The Morning Hark - 20 May 2022
Today’s focus …….Sentiment shift?
Daily roundup - all prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude futures both down half a percent to 111.40 and 109.00 respectively. Still all the usual factors at play on the supply and demand side that we have mentioned on several occasions. For now, it feels very much like a rangebound commodity.
EQ - Stocks have stepped back from the abyss which saw the US indices yesterday afternoon selloff close to their year’s lows. The Nasdaq and S&P are both up one percent at 12,000 and 3,930 respectively. Focus will remain on whether we take out and stay below the 3850 level in S&P which would be a draw down of 20% from the highs and hence officially we could claim to be in a bear market. Asian markets have also taken a turn for the better with all showing good gains with the Hang Seng leading the way up close to 3% at 20,620, whilst the Nikkei and Kopsi are also in healthy territory at 26,750 and 350 respectively.
Gold - Gold flat on the day at 1847 holding its gains from yesterday and looking for its first up week since mid April. Yesterday’s pop was attributed to concerns surrounding global growth and as such the precious metal regained some of its safe haven status. If the USD continues to suffer gold should continue to receive support and as we have mentioned this week gold is showing signs of bottoming towards the 1800 level.
FI - A flight to safety has driven yields in the long end lower with the US10y at 2.85. However, the shorter end has seen a decent rally in yields in Asia with the US2y up at 2.63
FX - Steady FX markets in Asia with the USD flat on the day after yesterday’s sell off. The USD Index sits below 103 at 102.85 with USDJPY back at 127.70. The EUR has clawed its way back above 1.05 to 1.0580 and even the GBP is looking perkier at 1.2475.
Is the USD turning at last after trading at a 20 year high or is this merely a short term position trade in what has become an overextended market? What we would say is that the USD seems more responsive to a better risk sentiment to a risk sell off but as I say this may be down to the market’s extended long USD positioning as well as the poor liquidity. In addition, the options market is getting less bulled up on further USD upside. It’s a hard call and we are focusing on 103.30 and 102.50 as levels in the USD Index which we believe will answer some of our questions. As we describe below it does feel like there is slight shift in sentiment. Either way, stocks hold the key.
Others - Bitcoin and Ethereum looking a touch better bid with the general mood but little of interest with them trading at 30,100 and 2,025 respectively.
Yesterday’s US data although secondary in nature painted a fairly gloomy picture for the US. Jobless claims rose, housing market is looking like it’s cooling with a drop in existing home sales and the Philly Fed index falling sharply towards a pandemic type level again. All in all, not the best of backdrops with the Target and Walmart news still very fresh in the market’s minds. The Fed pain trade is certainly playing out with stocks continuing to sell off but now the market’s focus is not on inflation and what effect that has on stock prices but rather now on recession and what that does to stock prices. The answer to both is lower but with the focus now on a potential recession there is a flight to safety as the market pivots away from the aggressive bond selling it precipitated as the Fed played catch up by tightening financial conditions to now buying treasuries as a safe haven trade hence pushing yields lower which in turn weakens the USD.
Focus has moved from the tech stock sell off to the staples sell off as everyday prices rise and the big retailers scream of lower margins and higher base costs. All of this ends at the consumer’s door who faces higher costs from mortgages to car loans to utilities to food bills. If this trend continues in the markets then the housing and employment data will be key going forward. With a further potential 10 rate hikes in the pipeline it seems unrealistic to think that the consumer will not blow up at some point. The Fed pain trade we’ve talked about at length was put in place to hurt the stock market using the effect as a tool to cool off inflation. The theory being that as people licked their wounds from losses in the stocks they would have less money to consume goods hence in theory driving prices lower. However, as credit conditions worsen you’d expect to see further stock market woes and further consumer pain fuelling more pain. The question remains at what threshold of pain would we expect the Fed to start lifting its foot off the market’s throat. We are not there yet by a long stretch given all the recent Fed chat but it feels like it’s getting closer.
One thing to note today is the option expiries for the S&Ps. There are close to $2tn of expiries with a lot having strikes at the 4,000 level. In theory, the expiries will leave the market makers free to buy back stocks to cover their short exposure and hence close out their hedges. In theory, this has the potential, especially in these thin liquidity conditions, to give the market a decent boost. Let’s see but worth bearing in mind.
Some data from overnight saw UK consumer confidence at its lowest level in 50 years which can’t come as any surprise. What is a surprise though is the UK retail sales for April which beat expectations with MoM coming in up 1.4% (-0.2% expected). However, to put in context the YoY measure is still down -4.9%. Another unsurprising data point (although it was expected) saw Japanese CPI above the BoJ’s target for the first time in 7 years. Finally, in China the 5y loan prime rate (mortgage ref rate) was trimmed to 4.45% from 4.6%.
📅⠀The main highlights for the day ahead in terms of data and speakers:
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Friday
BoE Speaker - Pill (08.30 BST)
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Good luck and a good weekend to one and all.
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
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Oil
The Balance - Pricing Differentials Between Brent Crude and WTI
ICE - Global Crude Benchmarks: Brent Sets the Standard
🔥⠀Top 5 trending links on Harkster yesterday:
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Prometheus Research - The Observatory
The Macro Compass - Let The Macro Polar Stars Guide You
TS Lombard - A recession to tame inflation?
Alhambra Partners - Looking Back At Chaotic March Through TIC
Blain's Morning Porridge - The Judder Moment Just Crashed Markets
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Short and sweet summary!