequence. So far the markets have taken the announcement in their stride. The short end of the USD rates curve pushed higher with the 5y10y inverting (5y higher than 10y) for the first time in 15 years. The USD in general terms sold off unsurprisingly given the market’s positioning. The main exception of course being USDJPY supported by its US rates proxy play. The market is pricing in a full 25bp hike for May with a 50/50 chance of a hike. Outwith the conflict in Ukraine, the market will next focus on next week’s Fed speakers and the PMI data for continued hawkishness.
The next major central bank follows hot on the Fed’s heels today with the BOE expected to follow suit with a further 25bp hike with an outside chance of 50bp hike. Ukraine will certainly weigh heavy on their decision in terms of the upward pressure on UK households’ daily costs but we expect them to emphasise the inflationary dangers and press ahead with their tightening cycle. One potential to temper fears for the economy may be a more flexible approach to their forward guidance thinking. I have posted a couple of previews of the meeting which give a deeper dive below.
The potential Russian default took a further twist yesterday when the Russians claimed that they had ordered the $117m payment to be sent to investors. The only snag is that those debt repayments were ordered to be paid out of the sanctions frozen foreign reserves and in effect flipped the responsibility for the payment onto the West’s authorities. Indeed the Russians warned that the payment may not go through if the US does not allow it. One to keep an eye on.
The woes of the LME continue. The nickel pit reopened yesterday after a week’s break after their much-publicised difficulties. However, trading was halted shortly after with the exchange citing a technical issue with its new daily limit band as prices plummeted with traders keen to exit positions. The new curbs had circuit breakers for a move of 5% but a number of trades breached this level causing the halt to trading for six hours.
📅⠀The main highlights for the day in terms of data and speakers:
Final CPI data out of Europe at 10.00 GMT headline 5.8% core 2.7% expected.
A raft of ECB speakers throughout the day including Lagarde, Lane, McCaul and Schnabel. Post ECB comments will be interesting to see if we get any more details on last week’s statement of intent to accelerate the normalisation process.
BoE rate decision and release of the minutes at 12.00 GMT 25bp hike expected to 0.75%.
Second-tier US data with housing starts, building permits, jobless claims, Philly Fed survey and industrial production.
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📚⠀ARTICLES ON HARKSTER AND FROM OUTSIDE EXPLORING IN MORE DEPTH SOME OF THE THEMES ABOVE:
BNY Mellon - Morning Briefing: Maximum Moderation for BoE
Pepperstone - BoE Meeting under a cloud of uncertainty
Nickel versus Digital
Twitter thread from Sam Bankman-Fried 👇
Commodities and collateral
Net Interest - Commodities Trading
Russian debt default?
🔥⠀Top 5 trending links on Harkster yesterday:
The Felder Report - Are The Bond Vigilantes Back?
BNY Mellon - Short Thoughts
What Bitcoin Did - The End of the Dollar Hegemony with Nic Carter
Discover more on harkster.com
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