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The Morning Hark - 29 Mar 2022
Today’s focus ……..VIX/MOVE due a move? JPY takes a breather and Bailey’s back to the 70’s warning
Daily roundup - all prices are at 7:50 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures fairly flat on the day at 108.90 and 105.30 respectively
EQ - Equity markets fairly subdued all showing small gains. Nikkei at 28,250 leading the way up 1%.
Gold - Futures down a further 1% on the session at 1924. Given Bitcoin’s recent performance is this the handing over of the baton to the digital gold? Doubt it’s going to be that soon but just as Covid had a huge accelerator effect on human behaviour in terms of working from home, online trading and general adoption of app-based real-life workarounds - will the conflict in Ukraine be seen in a similar manner for the realisation and adoption, by a wider audience, for the use cases of the digital world and in particular Bitcoin with its property as a store of value?
FI - The US10y up as high as 2.42 with the US2y10y spread now down to just 6bps. Markets are starting to look at a close to 70% chance of a 50bp hike in May and even a real possibility of a 75bp hike in June. Seems like it’s getting way ahead of itself?
FX - In the FX space a quiet session with even USDJPY at 123.35 taking a breather despite US rates on their recent highs. The JPY was helped by a better take up of the BoJ’s bond purchase operations by the market which saw an almost fourfold increase in activity compared to yesterday. Remember too we have corporate month-end today with the market trading T+2. In addition, it is Japanese fiscal year-end on Thursday so there could be a fair amount of arbitrary noise in some of these moves. As long as we stay above 122 the immediate move higher to the mid 2015 high at 125.86 remains intact. Ultimately the fundamentals for a higher USDJPY remain very much alive. I attach a note by pepperstone below discussing JPY intervention which they do not see until the 130 level, although as always the pace of the move tends to be more important than the actual level when it comes to intervention.
Others - Another fresh high for this move for Bitcoin to 48,200 almost exactly at the 200 dma. A breach of this opens up the 50/51,000 zone with the downside now into at the breakout area around 44.5/45,000. Similar pattern in Ethereum with a high at 3,400 however it remains shy of its 200 dam at 3,500.
The volatility measures for equities (VIX) and rates (MOVE) started the week as they finished last, diverging even further with the VIX closing lower again at 19.63 whilst the MOVE pushed ever higher to 129.28. Something looks wrong with this picture surely? With all the uncertainty out there in terms of higher commodity prices, the Fed on a sustained and aggressive hiking program, bond yields pressing ever higher, earnings surely will have a spate of downgrades, no end in sight for the conflict in Ukraine and China Covid uncertainty the VIX feels awfully low. All the factors we mentioned yesterday with buybacks, CTAs, etc are holding up the market in a steady grinding manner but the gap between these two measures seems stretched. On the MOVE side how much further can US rates keep moving higher? All of the charts look extended to say the least and a retracement is over due or perhaps just a pause for breath. I attach below a piece by spyglass discussing potential signals for the wider market in the US10y and 30y sector.
Peace talks continue today in Istanbul which always seem to have a calming effect on the markets although little has ever come out of them. The Ukraine side may be cautious today given the reports that their fellow negotiators and Roman Abramovich had suspected poisoning from a previous round of talks in Kyiv early in March. Luckily the symptoms have since subsided and the finger of blame is being pointed toward hardliners in the Kremlin who wish the war to continue.
On the ground, the stalemate continues with Russian forces stalling in any advancement but continuing with their heavy shelling of Ukraine cities.
President Zelenskyy continues to intimate a compromise stressing Ukraine’s wish to be neutral whilst offering the Donbas region’s status up for discussion. On the other hand, he continues to request military aid from NATO countries.
Market’s wise we saw the MOEX open yesterday, albeit with limited trading hours, amid heavy intervention to support the market. Trading will resume again today.
BoE Governor Bailey highlighted the risks to the UK growth profile in the coming months. Echoing the more dovish tone to the MPC last week. He sees this slowing demand having a dampening effect on domestic inflation which he sees in effect doing the job of monetary policy. He stated that the real income shock will be the largest seen since the 1970s and we all remember (well some of us) how jolly a time that was in the UK. As we suspected the BoE’s first out of the traps status on the hiking program will slow dramatically and as such he now sees a “further modest tightening” “might be” appropriate as opposed to the previous “is likely”. Further hiking seems sporadic at best going forward in the UK.
📅⠀The main highlights for the day in terms of data and speakers:
Little on the data front to get excited about.
Fed speakers today. Williams (dove) at 14.00 BST, Harker (hawk) on the economy at 15.45 BST and Bostic (dove) in the early hours. More of the same chat from last week to be expected.
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📚⠀ARTICLES ON HARKSTER AND FROM OUTSIDE EXPLORING IN MORE DEPTH SOME OF THE THEMES ABOVE:
Glassnode - High Volatility Is On the Horizon
Anthony Pompliano - #880 The $10 Billion Stablecoin Bet on The Bitcoin Standard w/ Do Kwon
Spyglass Macro - Forget the yield curve now
🔥⠀Top 5 trending links on Harkster from yesterday:
Pinecone Macro Research - Ramblin' Man
Quoth the Raven - Nothing Has Changed, Except For Everything
Notayesmanseconomics - The Japanese Yen falls as the Bank of Japan promises to buy an “unlimited” number of bonds
Wavetraders - Macro Report 12: “The Hodgepodge”
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