The Morning Hark - 26 Apr 2022
Today’s focus ……..Market rebound, PBOC measures and JPY risk reversals
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Both Brent and WTI futures up close to a percent on the session at 103 and 99 respectively. Brent has staged a recovery after trading below 100 in yesterday’s US session. The rally was helped by a general risk on sentiment with yields backing off their recent highs and US stocks leading the way higher. However, concerns still remain on the demand side with China lockdown situation weighing heavy on the space.
EQ - Asian indicies rebounded higher taking a cue from the late US rally. Hang Seng has lead the way with a 1% gain to 19,900 recapturing the opening levels of the week helped by the PBOC pledging support for the pandemic hit economy. The US indicies fairly subdued after the sharp rallies we saw yesterday afternoon. There’s a school of thought that a lot is in the price already with 3x 50bp hikes priced in, core inflation peaking, tax season selling over, US yields peaking and sentiment couldn’t get any darker. We remain sceptical and it still feels like markets are on pretty shaky ground. It doesn’t feel like 10 years plus of cheap money and the underlying roots that have been planted on the back of that can be supplanted in a matter of weeks and a near 20% sell off in the Nasdaq.
Gold - Gold smalls up on the day at 1904 continuing its offered theme but recovering overnight after trading much of yesterday’s session below 1900.
FI - US yields back to their trending higher ways after yesterday’s sell off which saw the 10y dip back below 2.80. We are trading now at 2.84 up half a percent on the session.
FX - Fairly subdued markets in the FX space with the USD continuing to remain close to its recent highs with the USD index at 101.70. AUD, NZD and CNH have all recovered a touch from yesterday’s pain helped by the better risk sentiment. The CNH was aided yesterday by the PBOC cutting the reserve requirement ratio by 1% from May 15th. This follows last week’s cut of 25bps and in theory will allow banks to hold less reserves on their balance sheet and redirect those funds to businesses and consumers. This gave some temporary relief to USDCNH with it immediately dropping off its highs close to 6.61 to 6.57. Support for the currency has continued with further measures for the pandemic hit economy being pledged by the PBOC although specific details were not released. CNH is still close to its recent lows and doesn’t look like we’ve seen the worst of it just yet. There were additional reports that the state banks are planning to lower their deposit rates. One thing to point out in the JPY options space after the recent rally in USDJPY has seen to slow somewhat as we approach the 130 level. The 1m risk reversals are now starting to favour JPY calls. Maybe it’s just a sign of an overextended market or as I say the stalling we have seen at these higher levels. Alternatively, with the BoJ meeting later in the week, maybe it’s a risk reward trade for a capitulation by them as they step away from defending the yield curve? Let’s see.
Others - Bitcoin and Ethereum followed risk higher to 40,500 and 3,000. This after a sell off yesterday which saw us knocking on the door of 38,000 and 2,800. The balances on exchanges, a measure of liquidity, have been gradually declining in recent months and this has had the effect of exaggerating the moves we have seen of late.
The MOVE and VIX spread widening again above the 100 point gap. MOVE edged higher again to 131.63 and is not far off its all time highs. Whilst the VIX after trading above 30 for the first time in 6 weeks yesterday reversed sharply as the US stock markets recovered back towards the 27 level.
📅⠀The main highlights for the day in terms of data and speakers:
Little of real note data-wise on the day.
US durable goods for March at 13.30 BST headline MoM expected at 1% vs -2.2% previously.
US consumer confidence for April at 15.00 BST headline expected at 108 vs 107.2 previously.
ECB Villeroy continues the ECB speakers rota at 13.15 BST.
📚⠀Articles discovered on Harkster exploring some of the current key macro themes in more depth:
Stay-At-Home Macro - It's 2022, not 1972
🔥⠀Top 5 trending links on Harkster yesterday:
The Commodity Report - Commodity Report #48
Brent Donnelly - Trade 12: Euphoria, panic, and despair
Prometheus Research - The Observatory
TS Lombard - QT's inflationary potential is real
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