The Morning Hark - 20 July 2022
Today’s focus ……Gazprom found their spanner, illiquidity rally and Draghi’s big day at the Senate
Daily roundup - all prices are at 7.35 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September down over a percent on the day at 106.00 and 99.20 respectively after yesterday’s round trip and pretty much back to where we started. Push me pull me forces of supply fears based around proposed price caps on Russian imports by the West versus higher rates and dollar on the other side. Spreads between the oil contracts have also widened with the front month trading considerably higher than later contracts suggesting a tightness in supply. The API data was a build in crude and we have the EIA data today and if that shows a similar build that would be the third consecutive week and suggest that demand is starting to slacken and indeed that is reflected in US gas prices. Let’s see.
We all became Nord Stream 1 experts once again yesterday with all the various reports. As we spoke of yesterday Gazprom had missed a force majeure warning to one of its clients suggesting that the return of the pipeline would be delayed at best. However, Reuters later carried an article from “Russian sources” that the pipeline would come back online on schedule albeit on a reduced capacity basis. Better than nothing I guess.
EQ - A sea of green in the equity space with all Asian indices up on the day with the Nikkei, Hang Seng and Kopsi trading at 27,663, 21,000 and 316 respectively taking their lead from the decent rally we saw in the US indices yesterday.
The US futures are up smalls with the Nasdaq and S&P trading at 12,323 and 3954 respectively after their three percent rally off the lows yesterday. Corporate earnings, although a mixed bag, haven’t been as terrible as some had predicted and the better news on the Nord Stream restart schedule added to the good mood. The CTA community were also front and centre as their momentum models kicked in on the break of 3920 in the S&P. Big level on the topside is around the 4065 area. One thing to remember is liquidity is shocking and this move could disappear in the space of a couple of quotes.
Gold - Gold futures down smalls on the day at 1704 so let’s move on. We still believe the 1695/1700 area remains the key to the downside with 1730 the first sell zone.
FI - US yields flat overnight with the US2y and 10y yields at 3.23% and 3.03%, respectively, consolidating their gains from yesterday. Yields pushed higher throughout the day yesterday and once again we find ourselves back above the 3% level for the 10y our rough and ready inflation/recession indicator. Around this level it does feel like a, dare I say it, “neutral” rate and a kind of equilibrium between the two economic factors; a market “safe space".
European yields also pushed higher with German and Italian 10y yields closing at 1.278 and 3.331 and remaining well above 200bps spread.
FX - The USD is dead! Losing a further percent yesterday after our old friend, who we haven’t seen for a while, ECB sources suggested that a 50bp hike was a topic of conversation for the ECB this week. Now the cynical amongst us may suggest that Lagarde is using this olive branch to the hawkish side of the Council to get agreement on the finer details of the anti-fragmentation tools so that they can be announced in full at tomorrow’s meeting. Indeed there is a thought that their window of opportunity to get ahead is closing fast both in terms of inflation and credibility. Let’s see but the trifecta we spoke about yesterday of a Draghi stay, 50bp hike and Nord Stream back on, has edged a touch closer to reality. Indeed the next two days will be pivotal for the EU as we enter H2 Draghi’s Senate appearance today (8.30 BST) will kick events off followed by a further vote of confidence (approx 17.30 BST). There will be a further address and vote tomorrow in the Chamber of Deputies, although seen as less significant given today’s proceedings. Having lost his parliamentary majority last week, but won the vote of confidence, can he cobble together a coalition without the 5Star Movement’s support or will it be election time. Let’s see and more below from Politico. Anyway, all this leaves us with the USD Index at 106.68 with the EUR taking most of the gains with its relief rally, currently trading at 1.0234. GBP and the JPY following on but to a lesser extent to 1.20 and 138.30 respectively. The USD continues to feel like a buy on dips trade.
Others - Bitcoin and Ethereum continue with the perky tone trading at 23,650 and 1570 respectively. Bitcoin has played a bit of catch up over the last few sessions after Ethereum’s bounce over the weekend with all the merger talk. FOMO, momentum break and chasing the Nasdaq seem to be the main drivers of the move. Microstrategy also was rumoured to have been averaging into more Bitcoin.
For those interested in an update of the Where’s Wally game rumours abound that the 3AC founders have been detained in Dubai whilst trying to board a private jet to Switzerland. Let’s see.
US Data
Housing starts fell to their weakest level in 9 months as the Fed’s aggressive hiking path seems to be slowly seeping into the real economy. Further data out today, including mortgage applications and existing home sales, is expected to add to the gloom in the sector and fuel further recessionary fears.
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UK Data
UK inflation just released and shows a further uptick in the headline YoY number for June to 9.4% whilst core remained steady at 5.8% although the MoM reading did ease a touch from last month and expectations to 0.4%. GBP little changed. UK politics at last shows some light at the end of the tunnel with the final two in the battle for the leadership of the Conservative party, and hence the PM job, to be chosen today then it’s off to the shires with you until the eventual winner is announced on September 5th. More below from Politico.
BoE Governor Bailey’s Mansion House speech signalled a further hike for the early August meeting but it’s between 25 and 50bps but given the inflation profile and the Bank’s own recent estimate of an 11 handle soon for the headline print 50bp seems most likely. He also touched on QT and confirmed that further guidance as to this policy’s pathway would be given at the August MPC.
Day looks dull as other than the flow driven spin the bottle moves we have seen of late. We do get Canadian CPI data which is again seen to come in piping hot. Also prior to tomorrow’s TMH we do get the BoJ rate decision, in the early hours of tomorrow morning, with no change expected to rates or indeed the yield curve control policy. Remember all the hype last month. Markets have short memories.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
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Wednesday
Canada Inflation Headline Rate YoY Final June consensus 8.4% vs previous 7.7% (13.30 BST)
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Thursday
BoJ Rate Decision no change expected (04.00 BST)
BoJ Quarterly Outlook Report (04.00 BST)
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Good luck.
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
ING - Rates Spark: Don’t be distracted from the defining moments ahead
Scotiabank - FX Quick Notes
Credit from Macro to Micro - A framework for RV in duration
Discover more market commentary & research from 450+ curated sources on Harkster.com.
📚⠀Further reading on the current key macro themes:
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Crypto
CoinTelegraph - Celsius lawyers claim users gave up legal rights to their crypto
CoinDesk - THE BREAKDOWN: The Ethereum Merge Settles In as Next Crypto Narrative 🎧
Jack Niewold - 3AC Twitter Thread
ZeroHedge - Scaramucci's SkyBridge Capital Suspends Redemptions In One Of Its Crypto Funds
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UK Politics
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Italian Politics
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FX
FX & Macro Weekly - FX and Macro Outlook for Week 29/2022
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