The Morning Hark - 17 Nov 2022
Today’s focus …UK Fiscal Package 2: “The Hunt for Red November”, Crypto contagion continues as does SBF’s arrogance and the Nike advert.
Over the next few days I shall be attending Token2049, the Fintech Talents Festival and Digital Asset Week all happening in London. Given the current environment, it should be an interesting time to be part of the conversation. Please bear with us if TMH is a touch shorter than normal, but I shall aim to provide as comprehensive coverage as possible. Thanks as ever for your continued support.
All prices are at 7.40 GMT/2.40 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude January futures off close to one percent in the Asian session currently trading at 92.60 and 84.50, respectively. The Polish missile story remains a headwind for oil with uncertainty over the exact source of the missile still not proven, with sentiment now starting to focus back onto the Russians.
EQ - Little of note in Asia with the Hang Seng, Nikkei and Kospi little changed at 18,172, 28,012 and 319, respectively.
The Nasdaq and S&P up a touch overnight in Asia trading now at 3987 and 11,811, respectively. Yesterday saw stocks retreat from their recent highs with earnings disappointing from a wide range of sectors. Micron, in the semiconductor space, pointed to a weak demand outlook and cuts to its future capital spending, whilst the large retailer Target cut its q4 outlook and announced a large cost-saving plan. Retail sales came in healthier than anticipated, which, along with the Fed speak, pointed to a higher for longer outlook for rates.
Gold - Gold Dec off smalls in Asia at 1770. Nothing new here, and still in the same pattern we have been in since CPI. The 200dma comes in around 1800. Short-term downside pivot at 1750.
FI - US yields flat in Asia with the US2y and 10y at 4.36% and 3.70%, respectively, after their sell-off yesterday. The 10y getting to interesting levels as we sit on the first level of support, followed by 3.50% and further to the 50dma around the 3.37% level.
European yields continuing their path lower, with German 10y yields trading currently at 1.989% and Italian 10y yields at 3.909%. The spread now comfortably back below 200bps and Italian rates pushing below 4% for the first sustained period since mid September.
UK gilts following a similar path lower with the 10y yield closing at 3.147% with all eyes on the Autumn Statement later in the day.
FX - Little of note in the FX space with the USD stable and the USD Index currently trading at 106.34. All the majors similarly subdued with USDJPY, EUR and GBP currently trading at 139.44, 1.0384 and 1.1920, respectively. Little else of note to report.
Others - Bitcoin and Ethereum holding up okay despite the contagion stories from yesterday, with the pair trading lower at 16,594 and 1205 respectively however still well off their recent lows.
UK Fiscal Package Take 2
Fiscal package take 2 arrives on Thursday. The “adults” have been back in the room for a number of weeks now, the spreadsheets have been churned, strategic leaks to the press filtered out, and we are all set for the official end to the new government’s honeymoon period. It ain’t gonna be pretty, but at least it will have more chance of being balanced and will have the OBR figures to at least make it seem credible. Adding to the credibility stamp will be the fact that Jezza Hunt will be unlikely to be attending any hedge fund sponsored cocktail parties this week to toast his achievements, unlike his beleaguered predecessor, whose advisors must live in caves if they thought that would be a good look. Anyway, what to expect? Little on the good news front with what is expected to be between £50/60bn worth of cuts split between spending cuts and tax increases, with a slight leaning on the former as to which will bear the bigger brunt. Hunt was doing the weekend press run claiming that everyone will need to pay in some shape or form, but the richest will sacrifice the most. Remember, over the last few weeks leaks have pointed to the higher rate of tax and its threshold, tax on pensions, inheritance tax, taxes on dividends, capital gains and corporation tax have all been touted as sources for funding. Could they even abolish the non-dom rules? From a spending cut perspective, it would seem that pensions and benefits would remain in line with increases in inflation and the NHS would be protected, but its fair game elsewhere.
Today’s headlines suggest that the wealthiest will bear the brunt of the pain as the chancellor is set to bring austerity firmly back front and centre in the UK. I post at the bottom a couple of bigger reads of what to expect but it ain’t gonna be pretty as the UK’s finances remain firmly in the “red”. Good luck, Jezza, but surely, given the low bar that Kwasi set, it can’t be as bad as Take 1.
Central Bank Speakers
ECB speakers were led by Visco, who claimed that the need to continue with restrictive policy was evident however, there was growing evidence for implementing a less aggressive approach to rate hikes.
De Guindos warned that very high inflation was the main risk to financial stability and growth in the near term.
De Cos insisted that there was still some way to go with rate hikes especially as inflation is persistent, has broadened and is expected to remain above target for an extended period.
Villeroy highlighted 2% was the level that the ECB could then look to slow the pace of further rate hikes.
Fed wise George was emphasising the higher for longer rhetoric but saw a situation where the Fed could go with 25bp increments next year. However, she stressed that there was a danger in prematurely ending the rate hiking cycle but bringing inflation down without a recession may not be feasible.
Daly said that pausing was off the table for now as we are tightening into a strong economy and we want to see that slowing with unemployment nearer the 4.5/5% level.
Waller was back on the bandwagon with a “ways to go” again with regard to rate hikes especially as we are barely in restrictive territory. Higher for longer points to 50bp increments going forward and it is premature to conclude from one CPI report that inflation is beaten.
All much of a muchness from both central banks. The Fed look set for 50bps in December and the ECB likewise
US Mid-term Elections.
As expected, the Republicans have now officially gained control of the House, albeit not as emphatically as they’d have hoped for. As things stand, they lead 218/211 (218 has gained a majority) with a further 6 results to come.
The Senate has gone with the Democrats the split 50/49 and no matter the result in Georgia they still have Vice President Harris’s casting vote. Georgia, one of the key swing states, has to go to a run off on 6 December as no candidate reached the 50% mark.
As we flagged yesterday, indeed, Genesis succumbed to the FTX collapse as it immediately suspended all customer withdrawals from their platform for now on a temporary basis. Gemini, which has a close partnership with Genesis, noted the announcement and was looking to help customers in their related Earn program. Remember that Genesis also suffered significant losses in the Three Arrows Capital collapse earlier in the year.
One other thing of interest in this space is that the Circle/Genesis partnership which received some investment from Digital Currency Group, Genesis’s parent company, has dropped its yield on its earn program to 0%. Potentially another one to keep an eye on given Circle’s obvious involvement with USDC and any potential wider contagion.
In another grim day for the crypto sector, BlockFi said that it was facing imminent bankruptcy and Voyager was looking for a fresh bid for its distressed assets after FTX obviously won’t be able to fulfil its commitments there. Temasek, the Singapore state investor, has written off its $275m investment in FTX, although to put it in context that is below one percent of its total funds. Multicoin has also suffered a 55% drop in value of its flagship fund, accounting for a 10% drop in the overall funds value.
Meanwhile, SBF still seems to be building his case for a “not sound of mind” plea if he ever does stand trial. A classic desperate trader excuse, which I have heard so many times before, if only I had been allowed to hold on long enough, I could have made good those losses. Deluded at best and just shows a total lack of understanding or respect for the markets.
I am coming to the end of a week of digital asset conferences, and, as I’m sure you can imagine, it has been a really interesting time to be in the middle of such events. The underlying thread in all three has been that the digital asset space will come through this period of consolidation, post FTX, and emerge leaner and stronger. I have always had a view that crypto years to tradfi years are like dog years due to the speed at which the new world develops. Hence the Luna/Terra and FTX debacles of course hurt the space, and there will be further casualties, but the digital asset world will recover swiftly. Yes the majority of alt coins will go to zero and people will lose money but real world end case use for the digital technology and subsequent assets, some of which can be turned into financial instruments and traded, in my opinion, are here to stay.
The majority of the institutional players want regulatory certainty, and without that, it is hard to see them become invested heavily in the space outwith custodial services or one-off proof of concept type trades done on the blockchain. Getting over that regulatory hurdle will be the next major step forward. The challenge for the sector is to work with the regulators to educate them, find a balance where there is protection but that protection does not kill off the innovation. I know easier said than done!
The Day Ahead
The Australian labour report came in stronger than expected, with a small drop in the labour force participation, helping the unemployment rate to drop to 3.4% equalling its previous record low. This came as the headline total employment gains beat expectations by some way with 32,200 gains. In terms of shifting the dial for the RBA this probably does little, and we’d anticipate further rate hikes at the “new” 25bp level for the near future.
The final European inflation report for October should continue to shadow the UK’s higher.
Big event of the day will be the UK’s fiscal package take 2, which surely will go down better than Liz and Khasi’s attempt from a couple of months back. A lot has been leaked and mainly the bad stuff so we would expect some sweetness on the day, but all well within the new grown up austerity approach.
The US data has some housing stats followed by the Philadelphia regional survey.
Finally, late in the evening we get the Japanese inflation report for October and prior to publication tomorrow we get the UK retail sales data for October.
For a little light relief, the new Nike advert for the upcoming World Cup is worth three minutes of your time - posted at the bottom.
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All times in GMT (EST+5 / CEST-1 / JST-9)
EU Inflation Rate MoM Final Oct consensus 1.5% vs previous 1.2% (10.00 GMT)
EU Inflation Rate YoY Final Oct consensus 10.7% vs previous 9.9% (10.00 GMT)
EU Core Inflation Rate YoY Final Oct consensus 5% vs previous 4.8% (10.00 GMT)
UK Autumn Statement (12.30 GMT)
US Housing Starts Oct consensus 1.41m vs previous 1.439m (13.30 GMT)
US Building Permits Prel Oct previous 1.564m (13.30 GMT)
US Philadelphia Fed Manufacturing Index Nov consensus -6.2 vs previous -8.7 (13.30 GMT)
US Philadelphia Fed Employment Nov previous 28.5 (13.30 GMT)
US Philadelphia Fed New Orders Nov previous -15.9 (13.30 GMT)
US Philadelphia Fed Prices Paid Nov previous 36.3 (13.30 GMT)
Japan Inflation Rate YoY Oct previous 3% (23.30 GMT)
Japan Core Inflation Rate YoY Oct consensus 3.5% vs previous 3% (23.30 GMT)
Bowman (14.15 GMT)
Jefferson (15.40 GMT)
UK Retail Sales MoM Oct consensus 0.3% vs previous -1.4% (07.00 GMT)
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Which Jezza wrote the budget? Was it Corbyn? Rishi's boss Klaus will be pleased with him.