The Morning Hark - 21 June 2022
Today’s focus ……RBA lesson for the ECB and BoJ? Nomura breaks cover on a US recession…more to follow? Solana antagonising the crypto natives.
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August both up on the day at 115.00 and 110.00 respectively. Focus flipped to supply side concerns late in the day yesterday and into Asia this morning with more demand seen out of the US and China due, respectively, to the ongoing driving season and the lifting of Covid lockdowns. We believe that the move late last week was partly attributable to the paring of risk and we believe that some of the move we’ve seen this week is a reversal of that trend as traders return from a long weekend. Always worth looking at the oil sector stocks when oil starts to reverse a trend with oil having backed off a good $10+ of late. Doing a very back of the envelope calculation for a handful of the majors it seems that when their stock prices last hit their current levels oil was at least $10+ lower. Not an exact science for sure but perhaps something to have a look at on a quiet morning.
EQ - A sea of green in the equity sector with most Asian markets up well over a percent with the Nikkei leading the way up close to two percent at 26,250. The Hang Seng and Kospi a little less exuberant but still well up at 21,345 and 316 respectively.
The US stock futures indices both well over a percent higher in the Asian session with the Nasdaq and S&P at 11,470 and 3,730 respectively.
Gold - Gold futures down smalls overnight at 1836. As we noted yesterday it seems the range for now is 1835 to 1861 and we will take note of the price action to reassess if we breach any of these levels.
FI - Global yields up across the board as the markets return from the US long weekend. The US 2y and 10y yields at 3.24 and 3.28 respectively both up well over a percent following the rises we saw in Europe yesterday with the German and Italian 10ys closing at 1.749 and 3.668 respectively. Still behaving nicely for the ECB maintaining a spread below 200bps for now.
FX - Very muted session for FX the USD is a touch weaker on the day with the USD Index down smalls at 104.41. The picture as a whole looks fairly steady for now with USDJPY above 135, the EUR above 1.05, CNH at 6.6950, and GBP in the mid 1.22s.
Others - Bitcoin and Ethereum had a bit of a breather yesterday and have managed to consolidate above the psychological levels we took out over the weekend, Ethereum looking the rosier of the two trading now at 1160 with Bitcoin having done a lot of work around the 20,000 level has now established itself above, for now, trading at 21,200. With the fallout from the Celsius, Babel Finance and Three Arrow Capital (amongst others) still far from settled and clarity surrounding any liquidity event remaining it still feels like the lows are not quite in yet.
One interesting development in crypto land happened in the Solana protocol space. Users of the Solana based lending and borrowing protocol Solend granted emergency powers, late on Sunday, in order to limit liquidation risks presented by a large stakeholder which endangered the whole protocol. The powers in effect granted the governance of the “whale account’ to the Solend Lab allowing them to execute an OTC trade to liquidate part of the position should the price of SOL go below $22.30 (currently $37.30) rather than on the illiquid open market. As an aside what they thought the OTC market maker might do to offset their risk and what effect that may have on the market as a whole is another matter. Anyway, much outcry ensued on crypto twitter and beyond as the crypto natives decried the loss of the “decentralised” nature of the protocol and the sector as a whole. Indeed it’s not a stretch to reflect on what happened with this vote in the decentralised Solana network mirroring the traditional finance world when we recently saw the US in effect take control of off shore Russian holdings of assets. Solend carried out another governance vote which invalidated the draconian first one and are working on a plan to prevent the systemic risk that this whale account poses to the protocol. For those interested, I post some additional and more in-depth articles below.
Fed’s Bullard overnight continued to bang the drum claiming justification for the Fed’s actions stating that “ US inflation expectations would become unmoored without credible Fed action”. Seems to me like the ships already sailed on that one but I get his point. To add to the mood music ex US Treasury Secretary Summers chimed in with his thoughts that US unemployment rate would have to rise above 5% for a sustained period of time to curb inflation (last count we are at 3.6% for the last 3 months).
First card to fall yesterday as Nomura became the first street analyst to predict a US recession for the tail end of this year in a research note issued yesterday. In it they predict GDP to be 1.8% this year (down from 2.5% previously) and -1.3% for 2023. It will be interesting to see if and when other analysts follow suit.
RBA Governor Lowe spoke overnight with claims that interest rates remain very low and incoming data will be the guide as to how fast and far interest rates have to rise. He did see inflation peaking into the year end around 7% as supply chain issues start to resolve themselves. The RBA minutes were also released overnight and the tightening we saw was deemed appropriate given the resilient economy and record low unemployment. One interesting comment they made that maybe the ECB and the BoJ should take heed of going forward was regarding their yield targeting. They introduced a target on the 3y at the start of the pandemic which served its purpose at holding down domestic borrowing costs. However, the exit from the policy late last year was “disorderly” and “caused reputational damage to the Bank”.
Little of major note data wise and in addition we have some BoE and Fed speakers where we shall be looking for the usual themes. One further point to note for the early hours tomorrow morning we have the BoJ minutes. Worth a look for two points; obviously the “line in the sand” 25bp 10y JGB curve control policy but also remember too the statement from the meeting mentioned “currencies” (“it is necessary to pay attention to developments in financial and FX markets and their impact on Japan’s activity and prices”) for the first time and it’ll be interesting to see any further discussions on that matter.
📅⠀The main highlights for the day ahead in terms of data and speakers:
Canada Retail Sales MoM Apr consensus 0.8% vs previous 0% (13.30 BST)
US Existing Home Sales May consensus 5.39m vs previous 5.61m (15.00 BST)
Pill (08.15 BST)
Tenreyro (13.15 BST)
Mester (17.00 BST)
Barkin (20.30 BST)
BoJ Minutes (00.50 BST)
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
ZeroHedge - It's Official: Nomura Is First Bank To Call For 2022 Recession
Fortune - U.S. recession is more than a 50/50 possibility in 2022, Nomura says
Fortune - Solana DeFi platform votes to reverse ’emergency powers’ to take over whale account facing massive margin call
Coindesk - DeFi Protocol Solend Passes Governance Vote to Reverse ‘Emergency Powers’
Blockworks - Solana Lending Protocol Faces Governance Conundrum
🔥⠀Top 5 trending links on Harkster yesterday:
The Commodity Report - The Commodity Report #56
Bison Interests - Buffett Buys Oil & Gas Stocks
Ecoinometrics - Bear market mindset
TS Lombard - The year of the payback
UniCredit - Sunday Wrap
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It seems to me that the central banks have been expecting supply chains to ease for 2 years now. I keep wondering why they think that is the case. There doesn't seem to have been much in the way of new Capex that is yet completed and monetary policies are still hyper stimulative, so why the change?