The Morning Hark - 18 Mar 2022
Today’s focus ……..Market reflects, Biden/Xi, BoE reflections
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures up 1% again in the session at 107.90 and 104.40 respectively. Oil remained bid overnight after yesterday’s rally on dampening hopes for a quick positive resolution for the Ukrainian/Russian peace talks and a squeeze on short term over sold positioning. The OVX index, the oil volatility index, we flagged as being remarkably low for all the geopolitical noise in the markets had a decent rally from around 59 to a close of 67.78 yesterday. Open interest in crude remains on its lows at levels last seen in 2016.
EQ - Equity markets very quiet overnight with small declines. Today is triple witching for the S&P market where we have expiries in index options, options on single stocks and futures on the stock index. There are a large number of ATM strikes at the present prices and this tends to lead to a quiet day for the market as strikes are pinned.
Gold - Futures still flat at 1935.
FI - all FI futures flat overnight with the US10y future consolidating around the 124.50 level.
FX - In the FX markets like the other markets a sea of calm prices in tight ranges overnight. USDJPY remains bid at 118.90 but remains below the post FOMC highs. The BoJ decision was uneventful and the market awaits Governor Kuroda’s press conference and if there is any push back on current JPY weakness. The AUD and NZD were the main stand outs both with decent gains. The AUD took out the NY high and took some momentum from that with the NZD following its path.
Others - Bitcoin has remained above the 40,000 and tested the next resistance at 41,500 a couple of times with little success. All in all still pretty dull as it remains in the 35/45,000 range we have seen over the last two months.
Russia hit the Western city of Lviv overnight with cruise missiles hitting an area near the airport but reports suggest not the airport itself. In addition reports of residential apartment blocks being hit in Kyiv as the Russians continue their assault on Ukrainian civilians in the hope of breaking their will. In brighter news, UK officials suggest the Russian assault continues to falter with the supply of food and fuel particularly troublesome hindered further by the strategic counterattacks of Ukrainian forces. The market will be focused on the Biden/Xi conversation and any positive news coming from it. The BBC has a story on the discussion between Putin and Turkey’s President Erdogan suggesting that the main sticking points for any peace deals, as previously hinted at, would be surrounding the regions of Crimea and Donbas but that an overall agreement may be easier than expected.
The market seems pretty tired today after the major risk events of the week and the constant headline watching that a geopolitical conflict always brings. The week has seen some major events. The Fed has come and gone and pretty much given the market what it was looking for in terms of rate hikes. So far the market has taken the result and Chair Powell’s press conference in its stride and seems happy to have risk on. The China selling shock fuelled by delistings and negative Covid news was violently reversed in a matter of a couple of sessions after the Chinese authorities vowed in effect “to do whatever was needed” to support the system. Even the comments and headlines from the war in Ukraine appear to be having ever less impact as the market perhaps becomes match fit in how it treats each pronouncement and as peace talks rumble on with an overall, at the margin, positive tone. So is that it are we out of the woods? That feels all a bit too easy surely? We have talked about the major structural issues in the markets especially in commodities where again we saw issues at the LME yesterday, potential Russia default, Trafigura additional funding discussions and the performance of their bond yields continue to raise alarm bells, the general liquidity issues in the markets, the shutting off through sanctions of the largest commodity producer, lots of writing on the end of the petrodollar era and all that that entails for the structures of global finance. There will be obvious fallouts from this conflict and as is so often the case with conflicts these effects can be seismic.
The market’s immediate attention will be on any comments out of the President Biden/Xi meeting today at 13.00 GMT with obviously Ukraine high on the agenda and did they/didn’t they respond to Russia’s supposed request for military assistance for their campaign. Then Monday when Powell speaks at an economic forum on the economic outlook and especially any further colour on the FOMC meeting and specifically the prospects of a 50bp hike for the early May meeting.
The potential Russian default looks, for now, to be off the immediate agenda. JP Morgan has processed the interest payments sent by the Russian government for the $117m of coupon payments which fell due this week. These payments have landed at Citi, the payment agent, for final processing as it appears that the current US sanctions do not prohibit Russia from making such payments. Next on the horizon is a further coupon payment later in the month and a $2bn bond repayment in early April.
The BoE produced a dovish hike with the backdrop of downside growth and surging inflation only added to by the Ukrainian conflict. The vote surprised the market with Cuncliffe voting for no change. The quickest pace of tightening in 25 years was accompanied by a forecast of a 8% peak in inflation in late 2022. The statement also replaced “likely” with “might be” in the context of further hikes. The BoE is definitely the leader in the clubhouse in terms of global central banks’ tightening cycles but I wouldn’t bet on it remaining there for long. In other cheery news, the FT reports a warning from Chancellor Sunk that an immediate EU wide embargo on Russian oil and gas would tip the countries into recession and have a 3% hit in UK GDP.
As an aside I have posted below some interesting articles. There’s a full download of the nickel market from that well-known publication mining.com which gives a good detailed overview of recent events. In addition, Arthur Hayes take on the end of the petrodollar age and his view that gold going to 10K.
📅⠀The main highlights for the day in terms of data and speakers:
Russian rate decision at 10.30 GMT - remember they lifted rates by 10.5% last month to protect the RUB. A further hike is expected today by the street.
Elsewhere second-tier data with CAD retail sales and US existing home sales data.
A slew of Fed speakers into the European early evening with Barkins, Evans and Bowman all lined up to talk.
Good luck and a good weekend to one and all.
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📚⠀ARTICLES ON HARKSTER AND FROM OUTSIDE EXPLORING IN MORE DEPTH SOME OF THE THEMES ABOVE:
Mining.com - The 18 minutes of trading chaos that broke the nickel market
Commodities and collateral
ZeroHedge - Pozsar: "We Could Be Looking At The Early Stages Of A Classic Liquidity Crisis"
ZeroHedge - Energy Traders Ask For Central Bank Bailouts To Save Them From "Margin Call Doom Loop"
Arthur Hayes - Energy Cancelled
🔥⠀Top 5 trending links on Harkster yesterday:
The Macro Compass - The Fed is Hitting The Brakes: Are You Wearing your Seatbelt?
The BondBeat - o/n; vigilantes; 5s10s Fed'version
Alhambra Partners - Media Attention All Over FOMC, Market Attention Totally Elsewhere
The Transcript - Structural not Transitory
TKer - A key chart to watch as the Fed tightens monetary policy 📊
Discover more on harkster.com
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