The Morning Hark - 20 Oct 2022

Today’s focus ……UK panto season back in full swing. SPR as you were but lower your bids to $70.01 and USDJPY 150 protecting the strikes?

Oct 20, 2022

All prices are at 7.40 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude December continued their rally in Asia after yesterday’s “buy the fact” SPR reaction and an unexpected decline in US crude inventories with the pair currently trading at 93 and 85.40 respectively.

Biden’s SPR announcement was as expected with the 15m sale quantity confirmed and further releases from reserves would be made over the winter if required. The only difference, compared to what had been initially reported, was that his “bid” for oil would be at $70 or below so I guess we can all lower our bids to $70.01!

Probably more importantly the G7 announced that the cap on Russian oil sales at an enforced low price would not be replicated versus other OPEC producers. This at the very least prevents further escalations in the US/Saudi spat.

EQ - Equity markets rollercoaster in Asia overnight with all indicies lower following the US session’s lead. However, the China covid news surrounding potential relaxation of some quarantine rules for inbound travellers, did help raise spirits and erase some of the earlier losses. However the indicies all remain in the red with the Nikkei, Hang Seng and Kospi currently trading at 26,972, 16,204 and 289 respectively. Earlier the Hang Seng had posted a 13 year low.

The Nasdaq and S&P continue to trade softly overnight in Asia at 11,061 and 3691 respectively.

Gold - Gold Dec flat overnight in Asia at 1635 as we took out our 1650 support and have remained below ever since with gold heavy on the back of the stronger USD and higher US yields. 1620 next support with 1650 now the near term resistance. I think gold only gets interesting if we take 1600 out.

FI - US yields holding onto their recent gains in Asia trading with the US2y and 10y now at 4.57% and 4.14% respectively.

European yields followed the US higher with the German and Italian 10y yields closing at 2.378% and 4.756% respectively.

UK gilts however were playing their own game as they moved lower again as they slowly try to get back to some of the normality of old with the 10y closing at 3.877%.

FX - The USD backing off a bit post the China covid news in Asia with the USD Index trading at 112.78. USDJPY is lingering close to the 150 level. Lot of option strikes at the level, which have another week or so to roll off, so we’d expect the level to be “noisy” but once we break it we should see a swift rally. EUR and GBP flat at 0.9787 and 1.1220. USDCNH a touch lower given the covid news but it had printed a new all time high just shy of 7.28 with it now at 7.2480.

Others - Bitcoin and Ethereum why do I bother at 19,104 and 1290 respectively.

Overnight highlights

Couple of points of interest overnight with the BoJ announcing an unscheduled bond buying operation as 10y yields break above their targeted 0.25% level.

Secondly, reports suggest that China is debating a reduction to covid quarantine rules for inbound travellers to the country. This has given risk a welcome boost. However, a word of caution the “reduction” is far from a big change with the current 7d in a hotel followed by 3d at home potentially morphing to 2d and 5d respectively. In addition, the top brass would have to approve this, so this is not imminent.

UK soap opera continues on speed

Well, that was a fool’s errand calling the potential end to the UK panto season it was merely an interlude for the various parties to rev up their engines and get going again.

So where to start? Well earlier in the day PM Truss was informed by the chairman of the 1922 committee that he indeed had a quorum of Conservative MPs to force a leadership contest but that he would not consider one without getting over half of the parliamentary party to submit a vote of no confidence. Given yesterday’s shenanigans, I think he’s going to be a busy chap today.

Truss then proceeded to oppose her new chancellor’s view on the protection of the triple lock for UK pensioners when she pre-committed that state pensions would indeed rise in line with inflation. I assume Hunt will just bide his time and get his own way when Truss exits stage left.

Next up Home Secretary Braverman was forced into a resignation for “mishandling secret documents on a personal phone”. Reports suggest there was a long screaming match between her and the PM before the resignation was forced upon her. Her resignation letter was fairly spicy and worth a look although “sources” claimed later that the letter was not factually true. After the shortest serving Home Secretary in 188 years, we get Grant Shapps to replace her, a man of “dubious business acumen”.

Moving onto the fracking vote. One of the cornerstone policies for the government as it tries to backtrack on green energy and revert to type as it endeavours to address the longer-term energy requirements of the country. The government initially tried to make the fracking vote a “vote of confidence in the government” before backing down. Amidst many stories of alleged bullying and indeed “physical manhandling” by messers Coffey and Rees-Mogg, which were subsequently denied, the government did win the vote. However in all the confusion, of whether it was a vote of confidence or not, the Chief Whip and deputy had resigned. PM Truss whilst scampering about trying to prevent the resignation failed to actually vote! The whips then pulled their resignations and all in the world appeared calm again. Keeping up?

Not quite the end of the story as reports then emerged that, having won the vote, the government were now trying to claim that it was indeed a vote of confidence and that the whips will be speaking to all those that failed to support the government and if no reasonable excuses were given then proportionate disciplinary action would be taken. I’m not sure if scampering after the Chief Whip trying to get them not to resign is a reasonable excuse?

Oh and the Treasury have reportedly sent over £11bn to the BoE to cover their losses for the bond buying program.

A small crumb of comfort for the UK on a “headline reverse indicator basis” is that The Economist’s cover this week has the headline “Welcome to Britaly”. Let’s see

I post Politico and some other pieces at the bottom for more details. The Charles Walker clip is well worth a look and sums it all up.

Central Bank Speakers

ECB and BoE chatter was of little note. The Fed speakers were all in a similar vein of late.

However, there did seem to be a big focus on the “pause” phase of the Fed hiking program with the speakers yesterday.

Brainard said there would be no pause until there was a definite peak in core CPI.
Bullard if inflation starts to decline meaningfully then the Fed can stay where it is at higher rate levels.
Kashkari could potentially pause rate hikes next year but employment is still strong and core inflation has not peaked.

The Day Ahead

The overnight Australian employment report and the China rate announcement did little to stir the markets. The labour market in Australia remains tight and next week’s CPI will give us more direction. Meanwhile, China, as expected, held rates steady.

Only data of note today is the Philly Fed report and US existing homes and then 4 Fed speakers to round the day off.

Early tomorrow Japanese inflation data.

For now all eyes on where yields go and of course UK politics. Pass the popcorn Boris……..

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Thursday

US Philadelphia Fed Manufacturing Index Oct consensus -5 vs previous -9.9 (13.30 BST)

US Philadelphia Fed Employment Oct previous 12 (13.30 BST)

US Philadelphia Fed New Orders Oct previous -17.6 (13.30 BST)

US Philadelphia Fed Prices Paid Oct previous 29.8 (13.30 BST)

US Existing Home Sales Sept consensus 4.7M vs previous 4.8M (15.00 BST)

Fed Speakers

Harker (17.00 BST)
Jefferson (18.30 BST)
Cook (18.45 BST)
Bowman (19.05 BST)

Early Friday

Japan Inflation Rate YoY Sept previous 3% (00.30 BST)

Japan Core Inflation Rate YoY Sept consensus 3% vs previous 2.8% (00.30 BST)

Good luck.

Adam Mancini - Breakout for SPX, How Far Can Bulls Go? Oct 19th Plan 🔒
James Picerno - 10-Year Treasury Yield ‘Fair Value’ Estimate: 18 October 2022
The Gryning Times - Are Stocks Cheap?
SEB - SEK, NOK, EUR and USD generally overvalued - in falling order
Nordea - Major forecasts: Not at the turning point

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