The Morning Hark - 31 Mar 2022
Today’s focus ……..Oil supply Biden to the rescue?, US rates in retreat and Japanese fiscal year end
Daily roundup - all prices are at 7:40 GMT with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures down close to 5% on the day at 107.10 and 102.40 respectively. The move was on the back of the US considering releasing up to 180m barrels of oil from its strategic petroleum reserve at potentially a million barrels a day. For context, the US currently holds around 570m in reserve and such a move will reduce the inventory to a 40 year low which at some point you’d imagine will need to be replenished. In any case, the markets are focused on Biden’s potential announcement today at 17.30 GMT. The move seems outsized for the actual magnitude of the release given the US daily’s consumption is roughly 20m per day. Perhaps the move is in anticipation of a more coordinated global release but seems more likely a reflection of, once again, the poor liquidity conditions we are witnessing in the markets.
EQ - Equity markets mixed bag with the Hang Seng and the Nikkei down about a percent to 21,960 and 27,820 respectively but European futures flat to smalls up. The China PMI series for March came in lower than expected with both manufacturing and non manufacturing below the 50 level for the first time since August at 49.5 and 48.4 respectively. Note the surveys closed prior to the Shanghai shut down so we could potentially see a further dip for April.
Gold - Futures flat on the session at 1922 still well above the Bank of Russia’s resting bid we spoke about yesterday.
FI - The US10y continues to retreat off its highs to 2.33, a full 20bp drop from the start of the week, with all other US tenors and European rates following suit. I attach below a piece by Pepperstone regarding the recent inversions in the US curves and some pointers as to what they may actually be telling us.
One point to note is the BoJ 10y JGB purchase operation, in effect defending the upper 0.25% band, will end today. We enter a new fiscal year as of tomorrow so it will be interesting to see if the market tests this band again and how indeed the BoJ would respond to such a move. Will they reintroduce their buying operation or will they impose some further yield curve controls? One to watch for both the FX and FI space tomorrow early doors.
FX - In the FX space similar to the other markets, outwith oil, has had a quiet session. USDJPY trading around the 122 pivot level at 121.80. The exception has been the NOK which has weakened on the back of the oil news. EURNOK is at 9.64 up almost a percent. The AUD and NZD were also weaker on the news but in smaller magnitudes.
Today is month end, quarter end and Japanese fiscal year end so there could potentially be some arbitrary moves in the FX space. Preliminary signals for the monthly rebalancing of international equity and bond investors point to net USD selling against most currencies except the JPY with the EUR the potential main beneficiary.
Others - Bitcoin has moved into a holding pattern since its recent run up. The last 4 days have seen a tight 46.5/48,300 range and it will be interesting to see what’s next. It still feels like we need a pullback into the 44/45,000 region before a press higher into the 50,000s. An update on Terra as yesterday saw them transfer a further $139m onto the Binance exchange. This brought their total purchases in this program to approx $1.4bn. As is the new world way there was a lot of speculation as to whether they were sending a signal with the break from the previous $125m transfers especially as 139 is often taken as a signal for the end of a cycle. This fails to take note of the fact that they did a $140m purchase over the weekend but why spoil the story. I have posted a link below, for those interested to delve deeper, of a podcast from Unchained which explains a lot of the mechanics of the foundation and exactly what they are aiming to achieve.
The volatility measures for equities (VIX) and rates (MOVE) continue to converge although mainly driven from a sell off in the MOVE (close approx at 113) as opposed to a rise in the VIX (close just above the 19 level again). The conflict in Ukraine remains in stalemate with little out of the latest round of talks to encourage belief that a ceasefire and peace resolution is anywhere close. Even if it was President Zelenskyy has promised his people a referendum on any deal which will take a long time and add to the uncertainty. Remember too that Zelenskyy has demanded that Russia’s troops have to return to their pre February 23 positions before any referendum is conducted. That seems a tough ask of the Russians. This prolonged and protracted process will surely only increase and prolong the drag on economic growth and as such future earnings. On that basis it continues to seem odd that the VIX trades near its lows.
The main news from the frontline came from the spooks with the US and UK spy agencies’ assessments of Russia’s efforts so far in the invasion of Ukraine. Tales of mutiny and incompetence in the ranks, the leadership, from a military stand point, in disarray and advisers to Putin scared to tell him the whole truth and extent of the debacle that is unfolding. To be honest who could blame them but sadly the human cost is obviously the tragic part of this whole sorry tale. The peace talks will restart again tomorrow in Turkey.
📅⠀The main highlights for the day in terms of data and speakers:
ECB speakers galore with Enria, Lane and Guindos all speaking this morning.
OPEC at 12.00 GMT unlikely to do much markets wise.
US Core PCE Price Index at 12.30 GMT expected at 5.5% versus 5.2% last.
Early hours of tomorrow we have Japanese Q1 Tankan Survey expected at 12 versus 18 previous.
If you enjoyed today’s piece, please do me a favour by sharing it with any friends or colleagues who you think would also find this newsletter useful! Thank you.
📚⠀Articles on Harkster and from outside exploring in more depth some of the themes above:
CoinDesk - What Is LUNA and UST? A Guide to the Terra Ecosystem
Unchained - Do Kwon Is Backing UST With Bitcoin – And Here’s What Else He Is Building
Pepperstone - Will an inverted yield curve spell impending doom?
Gold and The Rouble
Zerohedge - #GotGoldorRubles? Did Russia Just Break The Back Of The West?
Zerohedge - Yen At Risk Of "Explosive" Downward Spiral With Kuroda Trapped... And Why China May Soon Devalue
TS Lombard - YEN MOVES AND THE BOJ ‘TAPER’
🔥⠀Top 5 trending links on Harkster from yesterday:
Alhambra Partners - Volcker’s Petrodollar Bigfoot; Or Why Curves Today Are So Against The Fed And Its Rate Hikes
Quantifiable Edges - Yield Curve Inversions and SPX Returns
Bond Economics - Measuring Term Premia (And Other Comments)
Andreas Steno Larsen - Stenos Signals #7: Duration is getting killed across all asset classes
Scott Grannis - Bond market says no recession in the cards
Discover more on harkster.com
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