The Morning Hark - 22 June 2022
Today’s focus ……Chair Powell on the floor, BoJ nothing to see here and is FTX the Fed of crypto?
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August both down close to four percent on the day at 110.20 and 104.90 respectively. Risk off playing a major role in the move and well you’ve heard it all before China Covid, recession fears, OPEC threatening to increase output again and the capping Russian oil prices. All seems like a pin the tail on the donkey exercise to find a reason for a price move. Again I cannot stress enough how poor liquidity is so any move that you do see is exaggerated further by the lack of liquidity. Perhaps, as we mentioned yesterday, we should keep an eye on the oil sector in equities as a more macro precursor for the oil price action. Not so much a canary in the coalmine maybe more of a seagull on the oilrig? One thing I would say is the market is more focused on the recession word with Nomura looking for negative growth by the tail end of the year, Goldman’s upping their probability of one and the NY Fed’s forecasts calling for one too. The two unknowns remain the Covid situation in China as well as what is going to happen in Ukraine. Is there a case for a US led push to resolve the conflict with promises of funds to rebuild and EU membership in time to boost the markets ahead of the mid-term elections?
EQ - The risk off sentiment has given a reddish tinge to the equity sector in Asia with most indices showing weakness. In Asia the Kospi leading the way with an over two percent drop to 309 with the tech sector being hit badly. The Hang Seng down close to two percent at 21,100 and the Nikkei down smalls at 26,150.
The US stock futures indices both down over a percent in the Asian session with the Nasdaq and S&P at 11,420 and 3,720 respectively and basically back to the levels we saw yesterday morning after a round trip which saw them rally close to two percent before the spectre of recession and fears for global growth started to weigh heavy on them.
Gold - Gold futures down smalls overnight at 1828. So gold broke our downside level at 1835 and we shall use this as a trading pivot with an initial target of 1820 and 1800 beyond that.
FI - Global yields lower on the day in the risk off environment with the US 2y and 10y yields at 3.17 and 3.24 respectively. As we state above recession starting to get talked about more freely by the street analysts and cuts now being priced into the US curve for the spring of next year. Remember it was only last week we were close to ringing the bell at 3.50 in the US10y.
FX - The USD is a touch stronger on the day with the USD Index up at 104.70. The main victims have been the risk proxy currencies with both the AUD and NZD down close to a percent at 0.6910 and 0.6260 respectively. The EUR is trading around 1.05 again and GBP is knocking on 1.22. USDJPY however has been the highlight of the last 24 hours with an over one percent rally to 136.71 a near 25 year high. The ongoing BoJ yield curve control saga weighing heavy on the currency and it feels like something at some point has got to give. The market has got the bit between its teeth and this time it looks like it doesn’t want to let go. 140 looms large which would certainly ring alarm bells and most probably garner a greater reaction than the jawboning of late from Japanese officials. However, for a group that bang on about FX and fundamentals buying your currency whilst suppressing your yields seems to be counterintuitive. I post some more articles below on the whole debate suffice to say it feels like we are closing in on an end game soon. The CNH continues to weaken being dragged down by the JPY with USDCNH trading at 6.73.
Others - Bitcoin and Ethereum not out of the woods just yet that’s for sure after they gave up a good chunk of their recent gains with the general risk off theme which sees them trading at 20,100 and 1075 respectively. Some relief for the market yesterday was seen by FTX extending a $250m credit line to the crypto lending platform BlockFi (some more details below). This was a company that had been valued only last year at $6bn so stepping back I’m not so sure how much relief this play should give the wider market. Has FTX become the Fed of crypto? Or is it rather the vulture picking over the bones of the desert landscape that the crypto market has become? If it’s the latter it better be hungry because there certainly seems more to come. The fallout from the Celsius, Babel Finance and Three Arrow Capital (amongst others) is still far from settled and clarity surrounding any liquidity event(s) remaining it still feels like the lows are not quite in yet.
One point to note as we move towards the end of the week is the option expiries which sees more than a third of the open interest rolling off accounting for about $3bn in the two majors. The largest relevant strikes remain at the 20,000 and 1000 levels.
Fed’s Barkin overnight framed a 50bp or 75bp hike in July as reasonable. All eyes today on Chair Powell as he starts his semi-annual testimonies first before the Senate and then tomorrow in front of the House. The usual format with the prepared statement read out followed by questions from the floor so expect plenty of inflation bashing and concerns over the growth profile. We don’t see any reason for Powell to change the message of his FOMC statement of last week. A hawkish tilt would be a baseline case that 50bp are the new 25bp in terms of increments and having ruled out 75bps then going for it do we see a raise to 100bp if inflation surprises to the upside? That would get the markets going.
BoJ minutes were a damp squib and continues to leave the upside open for USDJPY. Although they do have “concerns” on the currency.
UK inflation data just hit the tapes and little of note with headline in line at 9.1% YoY. However core did offer a touch of relief with it 0.1% lower than expectations at 5.9% YoY. GBP little changed on the news. BoE’s Pill yesterday was clear that the BoE will tighten further in the face of inflation and that if growth is sacrificed then so be it. See you at the bottom then.
📅⠀The main highlights for the day ahead in terms of data and speakers:
ECB Non-Monetary Policy Meeting (08.00 BST)
Canadian Headline Inflation Rate YoY May consensus 7.5% vs previous 6.8% (13.30 BST)
Canadian Core Inflation Rate YoY May previous 5.7% (13.30 BST)
Cunliffe (09.40 BST)
De Guindos (08.00 BST)
Chair Powell semi-annual testimony to the Senate (14.30 BST)
Evans (17.50 BST)
Harker and Barkin (18.30 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
Mish Talk - Bank of Japan Blows Record $81 Billion Defending It's No Rate Hike Pledge
ZeroHedge - Bank of Japan Spends A Record $81 Billion To Avert Collapse, But $10 Trillion JGB Market Is Now Completely Broken
ZeroHedge - "That Would Be Crossing The Rubicon": The BoJ Is About To Own More Than Half Of All JGBs
FTX / BlockFi
Fortune - Sam Bankman-Fried’s FTX is offering money to crypto platforms: ‘We have a responsibility to consider stepping in to stem contagion’
Zerohedge - Crypto Exchange FTX Bails Out BlockFi With $250 Million Revolver
🔥⠀Top 5 trending links on Harkster yesterday:
Alhambra Partners - Everything Hitting The Global (eurodollar) Wall
Pinecone Macro Research - Walk in the Pines #72
Prometheus Research - The Week Ahead (Video)
Cornerstone Global Commodities - Oil Markets: 'Tension' Has Been Given a Timeline
Bond Economics - Treasury Market Pricing
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