The Morning Hark - 25 Apr 2022
Today’s focus ……..Macron victory (of sorts), risk off/USD on and the week ahead
Daily roundup - all prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Both Brent and WTI futures down close to 4% on the session at 102.00 and 98.10 respectively. Any number of bad news stories to blame for oil’s losses with the aggressive Fed rate hiking profile, prolonged Covid lockdowns in Shanghai affecting the demand side, reports that Beijing is starting to be hit with Covid, Libyan oil complex damaged in armed clashes and a large fire at a Russian oil depot in Bryansk.
EQ - Asian indicies once again a sea of red. Kospi and Nikkei both down over a percent at 349 and 26,600 respectively but the Hang Seng suffering the most down close to 4% at 19,800 on the Covid news we mention above. US futures pointing lower too with the S&P and Nasdaq down almost a percent at 4,230 and 13,250 respectively both well through the support levels we had seen at 4,400 and 13,600. The Fed put seems a long and distant memory.
Gold - Gold down a percent on the day at 1914 continuing its offered theme from last week on the back of the hawkish Fed.
FI - Yields backing off from their recent highs but still remain at elevated levels with the US10y at 2.86. The short end has seen the biggest sell off down 3% from Friday’s close at 2.63.
FX - The USD continues its march higher with the USD index at levels last seen in the early days of the pandemic in March 20 at 101.60. AUD, NZD and CNH all suffering close to 1% losses versus the USD at 0.7150, 0.6590 and 6.5540. All suffering on the risk aversion theme and the Chinese covid news particularly the spread to Beijing. USDCNH saw its biggest weekly drop since 2015 last week and with little concern shown at the pace of its decline by authorities that theme continued to start the week. USDJPY bucking the trend as it declines to 128.20 on the backoff in US yields. This despite a denial by Japanese officials regarding the story we mentioned on Friday that US and Japanese officials had discussed coordinated FX intervention to support the JPY.
Others - Unsurprisingly with this backdrop Bitcoin and Ethereum suffering at 39,000 and 2,850. All indicators are suggesting further downside with the fear and greed index at extreme fear levels at 23 but not yet below the 20 level which is often seen as a buying opportunity. One further such indicator is the bitcoin funding rate which has turned negative in effect the shorts in the futures market are paying for those that are long the contract. However, we are not yet at levels which would see a reversal of the soft trend.
The MOVE and VIX spread still remains at extended levels with close to a 100 point gap despite the VIX having made up some ground over the last week or so.
The Fed sell off continued in markets with yields remaining elevated and stocks continuing their selling off. The market is now pricing in up to 14 hikes in the cycle with now 50/75/50 hikes lined up for the next three meetings into the end of July which would see the Fed Funds rate onto a 2 handle. Remember earlier in the month we highlighted a Bloomberg article by ex NY Fed chief Dudley in which he felt that the Fed strategy had been laid out clearly in that they wanted stocks lower to reduce the excess cash stock holders have to spend and hence dampen inflation that way. The strategy looks to be in full swing. I guess one piece of good news for markets is that we are now firmly in the Fed blackout so they’ll be no new comments until after the FOMC meeting in early May.
In Europe Macron has defeated Le Pen (58.5/41.5) to win a second term in office. However, the bigger story is the fact that turnout was 72% the lowest in over 50 years and over a third of voters chose neither candidate. That old favourite “ECB sources” was on the wires claiming that ECB policymakers are eager to end bond buys as soon as possible and hike rates potentially in July but no later than September. Despite us passing the election risk event and the more hawkish chatter from sources the EUR could not hold onto its gains and is unable to hold back the ever rising tide of USD strength. On the data front today we have German IFO at 09.00 BST with expectations for a 89.1 print versus 90.8 previously. With the ECB sources news its probably worth keeping an eye on the ECB speakers this week Panetta, a dovish member, kicks things off today (18.00 BST) in a week that sees at least one council member speaking daily.
📅⠀The main highlights for the week in terms of data and speakers:
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Australian CPI Q1 - expectations are for a 4.6% YoY print versus 3.5% previously. Remember the RBA minutes released last week highlighted the key data they were monitoring to assess the need for an imminent rate hike and this print, along with wage data, was one of the data points to watch. (Wednesday 02.30 BST).
Bank of Japan Rate Decision and Quarterly Outlook Report - no change is expected for the policy settings with rates maintained at -0.10%. The Outlook Report is as elsewhere in the world expected to show a cut in the growth projections and a rising of the inflation outlook on the back of the war in Ukraine and the latest Covid lockdowns in China. Obviously, with the elevated levels of USDJPY any commentary on FX rates will be closely monitored. (Thursday 04.00 BST).
US Q1 Flash GDP - expectations are for 1% growth YoY versus 6.9% previously. The miss from last the reading is attributed to a large reversal in inventory accumulation although personal consumption is expected to counterbalance this somewhat. The market will obviously be looking at the extent of the slowdown and the potential that this may be a precursor to a recession. (Thursday 13.30 BST).
Eurozone Flash Q1 GDP and Flash April CPI - expectations for GDP are 5.1% YoY versus 4.6% previously and on CPI headline YoY at 7.5% with core at 3.2% versus 7.4% and 2.9% respectively. The usual culprits for the rise in CPI will be pointed at with food and energy prices expected to rise sharply on the back of the continuing supply constraints and the continuing conflict in Ukraine. (Friday 10.00 BST)
China April Manufacturing PMI - previous print was at 49.5. This will be the first look for markets to assess how China’s manufacturing sector has held up in April with all the various lockdowns across the country due to the continuing Covid pandemic. (Saturday 02.30 BST).
Q1 earnings releases - on Wednesday and Thursday a number of the big stocks report q1 earnings. Twitter, Amazon, Apple, Meta and Google all report and given they have been some of the biggest losers in this Fed driven market sell off their earnings will be of much interest. Also, any chatter on supply chain disruption from Apple will be of note to inflation watchers.
Good luck.
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📚⠀Articles discovered on Harkster exploring some of the current key macro themes in more depth:
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French Elections Aftermath
Fed
ZeroHedge - Stocks & Bonds Bloodbath As Fed Drops Hawkish Hammer
Stay-At-Home Macro - It's 2022, not 1972
Mish Talk - Is the Bond Market Forcing the Fed's Hand to Hike Faster?
🔥⠀Top 5 trending links on Harkster yesterday:
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The Macro Trading Floor - Lyn Alden: A Pendulum Between Stagflation & Reflation
Prometheus Research - The Week Ahead
Christophe Barraud - Top 10 Macro/Financial Charts of the Week - w16 (2022)
Stay-At-Home Macro - It's 2022, not 1972
Ayesha Tariq - The Weekend Edition # 39
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