The Morning Hark - 18 Nov 2022
Today’s focus …UK Fiscal Package 2: “The Hunt for Austerity”, Fed’s Bullard pulls a one two on the markets with his 5/7 range, Crypto the “never in my career” moment, Masa-Son’s tab and thundersnow.
Another week of drama in the macro and crypto worlds comes to a close but remember to look out for the Saturday Hark Back, the new publication from TMH. It takes a quick look at the key themes from the week gone by, with some links to articles and podcasts for a deeper read when you have more time to digest them. Hits the stalls tomorrow morning, and you can subscribe via Substack or find it on the Harkster App.
Good weekend one and all.
All prices are at 7.45 GMT/2.45 EST, with changes reflecting movement from midnight GMT
Oil - Brent and Crude January futures stabilising overnight in the Asian session after yesterday’s sell off with them currently trading at 89.90 and 81.80, respectively. The Fed’s Bullard did for the oil sector yesterday with his hawkish speech and belief that more hikes are in play. Immediate concerns for the US economy and subsequent demand for oil caused oil’s steep decline. In addition, continuing worries around the levels of China covid cases continue to plague the sector.
EQ - The Asia major indices, unsurprisingly, all lower with the Hang Seng, Nikkei and Kospi futures currently at 18,014, 27,890 and 318, respectively. The Hang Seng, as ever, taking the majority of the losses down over 2%.
The Nasdaq and S&P flat in Asia trading now at 3952 and 11,715, respectively. Bullard’s comments put a dent in the recent euphoria for stocks somewhat tempering their enthusiasm but thus far, they’ve regained around half of the initial move.
Gold - Gold Dec flat in Asia at 1768. Yawn. 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 4.46% and 3.75% respectively. Bullard’s comments had the US curve bear flattening and look to have had their desired effect. Remember the first 10y support is around the 3.70% level.
European yields followed the US lead with German 10y yields trading higher yesterday and currently at 2.025% and Italian 10y yields at 3.939%.
UK gilts had a 10bp spike over the Autumn Statement but retraced somewhat with the 10y yield closing at 3.201%. Certainly a more subdued reaction in comparison to the previous attempt at a fiscal package in the UK.
FX - Same old with little to note in the FX space with the USD stable and the USD Index currently trading at 106.52. All the majors similarly subdued with USDJPY, EUR and GBP currently trading at 139.70, 1.0382 and 1.1917, respectively. Little else of note to report.
Others - Bitcoin and Ethereum continue to hold in awaiting the next contagion news with the pair trading at 16,734 and 1215 respectively.
UK Fiscal Package Take 2
So in the space of a little under two months, we have managed to get from one side of the Titanic (£30bn tax cuts) to the other side of the ship (£55bn tax hikes/spending cuts) without, it seems, taking a breath! How did it come to this? Well I have nowhere near enough time here to answer that question, but I would say a couple of things quickly; it’s always easier going second in such scenarios particularly when the predecessor screws up so royally and secondly the predecessor screwed up so royally!
All about the delivery it would seem Liz n Kwasi managed to shun the “credible voices” in the OBR and senior treasury officials and shot from the hip. Whilst Rishi n Jezza used the press, managed expectations and put the OBR back on stage. So delivery has helped enormously, but the end outcome is questionable, and it seems if it was done correctly the first time, we could have met somewhere in the middle of that £85bn swing. Suffice it to say the “new” government’s honeymoon is well and truly over.
Some of the highlowlights are:
6-year freezes on income and inheritance tax thresholds;
Lowering of the upper income tax band by close to £25k;
14% of the population will now be higher rate taxpayers;
Potential 5% increases in council tax;
Capital gains and dividend tax allowances lowered;
Increase in oil and gas company windfall tax from 25% to 35%; and
Pensions and benefit rises however would increase in line with inflation.
The OBR forecasts were dismal to say the least:
GDP to fall to -1.4% next year;
UK economy is already in a recession;
It will take output 2 years to recover to pre-pandemic levels;
Unemployment is set to rise to close to 5% by q3 2024;
10% drop in real estate over the next 2 years;
Inflation set to average over 7% next year; and
Real disposable incomes are set to fall at their fastest rate in 70 years.
The good thing is forecasts are more often than not wrong. The bad news is they are usually too optimistic!
Whilst the tax impacts (£25bn) will begin next year, the spending cuts (£30bn) will not start until after the next election, which seems a stretch and is potentially a nod to the fact they know they won’t win that election!
Overall the UK is left with the highest level of taxation since WWII, a record fall in the living standards whilst rates are set to rise further potentially to around 4%. Oh and btw inflation just pointed above 11%. Not sure about you, but I seem to smell a distinct whiff of deflation about the place and, like a gas leak, that never ends well.
More links at the bottom for the brave amongst you.
Central Bank Speakers
Only one place to start, and that’s with the Fed’s Bullard, who put a cat among the pigeons for the markets when he suggested that the “sufficiently restrictive zone” was to be a minimum 5% and potentially higher than 7%. That was the money line obviously, but overall the whole tone was hawkish, with the usual rhetoric surrounding the speed of the move not being as important as the level and how long we remain there. In addition, he felt that hikes, thus far, had only had a “limited impact” on inflation so far. Rather obviously, he pointed out that the more the Fed do now the less they will have to do in q1.
Kashkari equally was not keen at saying how high rates could go, but they do need to remain at elevated levels for longer to combat persistent inflation.
SBF/CZ/Alameda
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here” this is a direct quote from the new CEO of FTX, and ex-Enron lawyer who spearheaded their bankruptcy process, regarding FTX his latest clean up job. Lot of copy written on the back of this comment, but I’ll just leave it at that, I think.
The other couple of crackers to come out from yesterday’s documents was the mismatch on the balance sheet; $740m of crypto in cold wallets versus $9bn of customer assets.
On the casualty front, it would appear that Binance are favourites to step into FTX’s shoes for the distressed assets of Voyager. A WSJ article suggests that Genesis, prior to this week’s client call, where they “temporarily” stopped withdrawals, had sought a $1bn rescue package to alleviate the pressure exerted from “illiquid assets” on their balance sheet. We have heard that story before and generally know where that ends up. Also, how deluded are these people to think they would be able to rustle up some investors? Remember, these are the guys that had a $2.4bn exposure to 3AC earlier in the year.
Also worth remembering that Genesis’s parent company Digital Currency Group are also the largest shareholder of Grayscale Bitcoin Trust, the world’s largest cryptocurrency fund. The $10bn fund, which holds 3.5% of bitcoin, has seen its share price plunge to a 40% discount to its underlying asset value as investors have started to redeem their assets. It’s a tangled web, so keep an eye out.
There will be more casualties, and you don’t have to stray too far from Twitter, if it still exists by the time you read this, to surmise who may be potential candidates. I’ll leave it at that.
One final thought and maybe they were trying to “bury” the news under SBF, but our old friend Masa-Son from SoftBank has stepped down from running the fund with, allegedly, a $5bn personal tab still to be paid. More at the bottom.
The Day Ahead
UK retail sales for October just released, and its a beat! 0.6% MoM versus 0.3% expected. Spend it while you got it, I guess!
US existing home sales and some central bank speakers the only thing distracting us from our World Cup sweepstakes and betting strategy tactics.
One point of note Lagarde’s speech is at the European Banking Congress and has been used previously as an important forum to get policy across. Just saying.
Speaking of which, for some light relief, the new Nike advert for the upcoming World Cup is worth three minutes of your time again.
Over the weekend, it may be worth looking out for the Fed Bostic’s speech on Saturday evening and early on Monday the China prime rate announcements, although no change is expected to either the 1y or 5y rates.
Finally, on Sunday Qatar v Ecuador (16.00 GMT) will open up the 22nd edition of the World Cup and then Segway straight into a thundersnow American Football game (18.00 GMT) where the Browns visit the Bills on the shores of Lake Erie.
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All times in GMT (EST+5 / CEST-1 / JST-9)
Friday
US Existing Home Sales Oct consensus 4.38m vs previous 4.71m (15.00 GMT)
ECB Speakers
Lagarde (08.30 GMT)
Nagel (13.00 GMT)
Knot (13.15 GMT)
Fed Speakers
Collins (13.40 GMT)
BoE Speakers
Mann (13.15 GMT)
Haskel (17.15 GMT)
Good luck and a good weekend to one and all.
The Macro Compass - The Bond Market Is Talking: Are You Listening?
Nordea - Macro & Markets: It's not over yet
The Chart Report - Chart of the Day – Thursday, November 17th, 2022
HFI Research - Oil Data Remains Convincingly Bullish But The Price Action Is Not
Discover more market commentary & research from 500+ curated sources on Harkster →
FXMacro Guy Weekly Review and Daily Tweet
@fxmacroguy - Thursday wrap-up thread
Crypto
CoinDesk - Sam Bankman Fraud: Inside the Collapse of FTX’s Hollow Empire
Paul Peterson, University of Illinois - Behind the Collapse of MF Global
@options_insight - Crypto Roundup
Milky Eggs - What happened at Alameda Research
Glassnode - The Fall of FTX
Taiwan
The New Yorker - A Dangerous Game Over Taiwan
UK Fiscal Package Take 2
Macrodesiac - 🔔 Filling Jeremy's Big Black Hole
Duncan Weldon - Five Autumn Statement Takeaways
Politico - London Playbook: Spinning the gloom — Hate Mail — Farting on Hancock’s throne
Nike World Cup Advert
@Football__Tweet - Nike advert . . . Instant classic. 👏
SoftBank
@BondHack - MASA'S $4.7BN IOU TO SOFTBANK REVEALED
Discover more market commentary & research from 500+ curated sources on Harkster.
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Great World Financial summary, as usual !!!
Love the World Cup update...
Can't wait to watch the WC tournament....
Excellent morning read