The Morning Hark - 3 June 2022
Today’s focus …….Microsoft flags the USD, Brainard sees no pause and US payrolls in focus
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August both down smalls in the Asian session to 117.20 and 113.90. As we anticipated yesterday was a volatile session. Yesterday’s FT story on the OPEC boost in oil production proved to be true but it was very much sell the rumour buy the fact. OPEC announced that it would boost output to 648,000 barrels per day in the next two months from the previously agreed 432,000bpd. However, after the initial reaction doubts surfaced that this would indeed be sufficient to quell the tight market. In addition whilst Saudi Arabia and the UAE could fulfil the excess supply the agreement was split across all countries. However some countries are already struggling to meet their existing targets (Angola and Nigeria), and with Russia remaining in the group, the market doubts that OPEC will be able to meet that headline number. It is felt that with China starting to ramp up again as it comes out of Covid lockdowns, the EU embargo and yesterday’s EIA numbers out of the US, showing stockpiles of oil decreasing at twice the rate expected, the demand side will remain king. 130 here we come?
EQ - Several holidays in Asia but the Asian stock futures that were open showed some healthy gains with the Nikkei leading the way up over a percent to 27,750 and the Kopsi following albeit to a lesser degree to trade to 352. The Nikkei was helped by the strong close in the US markets coupled with a stronger than expected services PMI print (52.6 vs 51.7). The US indices remain steady consolidating their good gains seen yesterday with the Nasdaq knocking on the 13,000 level again at 12,900 and the S&P at 4180.
Gold - Gold futures flat overnight at 1870. After a period of consolidation post its rally off the lows, gold seems to have got its breath back and regained some momentum. We traded just shy of our first target at 1880. With yesterday’s move, we would raise our stop loss now to 1830 and look for 1900 as our next top side target. The move yesterday was set off by poor ADP employment numbers (US private payrolls) pushing the USD lower and gold on its way higher. Obviously, today’s US payrolls report will be the key to whether this momentum can remain in play.
FI - US yields remain steady in the Asian session with the US10y futures yields trading at 2.92. It still feels very much like a pause before a resumption of a push back to the 3% handle. The 10y German Bund yield which we have been speaking about of late has continued its rise closing at 1.24% after its breakout from the 1.12% level. With German inflation back to 1970s type levels, and the obvious historic fear the Germans have of inflation, the market’s perception is that the ECB is well behind the curve and sees a minimum of 100bp priced in for the rest of the year. The question remains will we see a 50bp hike squeezed into those 4 meetings and with every passing number it certainly feels that way.
FX - Fairly muted FX session in Asia again with several countries out on holiday. The USD holding steady after its sell off yesterday on the back of the poor ADP payrolls report with the USD Index at 101.74. With US yields holding in USDJPY remains bid at 129.95. With the USD sell off both the EUR and GBP blew out of the topside of our trading ranges although like the rest of the sector they remained steady overnight at 1.0755 and 1.2570. Nothing else to add here with all eyes on US payrolls.
Others - Bitcoin and Ethereum caught some of the equity bid yesterday although in a somewhat subdued fashion trading now at 30,500 and 1820 respectively. Downside danger levels remain at 28,250 and 1700 respectively.
On our risk measures, the MOVE index after its flirting with the topside has pressed back below 100 again to 99.27 with the subdued trading in the US yield space yesterday. VIX remains very tame given the landscape with futures currently trading at 25.60.
Interesting price action yesterday which saw Microsoft warning pre-open on the outlook ahead and cutting Q4 estimates blaming the strengthening USD for the headwinds. However, the sell off was met by strong buying which took us to the cusp of potential breakout levels in the Nasdaq and S&P at 13,000 and 4200. This despite Fed’s Brainard definite push back on a September pause by stating that it “might well be appropriate to have another meeting where we proceed at the same pace” ie September 50bp. The market is veering that way with such a hike about two thirds priced in. Microsoft’s USD warning is worth bearing in mind moving forward the elevated level of the USD is yet another negative factor in the equity landscape, on top of an aggressive Fed and a balance sheet run off. On that basis surely the lows are not in yet?
US payrolls, services PMI and non-manufacturing ISM are the focus of the day. Payrolls are again expected to be running hot albeit at a slower pace but with an expected fall in the unemployment rate and hourly earnings still rising this looks more on a constrained supply side rather than softer labour demand. Take note however that May is often a volatile print given it is the start of the summer hiring for seasonal workers. Both PMIs are expected to be lower than previously seen but still in positive growth territory. Will the equity bounce survive the numbers? Similar to earlier in the week a strong number where we beat the headline and the wages element is higher should put a brake on the rally.
📅⠀The main highlights for the day ahead in terms of data and speakers:
EU S&P Services PMI May - consensus 56.3 vs previous 57.7 (09.00 BST)
EU Retail Sales MoM Apr - consensus 0.3% vs previous -0.4% (10.00 BST)
US NFP May - consensus 325k vs previous 428k (13.30 BST)
US Unemployment Rate May - consensus 3.5% vs previous 3.6% (13.30 BST)
US S&P Services PMI May - consensus 53.5 vs previous 55.6 (14.45 BST)
US ISM Non-Manufacturing PMI May - consensus 56.4 vs previous 57.1 (15.00 BST)
Brainard (15.30 BST)
China Caixin Services PMI May - previous 36.2 (02.45 BST)
Good luck and a good weekend to one and all.
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
ING - ECB stuck in sequencing
ZeroHedge - 'Minor' $1.9 Million Failed Bond Interest Payment Triggers Russian "Failure-To-Pay" Event
🔥⠀Top 5 trending links on Harkster yesterday:
LPL Financial Research - Was that the Low?
SGH Macro Advisors - Tim Duy’s Fed Watch, 5/31/22
The Last Bear Standing - The Volatility Squeeze: Part 3
Mauldin Economics - I Suck at Trading Stocks
Alhambra Partners - President Phillips Emerges To Reassure On Growing Slowdown
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Great roundup, thank you.