The Morning Hark - 24 Mar 2022
Today’s focus ……..All roads point to Brussels, Sunak’s phone-in woes and Bitcoin potential volatility?
Daily roundup - all prices are at 8:00 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures flat on the day after the strong surge higher yesterday at 122.10 and 114.90 respectively. The surge was fuelled by supply worries with the US inventories data showing a decline for the month in addition to concerns that China’s recent covid outbreak will affect their refineries and news that a Russian refinery could be offline for over a month due to storm damage.
EQ - Equity markets relatively calm after yesterday’s sell-off in the US session. Digestion of all the Fed speakers’ thoughts on the US rate path and no new positive news out of Ukraine are being pinned for the move. The move has brought us back to around the breakout level in S&Ps we saw the previous day around the 4,460 area.
Gold - Futures remains sidelined at 1944.
FI - all FI futures down smalls overnight with the US10y future taking a breather from its relentless surge lower at 122.55 but still a hair’s breadth from its lows. A good recovery from the US session where we saw a correction in the recent downtrend with the 10y future retracing back to 123.50. The move was fuelled by less optimistic Ukraine headlines and the stock market sell-off.
FX - In the FX space, USDJPY has recovered overnight after it got its much needed albeit very brief breather with the sell-off we saw yesterday towards 120.60. Indeed it has posted a new high to 121.75 and this even as US 10y yields backed off from their recent highs. The BoJ minutes of last week’s meeting were released this morning and reiterated the bank’s readiness to continue on their easy monetary policy with no sign of any concern as to the JPY’s weakness.
Others - Bitcoin is back through our trading pivot at 42,500 and has tested the recent highs again in the mid 43.000s posting a marginally higher one at 43,500. Equally, Ethereum has flipped through its pivot at 3,000 and has posted a new monthly high at 3,080. More on Bitcoin and a potential move below.
The focus today for Ukraine will be the various summits we see in Europe and what new measures if any, we can hope for. The triple header involves NATO, G7 and a European Council summit for the EU leaders with Biden attending all three. Expectations are at best limited for anything concrete that will shift the dial in terms of pressure on the Russians. The interconnected nature of large parts of Europe with Russia in terms of fuel, food, auto supplies and fertilisers makes it hard to form a consensus on packages. This is clearest when we look at potential EU sanctions on Russian fuel with Germany and Hungary adamant that this is a red line. Reports suggest the US could potentially step in to soften the blow of such sanctions in terms of additional US supply but that seems, literally, a pipe dream. Sanctions on individuals seems to be the easiest way to turn the pressure up although how much harm this does to Russia’s war effort is questionable. Reports today suggest that Biden will sanction 300 Russian MPs.
The Fed speakers continue and what’s more, continue with the same hawkish rhetoric. Bullard, the well-known hawk, reiterated that the Fed will need to move faster to keep inflation under control. Same old story I guess and I’m sure more of the same today with another handful of speakers lined up. Kashkari will probably be the highlight given the dove’s hawkish pivot last week and the market will look for confirmation of his flip in today’s speech. Equally Evans another dove will be worth a look.
There has been much recent chat on US yield curve inversion and especially the 2y10y with the gap between the two down to just 20bps. As we know the 2y tends to focus on the Fed’s rate path and the 10y more on the general state of the economy thus any inversion potentially points to a recession. Indeed the last 8 times we have witnessed such an inversion the US has gone into a recession. Back in late 2018, we saw such an event causing a sell-off in stocks of 20% and a rather unhappy President Trump. The Fed backtracked in 2019 and reversed their hiking cycle and indeed cut rates. Will this time be different? The Fed certainly are being forthright in their message to the market that taming inflation is their goal no matter what. Back in 2018 inflation certainly wasn’t so that is a key difference however the Fed this time also has the small matter of their balance sheet reduction programme and how they plan to address that in the middle of, what they propose to be, the most aggressive hiking cycle in a generation. Remember also we have midterm elections in the US so it’s hard not to see politics playing a part in this landscape at some point too. All for another day I guess but worth bearing in mind.
Chancellor Sunak’s spring statement has gone down pretty badly on the front pages this morning. The package has done little to alleviate the squeeze on real incomes in the UK and indeed help the UK’s growth outlook. The LBC phone-in, we mentioned yesterday, went down as well as could be expected with a stream of callers highlighting the extent the fuel poverty crisis is having on their lives. I wonder if that experiment will be repeated in the future. Obviously, the situation is pretty grim and the Chancellor is in a tight spot to say the least with conflict in Ukraine, living costs squeeze, the Covid bill to pay, raging inflation and energy costs getting ever bigger. Some papers are speculating that a larger giveaway is being held back for nearer an election but the pain seems pretty real now. The inflation and growth revisions for the year-end print did little to cheer with inflation revised up to 7.4% from 4% and growth down to 3.8% from 6%. They look a tad optimistic to be honest and I guess are in line with the more cautious approach we saw from the BoE last week. They are the fastest hiking central bank in the world for now but the Fed will take that mantle off them pretty soon and leave them for dust if they stay true to their word. GBP surely looks vulnerable in the medium term versus the USD.
Glassnode is a digital asset on-chain activity analysis company. Their excellent weekly newsletter is always worth a read for those with a passing interest in the digital asset space and especially Bitcoin. The latest piece out earlier in the week is titled “high volatility is on the horizon” and echoes what we have been talking about this week but in a much more detailed and sophisticated manner (I attach the piece below for a more detailed read). The key signals that they see flagging a potentially explosive move for Bitcoin in the coming days/weeks are:
Implied volatility in the options market is starting to move off the lows (7 day moving average measure). Similar type moves were seen prior to the May ’21 sell-off, July’s short squeeze and the run up to the all time highs in Q4 last year;
Futures open interest is edging towards the 2% level of market capitalisation and again this level has signalled levels of high risk and volatility; and
Futures premiums for the 3m rolling average are historically low annualising at 3.5% again a precursor to previous volatile moves.
In summary yield compression, tight two month trading range, low implied volatility and a trading period of 135 days or so since the ATH suggest moves are afoot. Let’s see.
Just one other point of note. The Glassnode piece also highlights trends in the various trading timezones. We have highlighted of late that the Asian market often has these down candles which reverse a promising bullish trend. Their analysis does point to this as a strong trend in the first quarter of the year. They pin this on the fact that Asia was a heavy buyer of Bitcoin in the last quarter of last year, compared to Europe and the US, in the run up to the all time high. That has left an overhang of positioning and made them a disproportionate seller, in this quarter, when they have seen any outsized move to the topside in their timezone.
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📅⠀The main highlights for the day in terms of data and speakers:
Flash PMIs throughout the morning for Europe and the UK.
In the US we have durable goods and initial claims data at 12.30 GMT followed by the US flash PMIs at 13.45 GMT.
Once again plenty of Fed speakers with Kashkari at 12.30 GMT, Waller at 13.10 GMT, Evans at 13.45 GMT and Bostic at 15.00 GMT.
NATO meeting and the Secretary General’s press conference at 13.15 GMT
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📚⠀ARTICLES ON HARKSTER AND FROM OUTSIDE EXPLORING IN MORE DEPTH SOME OF THE THEMES ABOVE:
Politico - London Playbook: Mariupol ultimatum — Zelenskyy aide interview — Fuel up
Commodities and collateral
ZeroHedge - Pozsar: "We Could Be Looking At The Early Stages Of A Classic Liquidity Crisis"
ZeroHedge - Energy Traders Ask For Central Bank Bailouts To Save Them From "Margin Call Doom Loop"
Arthur Hayes - Energy Cancelled
Glassnode - High Volatility Is On the Horizon
🔥⠀Top 5 trending links on Harkster yesterday:
Visual Capitalist - Visualizing the EU’s Energy Dependency
Alhambra Partners - *The* Monetary Answer: Undoing The Biggest Money Mistake of the Past
42 Macro - The Macro Minute | March 23, 2022
Spyglass Macro - Yields have exploded
Pepperstone - As Good as Gold - 23 March 2022
Discover more on harkster.com
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