The Morning Hark - 31 Aug 2022
Today’s focus ……Geopolitical tensions rise, more of the same from central bankers and month end noise.
All prices are at 7.35 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures up close to one percent in Asia trading at 98.60 and 92 respectively. Oil rebounded overnight after a rough day yesterday. Any number of reasons ganged up on the sector as it came off some 5%. Demand fears resurfaced with China covid curbs again cited as well as the recent hawkish chatter from central bankers although that was apparent when we were trading at the highs with no follow through lower so a tad puzzled by that reason. More apparent was the API data which showed an unexpected build in crude stocks when estimates were pointing to a drop.
EQ - Equity markets in Asia overnight all up overnight with the Nikkei and Kospi both up smalls at 28,068 and 322 respectively. However the Hang Seng is up over two percent at 19,876 with the tech majors rebounding higher contributing to the outsize move.
The Nasdaq and S&P both consolidating in the Asian session currently trading at 12,440 and 4009 respectively. Rollercoaster day yesterday with the European session showing legs higher in extremely low volume trading before the China/Taiwan news turned things around. The move was extended lower by “good” US data. We remain around the 4000 support and see further support down into the mid 3900 region. Topside looks capped into the 4070 region for now.
Gold - Gold Dec futures flat in the Asia session at 1734. Tight range trading over the last few sessions. Our breakout levels remain clear with support at the 1720 level and beyond to the year’s low around 1700. Near term resistance remains in the 1750/55 noisy zone.
FI - US yields off a touch in Asia with the US2y and 10y yields currently trading at 3.45% and 3.10% respectively.
European yields continued to take their lead from the hawkish ECB speakers yesterday with the German and Italian 10y yields closing firmer at 1.514 and 3.828 respectively.
FX - USD off a little with the USD Index currently trading at 108.68. FX seems to be sat on the sidelines at present awaiting to take its cue from the stocks and rates markets. The majors are all a touch firmer with the JPY, EUR and GBP currently trading at 138.47, 1.0025 and 1.1679 respectively. USDCNH a touch softer and back trading around the 6.90 level after a stronger than expected Yuan fix. The major mover was the AUD which has firmed over half of one percent to 0.6894 on the back of the firmer risk tone.
Others - Bitcoin and Ethereum followed the stocks rollercoaster yesterday but to be honest dull as and trading currently at 20,240 and 1587 respectively.
Geopolitical Tensions
With all the hawkish central banker talk geopolitics tried to gets its oar in yesterday as tensions between Taiwan and China raised their head once again. Taiwan, in what its claiming is an act of self defence, shot live rounds at a Chinese drone which was within Taiwan’s air space. The defence minister did a fair amount of sabre rattling to emphasis the point that Taiwan will defend itself at all counts. China have since responded by sending its nuclear bombers on regular patrols in the Taiwan Straits. All in all not looking good.
Further Fed Talk
Williams was bang on message as expected with the getting old now hawkish mantra of higher for longer and inflation will take a few years to gravitate back to 2%. His view on terminal rates was “above 3.5%” and again remaining there for some time.
Barkin spiced things up a bit with some more nuanced language stating that the US is facing “post-war like inflation” and with echoes of Draghi the Fed will “do what it takes” to return inflation to 2%.
More of the same and I assume will be repeated in some manner by the Fed speakers later today. Mester is on the economic outlook but Bostic is fintech related.
Markets are now pushing the probability of a 75bp hike later in the month up to around a 75% chance.
Datawise the JOLTS job survey produced an upside surprise and consumer confidence had a strong print beating expectations. In the good/bad news this helped stocks continue their weakness. Some more encouraging news for the stock market may come later in the week as the White House again opined on Friday’s NFP when they said that they anticipate the numbers “to cool off a bit”. Let’s see.
ECB Watchers
On a day when German inflation was reported to be knocking on 8% and consumer sentiment in Europe was again seen dipping the ECB speakers were continuing to ramp up their hawkishness.
Knot, who despite stating that he sees an inevitable economic slowdown this year, feels that neutral rates may not be enough to tackle inflation. Hardly groundbreaking stuff.
Vasle supports a hike that could exceed 50bps.
Nagel said that he was in favour of front loading rates.
All well and good talking the talk but whether they are able to deliver such a hike next week and what the ramifications of such a hike would have on the Eurozone is another matter. I post below an interesting piece from OMFIF on some of the dilemmas facing the ECB and their decision next week.
One last point on Europe we anticipate more noise in the lead up to the EU ministers’ emergency energy meeting scheduled for the 9th September which is hoped to present some solutions to the ever growing energy crisis in Europe.
Meanwhile back in lame duck land, I mean the UK, all is quiet on such potential meetings or measures as we await the appointment of a new PM who I am sure will swoop in with a number of proposals that will ramp up the liability side of the UK balance sheet but do little to appease the beleaguered UK citizens. I guess the rising cost of energy will have the effect of getting people back to work so they can get a heat up, warm their food and maybe even take a shower.
Markets wise we have more gloom with markets now pricing a 40% chance of a 75bp hike in September from the BoE as UK gilts reached levels last seen back in 2014 yesterday. I don’t know why we don’t skip the middle man and go straight to the IMF to be honest. Suffice to say GBP remains a sell on rallies.
The Day Ahead
Highlights for the morning centre around the German employment data and more importantly the flash August prints for European inflation which is again expected to show an uptick in line with the German print yesterday as we head into the ECB meeting next week.
The afternoon will bring Canadian GDP for q2 and the August Chicago PMI ahead of the more important ISM tomorrow.
Remember too it is month end with all the noise that entails in what are once again extremely illiquid markets.
Some headlines may stalk the screens with regard to the Nord Stream pipeline as Gazprom shut it down for a further three days of maintenance. I’m sure you’ll remember not that long ago when we became experts on gas pipelines and all the subsequent market volatility that entailed.
Throw in a couple of Fed speakers with some more hawkish talk and that’s your lot.
Early doors tomorrow sees the start of PMI day with Australia, Japan and China all reporting their final prints for August in the early hours.
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Wednesday
German Unemployment Rate Aug consensus 5.5% vs previous 5.4% (08.55 BST)
EU Inflation Rate YoY Flash Aug consensus 9% vs previous 8.9% (10.00 BST)
EU Core Inflation Rate YoY Flash Aug consensus 4.1% vs previous 4% (10.00 BST)
Canada GDP Growth Rate QoQ q2 previous 0.8% (13.30 BST)
Canada GDP Growth Rate Annualised q2 consensus 4.4% vs previous 3.1% (13.30 BST)
US Chicago PMI Aug consensus 52 vs previous 52.1 (14.45 BST)
Fed Speakers
Mester (13.00 BST)
Bostic (23.30 BST)
Early Thursday
Australia S&P Global Manufacturing PMI Final Aug previous 55.7 (00.00 BST)
Japan Jibun Bank Manufacturing PMI Final Aug previous 52.1 (01.30 BST)
China Caixin Manufacturing PMI Aug consensus 50.2 vs previous 50.4 (02.45 BST)
Good luck.
Notayesmanseconomics - The Bank of England is in danger of losing the currency war
Prometheus Research - The Observatory
RIA Advisors - The Rule Of 20 & Why The Bear Market Remains
BNP Paribas - Global : The new meaning of ‘whatever it takes’
Discover more market commentary & research from 450+ curated sources on Harkster.com.
ECB
Christophe Barraud - ECB Lacking Consensus for Jumbo Rate Hike Some Officials Want - Bloomberg
Lyn Alden
Lyn Alden - August 2022 Newsletter: Investment Cycles
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