The Morning Hark - 21 Nov 2023
Today’s focus... Central bankers continue the theme but the markets ignore. Another US assault on Crypto. The OpenAI saga deepens and has history intertwined with SBF….of course it does!
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Overnight Highlights
Prices are at 7.05 GMT/2.05 EST, with changes reflecting movement from midnight GMT
Oil - Oil’s recovery stalling somewhat as we see a close to one percent sell off in Asia. Brent and Crude January futures currently sitting at 81.70 and 77.20 respectively.
A lot of demand side worries being apportioned to this sell off after the OPEC+ supply cut stories had helped the recovery rally. Seems a touch of the “pin the tail on the donkey” about the stories and much more likely some position adjustment/profit taking after a good rally in oil in what is a holiday shortened week.
EQ - Asian equity markets a touch softer overnight with what seems some profit taking after the recent rallies we have seen in the space. Currently the Hang Seng and Nikkei sitting off smalls at 17,800 and 33,345 respectively and pretty much at our opening levels from yesterday.
The US indices flat overnight and holding onto their gains from the US session. S&P currently at 4561 whilst the Nasdaq is at 16,095. Yesterday saw record closes for Microsoft and Nvidia, ahead of their earnings today. This helped the Nasdaq close at a near two year high. Maybe Santa is coming a month early on Thanksgiving?
Gold - Asia took the bait at last and started to trade gold again. We’ve seen a close to one percent rise in Dec futures trading now at 1993. Once again 2000 is proving to be a tough nut to crack as we traded just shy of the mark overnight. Seems a bit of catch up from a continuing trend for a weaker USD and lower US yields.
FI - Global yields continuing the softening theme, despite central banker protestations, and continue to leak lower in the Asian session. Currently the US2y and US10y trading at 4.91% and 4.40% respectively.
Remember the 4.33% remains the downside focus in the US10y with beyond that the 200dma around the 4% level.
European yields had a pretty dull session with rates relatively unchanged. German 10y closing at 2.61% and the Italian 10y yield similarly at 4.34%.
UK gilt yields likewise with them closing at 4.13%.
FX - USD weakness continuing to play out as the market is convinced we have hit an inflection point for the US rate cycle despite what Fed speakers may say. USD Index leaking further and currently at 103.27. The JPY, EUR and GBP all surfing the wave higher in Asia with them sitting currently at 147.55, 1.0960 and 1.2530 respectively.
AUD, post RBA minutes, got as high as 0.6588 before tailing off but still at recent highs. The NZD similarly so at 0.6060.
As we continue to point out surely USDJPY is the next to go? Early signs continue to be encouraging despite the Fed trying hard to push back on market expectations for rate cuts. The Fed minutes this evening you’d have to think will lean to the hawkish side. On that basis, given the move we have had of late in the USD, it would not be a surprise to see some profit taking but it does feel for now at least the new regime would see any such reversal in the USD eventually being sold into.
Others - Bitcoin and Ethereum price action wise little of note with the pair comfortably in their recent ranges at 37,350 and 2013 respectively.
Macro Themes At Play
Central Bank Speakers
The ECB’s Wunsch started the week off, as I’m sure the rest of the central bankers will continue, with a pushback on the market. He claimed that bets on rate cuts risk prompting rate hikes instead. Furthermore markets are optimists to rule out further hiking by the ECB. He sees rates remaining unchanged at the December and January meetings.
de Cos warned that it was premature to start talking about interest rate cuts. However he conceded that rates at the current levels “should be enough”.
Villeroy claimed that the ECB had reached a plateau, in terms of rates, and would remain there for the next few quarters. He continued that he would not give dates for rate cuts.
The Fed’s Barkin much of a muchness in terms of pushback to the market’s recent reaction. He was not convinced that inflation is on a smooth glide path to 2% and fears that more needs to happen to curb demand and inflation.
The Fed is making real progress on inflation but a continued strong growth could warrant higher rates.
The BoE’s Bailey the usual rhetoric of hard talk. Concerned on second round inflation effects from food and energy. The labour market remains tight and hence elevates wage pressures. Services inflation remains too high and the risk is that we may need more aggressive action. The Bank’s latest projections suggest that rates will need to remain restrictive for quite some time.
Crypto
Quite a day of it in Cryptoland. We saw two approaches from the US to try , once again, derail the crypto space. The US Justice Department are, according to Bloomberg, seeking a $4bn settlement from the Crypto exchange to settle its criminal case against them. It’s reported that this would allow Binance to continue to operate its business but could also include its CEO CZ facing criminal charges.
The exchange’s token BNB rose 7% on the news as it is seen as lifting a cloud over the uncertainty regarding the charges. Plus I guess $4bn is a cheap cut.
BitcoinNews - Binance faces $4bn fine
Elsewhere another Crypto exchange Kraken has been charged by the SEC for operating as an unregistered securities exchange, broker, dealer and clearing agency.
Kraken retorted that the charges were “incorrect as a matter of law, false in a matter of fact and disastrous as a matter of policy”. That’s you told Gary!
OpenAI
Just when we thought we’d run out of Sams to have fun with another one comes along! Well it is November the time for Sams to turn the new frontier worlds upside down! For confusions sake lets call SBF Sam1 and Sam Altman Sam2.
As a quick recap OpenAI was founded back in 2015 with Musk as co-founder of the non-profit organisation. In 2020 there was a split with some executives going off to form Anthropic which claims to have safety in AI as its greater focus.
Fast forward to this weekend and we had the coup that led to the CEO, and poster boy, Sam Altman being fired and the President Greg Brockman quitting. A new interim CEO is put in place and the firing is put down to a “breakdown in communication”. Bit of flip flopping then ensues whereby they consider taking Sam2 back but then some senior employees leave also.
Sam2 then seems set to return or start up a new AI venture before Microsoft, an investor in OpenAI, swoop in and hire him, Brockman and some of the other senior team. Almost all employees write a letter to the board expressing that they will quit if Sam2 is not reinstated.
OpenAI are now allegedly discussing a merger with Anthropic, yes them again! And in case that wasn’t enough OpenAI investors are seeking legal recourse against the board for their handling of this debacle.
I apologise for the history lesson but I wanted to draw your attention to the article below, which I wish I had read last month when it was published! It draws links with Open Philanthropy and Effective Altruism, remember them from the SBF case, and the influence they are trying to put on the Washington regulators. Fascinating read and a common thread between the two Sam’s seems to be Dustin Muskovitz, an early FaceBook employee and at Anthropic! He also has close links to a number of the board members at OpenAI and some suggest, allegedly, that the weekend debacle stemmed from a rift between him and Sam2.
This one has legs.
Politico - Open Philanthropy shaping AI Regulation
The Day Ahead
RBA Governor Bullock pushed back on excessive wage demands suggesting that further hikes would be needed if 4% wage demands could not be sustained without higher productivity.
The RBA Minutes overnight sound bites:
Considered both on hold and a further raise;
There was a credible case for not hiking but judged that case for was stronger given inflation risks had increased;
Further tightening depends on data and assessment of risks;
Saw risk of higher inflation expectations in the case of no rate hike;
Risk of not returning inflation to target by end of 2025 has increased;
Inflation and the economy were slowing;
Geopolitical and global outlook remains uncertain; and
Middle East tensions could be a drag on global growth.
On the margins, despite considering a hold, a hawkish hike and the market has taken it as such with the AUD up to a high of 0.6588.
Canadian inflation report for October the main highlight of the day data wise. The report is expected to show a softening in line with recent global trends.
Also some US housing data so lets see if last week’s better housing data for the US continues.
FOMC minutes and as we said before its difficult to get too excited about these minutes given the amount of Fed chatter we have had since the early November meeting. As a recap rates on hold with the statement still pointing to the potential for additional hikes if required and upgrading the economic growth assessment to “solid” from “strong”. In addition a nod was given to the tightening financial conditions. The Powell press conference was deemed to be dovish by the markets and remember too he commented on the “dot plot estimates are out of date” almost immediately. Don’t be surprised to see the minutes place more emphasis on the more hawkish comments of the members given the market’s recent unwinding of those tighter financial conditions.
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Main Highlights Ahead
All times in GMT (EST+5 / CET-1 / JST-9)
The main highlights for the day ahead in terms of data and speakers:
Tuesday
Canada Inflation Rate MoM Oct consensus 0.1% vs previous -0.1% (13.30 GMT)
Canada Inflation Rate YoY Oct consensus 3.2% vs previous 3.8% (13.30 GMT)
Canada Core Inflation Rate MoM Oct consensus % vs previous -0.1% (13.30 GMT)
Canada Core Inflation Rate YoY Oct consensus % vs previous 2.8% (13.30 GMT)
US Existing Home Sales Oct consensus 3.9m vs previous 3.96m (15.00 GMT)
FOMC Minutes rates on hold, dot-plot out of date, no rate cuts discussed, higher for longer (19.00 GMT)
ECB Speakers
McCaul (13.45 GMT)
Lagarde (16.00 GMT)
Schnabel (17.15 GMT)
BoE Speakers
Bailey (10.15 GMT)
Ramsden (10.15 GMT)
Haskel (10.15 GMT)
Mann (10.15 GMT)
Good luck.
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