The Morning Hark - 2 June 2022
Today’s focus …….The Return of the Dudley, Dimon flip and Russian default?
Daily roundup - all prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August down close to two percent in the Asian session to 114.50 and 110.90. A lot of noise in the space over the last couple of days with the EU ban, the Russian exclusion from the Opec production deal, their counterclaims of how they will avoid such exclusions and now a story that the Saudis will step into the breach and pump more oil if Russian output falls due to the sanctions imposed on it. With Biden hinting at a meeting with the Saudi rulers, potentially we are seeing the fruits of that initiative. The report in the FT suggests that Saudi Arabia and the UAE have discussed an increase in output and that it could be announced at today’s OPEC meeting. This has been the catalyst for the oil move lower, although it has erased around half of the initial losses it sustained and it certainly sets up another potential day of high volatility.
EQ - Asian stock futures a mixed bag with the Nikkei flat at 27,420. The Hang Seng however is struggling again down over a percent on the day to 20,860 with the Kopsi also down a similar amount at 350. The Hang Seng losses are being pinned on negative Covid news out of Hong Kong which is reported to be reintroducing their toughest Covid measures as a new variant of the strain has been reported. In addition comments by top tier research firms pointing to weaker consumer spending posing a big risk to big tech company earnings has put pressure on the tech sector with Alibaba leading the move lower. The US indices are steady with the Nasdaq and S&P at 12,550 and 4100 respectively and little of note to report.
Gold - Gold futures up smalls overnight at 1854. Gold seems caught for now in a consolidation mode after its recent rally from the lows. However, when you consider the move in yields and the USD it is holding in very well. Thus far we have held the first support at the 1830 level but for the upside to remain in play 1800 is the key support it needs to hold. Upside targets remain at 1880 with 1900 beyond that.
FI - US yields have backed off a touch in the Asian session with the US10y futures yields back to 2.92. It feels very much like a pause before a resumption of its push back to the 3% handle. The 10y German Bund yield which we spoke about yesterday broke higher as it breached the trend line around 1.12% and as we thought this has helped the overall shift higher in yields.
FX - Fairly muted FX session in Asia with the USD holding steady with the USD Index at 102.37 and with the yield move USDJPY remains bid to 129.90. All others in fairly neutral territory after the USD rally yesterday with EUR looking to be in a 1.0610/1.0710 range and similarly GBP in a 1.2470/1.2550 range.
Others - Bitcoin and Ethereum back in the doldrums again with both significantly lower to 29,900 and 1795 respectively. Ethereum looks sick at best and we are watching 1750 and 1700 as the downside warnings of a deeper pullback. Bitcoin support now at 29,250 and then 28,250. Feels like we could see these Ethereum levels in a heartbeat with confidence in the space at a very low ebb.
Our risk measures are diverging once again with the MOVE index pushing higher in tandem with the bond yield move to 109.38 with a remarkably stable VIX futures at 26.10. A reflection of the VIX underperformance can be seen in the VVIX (the forward measure of the VIX) which is at pre-pandemic levels.
We had a visit from an old friend yesterday and he certainly didn’t disappoint. Ex NY Fed president Dudley appeared as if by magic to throw in his thoughts on the rate path ahead and express “his view” that the Fed should keep pushing rates higher and only look to pause once rates are above 3%. Remember it was Dudley back in early April who introduced the Fed pain trade in an article on Bloomberg where he suggested that the Fed would inflict pain on the equity sector as a tool to cool inflation by choking off stock gains and indeed inflicting losses so as to temper consumer spending. This article introduced the concept that the Fed was pulling its Fed put and it would do anything to get inflation down no matter the consequences in other markets. For context at the time of the article we were trading around the 4,500 and 14,500 levels for the S&P and Nasdaq and it took a further couple of weeks for them to react fully and get the message. US10y yields were in the mid 2.60s at the time and certainly took the message to heart. The market reaction yesterday echoed the move with rates reacting with the most belief and I wonder if it’ll take equities quite as long to follow through this time? Seems too much of a coincidence that Dudley appears on the wires again with the backdrop of a rally in stocks, a back off in yields and credit spreads tightening.
Certainly JPM’s Jamie Dimon seems to be getting the message flipping from the strong economy with storm clouds message of a week ago to “it’s a hurricane” in describing what’s coming for the US economy. Wells Fargo’s CEO Scharf also doubted the ability of the Fed to engineer a soft landing in these conditions. According to Dudley, whilst never wanting to engineer a hard landing, the Fed’s focus is Make Inflation Low Again and that’s all that matters (for now).
On a separate note the Credit Derivative Determinations Committee ruled that Russia had triggered a “failure to pay” event due to a missing $1.9m interest payment on a bond which was in breach of the terms of the bond payment and potentially triggers an insurance payout possibly for billions of dollars. One to watch and I post some more details below.
Quiet on the data front today ahead of the all important US payrolls report tomorrow. UK is out on a long weekend to celebrate the Queen’s Jubilee so markets perhaps a touch lighter liquidity wise which may extend any moves. Couple of Fed speakers later in the day to keep an eye on and some early data for tomorrow morning with services PMIs in Australia and Japan.
One outlier in the quiet day may be the economic progress report speech by the Bank of Canada’s Beaudry (16.00 BST) . Yesterday saw the expected 50bp hike from the BoC accompanied by a hawkish statement but the lack of a press conference gave little room to expand on future guidance. Perhaps this might offer a stage to outline the Bank’s thoughts on the path ahead and in particular whether larger hikes are necessary and whether they are likely to pause at neutral rates or push higher.
📅⠀The main highlights for the day ahead in terms of data and speakers:
Logan (17.00 BST)
Mester (18.00 BST)
Villeroy (07.45 BST)
De Cos (16.15 BST)
AUD S&P Services PMI May - previous 56.1 (00.00 BST)
Japan Services PMI May - consensus 51.7 vs previous 50.7 (01.30 BST)
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
Axios - JPMorgan CEO warns of economic "hurricane"
ZeroHedge - 'Minor' $1.9 Million Failed Bond Interest Payment Triggers Russian "Failure-To-Pay" Event
🔥⠀Top 5 trending links on Harkster yesterday:
Stay-At-Home Macro - Lessons from the 1960s for the Fed?
Alhambra Partners - Follow China’s True Line
The Macro Compass - How To Avoid Stupid Mistakes
Convexity Maven - The Water is Warm in the MBS Pool
Prometheus Research - The Observatory
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