The Morning Hark - 28 Sep 2022

Today’s focus …….A deluge of speakers from Fed, ECB and BOE. US Pending home sales 15.00BST

Sep 28, 2022

All prices are at 6.25 BST with changes reflecting movement from midnight BST

Oil - Brent and Crude November futures are lower in Asia trading currently at 85.10 and 77.45 respectively, both losing around $1.20

The losses have appeared despite the Nordstream pipeline news and Russia supposed desire to cut production by 1mln BPD at the next OPEC+ meeting.

The Nordstream pipeline pressure dropped yesterday and investigations by Danish and Swedish authorities reported bubbles rising from the sea over the area where the pressure dropped. More details below.

EQ - Equity markets in Asia have moved lower overnight post the US data with the Nikkei and Hang Seng at 25,800 and 17,420 respectively. The Kospi is the biggest loser on the day at 282.40, down 2.15%

Higher US yields did not help, and that combined with Deese playing down any thoughts of a new Plaza accord and then Apple announcing they were turning down the dial on iPhone production due to falling demand led to the selling.

Nasdaq and S&P’s are down around 1% each.

Gold - Gold Dec futures is lower on the day mainly due to USD strength. They sit at 1632 down around $4.5 but will continue to be pulled around by US yields today.

FI – US treasuries yields pushed higher in early Asia with 10yr up to 4%and 2yr at 4.30% and although those levels could not be maintained the dip has been shallow so far. All the Fed speakers were repeating their mantra of more for longer and the sole need to fight cost pressures. Daly in the early hours did talk about maintaining full employment but even she was merely paying lip service to the dual mandate.

FX - USD is king again and the GBP still is the guttersnipe. USDJPY has pushed towards 145.00 again with a high in Asia of 144.86. The will they, won’t they conundrum of intervention will be the thought process today, as 145 was previously thought to be the line in the sand and the break of that level did see the first proper intervention. This feels more orderly though and as Japan always state orderly market function and mirroring fundamentals is ok with us. With US yields touching 4% on the 10yr and BOJ purchasing any old bit pf paper you have; it seems appropriate for USDJPY to creep higher. 150 anyone?

Now turning to the new TRY, GBP is pummelled again even though the architect of its doom promises that he has it all fixed. The low in Asia today is the low of the dip following the big dip on Monday, (you might need to look at the chart!). Fully expect London to remove that level early today.

USDCNH printed a new high today at 7.2356 following a break of the 7.20 double top and looks very stretched technically but if the PBOC wanted it lower I feel it would be already so it is very difficult to fight.

Others - Bitcoin and Ethereum are holding in somewhat even with the turn lower in risk. I am not sure how much longer that can last and assume that computers are running scenarios of how to crash that market most efficiently. They sit currently 18,720 and 1282.50

Nord Stream

Worrying development and one which looks like taking some time to play out. There has been an explosion of sorts on both the Nord Stream pipelines which is claimed to be sabotage. Lots of finger-pointing and the obvious implication is that it’s Russia in an attempt to ramp up the pressure on Europe and its energy crisis. Sources claim that the CIA had warned Germany of a potential attack on the pipeline earlier in the year. With everything else going on in markets not ideal to say the least and I’m sure the story will develop over the coming days. I post at the bottom Andreas Steno Larsen’s (from The Macro Trading Floor) early take on the situation.

Market dysfunction

Very much the theme for the week with pressure points continuing to be strained.

UK gilts after some relief flipped and started to test the highs in yields again. The 30y hit the highest level in 20 years and is now above 5% for context last month it was below 3%. The 10y was not far behind. Meanwhile, its spread versus the German 10y widened to 222bps levels last seen back in1991. Although German yields didn’t escape the carnage with their 30y hitting 2% a level last seen back in 2014.

US stocks after having somewhat of a brighter day headed south into the afternoon session with the S&P hitting fresh lows for the year and indeed pushing lower again as we speak. The US10y has taken out 4% and the 30y US mortgage rate is now above 7% after its fastest ever rise.

The MOVE index has reached the highs last seen at the height of the pandemic.

USDCNH has hit a record high close to 7.24. The BoJ is back in conducting its bond buying operation in the 5y and 10y sector.

However, US Treasury secretary Yellen has just confirmed that she doesn’t “see any erratic financial market conditions”. Not sure which screens she’s watching. Although her time may be coming to an end as news is emerging that she will be a casualty of Biden’s reshuffle after the midterms.

I still believe that without some coordinated intervention of sorts data is key to turning this around or at least pausing the moves. On that basis, Friday’s August PCE is probably front and centre. A topside miss like we had with the CPI earlier in the month could cause a lot of problems. A miss to the downside would give some relief for the markets with potential signs of a peak in US inflation and getting us closer to a Fed pivot but we’re a long way from Friday let alone a Fed pivot. Don’t forget Friday also brings month and quarter end and all that that can entail for price action.

UK Fiscal Package

Pill played a straight bat to say the least admitting the BoE was responsible for “keeping orderly markets” so that’s not looking good on his CV as we speak. Also, that there was “clearly” a UK specific element to repricing of assets. On an emergency rate hike, he neither confirmed or denied such a potential move so as you were but he did promise a “significant” move in November.

Meanwhile Kwarteng was telling city grandees that he was committed to fiscal sustainability so once again everything should be fine. He speaks to their Wall Street counter parties today.

Back in the markets as we hit multi year highs across the gilt curve we have the circular madness in the UK whereby the more the BoE hike, the more the government has to spend and hence not only fuel inflation but also lead to more gilt issuance which in turn raises rates hurting the private sector as well as raising the funding costs for the government. Something has to give. Moody’s have released their verdict on the fiscal package calling it “credit negative” and has the potential to “permanently weaken the UK’s debt affordability”.

The IMF have come out and openly criticised the package with the view it is “likely to increase inequalities” and “add to price pressures”.

The market doesn’t believe you Mr Kwarteng and neither do the IMF.

Central Bank Speakers

From what I could see didn’t say anything particularly new although it was difficult to keep up! Probably the highlight was the Fed’s Bullard with his more forthright views that there was a recession risk, and an unexpected macro shock could see us entering a recession. Nothing new but probably a little bit more explicit than previously. After recent talk on the potential for a change in the inflation target, he called this “dangerous”. Again I post below the excellent FXMacro Guy’s more comprehensive round up of the important speakers from yesterday as well his weekly which, in these markets, is essential reading to keep abreast of what are the significant events that have occurred across all markets in the past week.

Today’s focus

Little of note other than a team sheet of central bank speakers and some US housing data to take note of especially after yesterday’s unexpected big topside beat for new home sales which saw its second largest increase on record.

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Wednesday

US Pending Home Sales MoM Aug consensus -1.5% vs previous -1% (15.00 BST)

Fed Speakers

Bostic (13.35 BST)
Bullard (15.10 BST)
Powell (15.15BST)
Bowman (16.00BST)
Barkin (16.30BST)
Evans (19.00 BST)

ECB Speakers

Lagarde (08.15 BST)
Kazimir (09.00BST)
Holzmann (09.30BST)
Elderson (16.00 BST)

BoE Speakers

Cunliffe (09.15 BST)
Dhingra (19.00 BST)

Good luck.

Notayesmanseconomics - Much higher mortgage rates will burst the housing bubble
RIA Advisors - The Big Short Squeeze Is Coming
Macrodesiac - 🔔 The Contra View
Russell Clark - IS IT TIME TO BUY STERLING?
Blain's Morning Porridge - The UK’s Monumental Policy Mistake – how bad will it get?

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NordStream

Andreas Steno Larsen - One of the most scary days in European history of energy supplies

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The Weekly Hark