The Morning Hark - 21 July 2022
Today’s focus ……ECB day 25/50?, anti-frag tools? Draghi off? Volatility on…definitely
Daily roundup - all prices are at 7.35 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September close to flat on the day at 106.70 and 99.50, respectively, but once again we revert to pretty much our last few days’ opening levels! Push me pull me forces once again with tighter supply which is supported by the further backwardation of the oil curve with the near contract far outstripping the latter contracts in terms of price. However, this is neutralised by builds in inventory of crude with the EIA data showing another build to go alongside the previous day’s API data suggesting a slackening in demand.
Nord Stream 1 revving back up day and from latest reports it would seem that all is good with gas supplies starting to roll again. Once again much ado about nothing and just really another market noise event and hopefully the last we hear of NS for a while although I somehow doubt it.
EQ - A mixed bag for the Asian indicies with the Nikkei and Kospi up close to one percent on the day at 27,760 and 320 respectively. However the Hang Seng flat at 20,750.
The US futures flat with the Nasdaq and S&P trading at 12,490 and 3972, respectively. The rally remaining in place, for now at least, as the market looks through the weakening data and eyes up those future juicy rate cuts next year. Someone better point out that its group on the menu for now with a 75bp hike coming up next week and a somewhat seasonally awful equity returns month in August to get through before any of that haute cuisine.
Gold - Gold futures down close to one percent in the Asian session to 1690 as we at last get some volatility back in the space. We have taken out the bottom of our range, the 1695/1700 zone, and have traded below there ever since although with little real follow through and in very light trading. Interest rate hikes certainly hanging heavy but it feels just more of a technical move to take out the year’s lows. Gold is definitely a byproduct of the market sectors just now.
FI - US yields flat and pretty much at our opening levels from yesterday with the US2y and 10y yields at 3.24% and 3.05%, respectively. For now, the market seems content to trade around the 3% pivot in the 10y prior to the Fed next week.
European yields testing the ECB with the spread between the German and Italian 10y yields widening again to 211bps with them closing at 1.259 and 3.37, respectively. Italian political tensions the obvious culprit for the move wider.
FX - The USD off a touch overnight but once again we are around our opening levels from yesterday as we await direction today from Italian politics and the ECB. USD Index at 106.75. The majors are also close to what we saw yesterday morning with the JPY, EUR and GBP trading currently at 138.37, 1.0210 and 1.1985 respectively. The USDs recent demise has done for USDNOK’s rally above 10, which we have spoken about previously, although it did have a decent run up beyond 10.30. For now with the USD on the back foot a sell into the 10 zone seems reasonable in the short term although we would suggest that the USD is not for a turning just yet not until we see a firm commitment from the Fed that they are either pausing or indeed set on a pivot. One word of caution on this would be that we are fast approaching August where we often see periods of pain, as markets look for weakness and overpopulated trades in holiday (even more) illiquid markets. In addition, it is often a month of stock market underperformance. As we know long USD is well populated, so ripe for a pain trade, so any sell off in the USD is certainly worth fading but perhaps more of a scaling approach especially as we have the potential to see some overshoots in the price action.
Others - Bitcoin and Ethereum took a small back step yesterday and are now trading at 22,900 and 1484 respectively. Bitcoin had captured a five week high above 24,000 before reversing on the news that Tesla, in its q2 results, had disposed of the majority of its holdings of the coin during q1.
US Data
A further raft of poor housing data yesterday again added to the recessionary woes for the US with mortgage applications hitting a 22 year low and existing home sales hitting a two year low and stretching the monthly drops, in that series, to five in a row. Well, the Fed’s aggressive hiking path is working but are they running the economy into the ground? Further bad news came from some high profile names announcing yesterday that they were either cutting jobs or initiating hiring freezes amongst them Ford, Google and Microsoft. Employment is always a lagging indicator and as we have mentioned before these two weeks coming are pivotal for the US economy and the Fed in terms of where they stand for the remainder of the year with q2 GDP, FOMC, ISM’s, PMIs and NFP all coming up by August 5th.
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ECB/Italian Politics
The big day cometh. We have waited 11 years for an ECB hike and do we get a double dose (50bps) today? As a word of caution the last hike they did tipped us over into a sovereign debt crisis and cuts were back on the table within three months. Anyway 25 or 50 is the burning question and one which has been muddied a good deal by the shenanigans we have seen in the drama that is Italian politics.
Let’s cover Italy first. Draghi stood up in the Senate and, on the basis that the Italian people had asked him, said he was remaining as PM but his coalition must back his reform agenda. Much machinations followed and three of the coalition partners (Forza, League and 5Star) abstained from the subsequent vote of confidence. Draghi won the vote but elections in the autumn look the only feasible way out and whether Draghi himself will play a part in them remains to be seen. Today sees the house confidence vote which is expected around the time Lagarde is still speaking just to make things easier! Politico take below for more details.
Now the ECB. Remember the timings are slightly altered with the announcement at 13.15 BST and the press conference half an hour later (in line with the Fed’d schedule). Anyway 25 or 50 is the big question. The ECB sources earlier in the week would have you believe that 50bp was very much on the table and perhaps reaching a favourable tipping point especially as it was felt that the ECB was slowly losing its window to act decisively. However, the Italian drama would seem to have dampened such talk and 25 seems the more likely option with promises of more to come in the coming meetings and potentially 50bps next time in September. The June commitment for hikes was for a “gradual and sustained” path so look out for any tweaks to that language. The market is currently pricing in around 36bps and as such expect a volatile session. The other focus will be the anti-fragmentation tool announcement of more details or not. There was a view that the 50bp hike would be seen as a concession to the hawks to garner some agreement regarding the tool announcement but with that seemingly less likely does the toolbox remain in the shed? Also even if they are fully announced will they a) be powerful enough and b) be able to be activated? I have posted some ECB previews below which give you a deeper dive into some of these dilemmas or track all articles on our ECB feed here.
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In other news . . .
Couple of catch ups from the last few sessions. CAD CPI disappointed coming in much lower than expected and pointing to a peak in the cycle which we have also seen in other major economic zones. Inflation is still on a 8 handle mind you but remember too that the BoC just raised 100bps last week. Policy mistake? Speaking of which the BoJ left rates well alone, despite inflation a tick over their target 25 rate, and the yield curve control policy remains in place all as expected. Forecast wise again no shocks as they raised their inflation expectations (2.3% from 1.9% for FY22). They also alluded to “sharp volatility” in the currency. Remember Japanese CPI tomorrow early doors as well as Australian and Japanese flash PMIs.
Oh yes and it is Rishi v Liz for the battle for the next PM. Off to the shires with you and the very best of British to you both (you’ll need it). Politico below for more.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
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Thursday
ECB Rate Decision 25bp hike expected (13.30 BST)
US Philadelphia Fed Manufacturing Index Jul consensus 0 vs previous -3.3 (13.30 BST)
US Philadelphia Fed Business Conditions Jul previous -6.8 (13.30 BST)
US Philadelphia Fed Prices Paid Jul previous 64.5 (13.30 BST)
ECB Press Conference (13.45 BST)
ECB Speakers
Lagarde (15.15 BST)
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Early Friday
Australia S&P Global Manufacturing PMI Flash Jul previous 56.2 (12.00 BST)
Australia S&P Global Services PMI Flash Jul previous 52.6 (12.00 BST)
Japan Headline Inflation Rate YoY June consensus vs previous 2.5% (12.30 BST)
Japan Core Inflation Rate YoY June consensus 2.2% vs previous 2.1% (07.00 BST)
Japan Jibun Bank Manufacturing PMI Flash Jul previous 52.7 (01.30 BST)
Japan Jibun Bank Services PMI Flash Jul previous 54.2 (01.30 BST)
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Good luck.
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
BNY Mellon - Short Thoughts
LPL Financial Research - Best Day for Breadth in Over 3 Years
RIA Advisors - Liquidity and Valuations – The Cornerstones of Investing
ING - The Commodities Feed: European natural gas uncertainty
Discover more market commentary & research from 450+ curated sources on Harkster.com.
📚⠀Further reading on the current key macro themes:
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UK Politics
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Italian Politics
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ECB Previews
ABN AMRO - ECB Preview: Difficult trade-offs intensify
Pepperstone - ECB Meeting amidst messy Italian politics and gas flow fears
BNP Paribas - ECB: ADDRESSING UNWARRANTED SPREAD WIDENING
ZeroHedge - ECB Preview: First Rate Hike In 11 Years, And Another Major Policy Mistake
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I am so glad I found you. I rand a global fund in 1986- 1992, but had to retire because of illness. For years I have been patching together info on various markets, because after investing globally is my expertise. I must say I was very good at it. Your newsletter is great because it packs in really good information so that, being American, I have a good feel as to what happened overnight. The US was the only game in town for a more than a few years. The tables will turn for US investors as the dollar will roll over. I experienced the volatile 1987-88 currency wars when people kept betting the dollar would continue to go down. My bet here is that dollar will stay strong longer than most investors have patience and that when it turns, the first leg down will be quite fast. Will the central banks intervene? Who knows but politically a strong dollar is crucifying Europe because so many commodities are priced in dollars. US multinationals are up in arms too as foreign earnings are much less than expectation.
So keep your quality newsletter. I’m very appreciative
!
Excellent and insightful update. Best read alongside 'Unhedged" from the FT – perfect combo!