The Morning Hark - 4 July 2022
Today’s focus ……Tough few months ahead, the crypto week just gone and the week ahead
Daily roundup - all prices are at 7.35 BST (British Summer Time) with changes reflecting movement from midnight BST
Oil - Brent and Crude September futures up small on the day at 112.10 and 105.80 respectively. All the usual push me pull me stories continue to play out in the oil market however a couple have garnered more interest. Libya continues to see unrest in the country with protestors storming and setting on fire parliamentary buildings in the east of the country as unrest grows over power cuts, rising prices and political deadlock. With such uncertainly in the country Libya’s oil exports will continue to remain well below normal levels. Secondly JPM published a doomsday research piece on the price of oil which unsurprisingly got a lot of attention as its headline number screamed $380 per barrel for crude. This is a worst case scenario prediction if the G7 carries out its threat to cap the price of Russian oil, which we still remain sceptical about, and in return Russia, given its robust fiscal position retaliates with a huge cut in crude production.
EQ - Asian equities a mixed bag in quiet overnight trading with the Hang Seng and Kospi flat at 21,780 and 305 respectively. The Nikkei however has bucked the trend and shows a near percent gain to 26,160.
The US indices softer in Asia but remain in the ranges we saw in the latter part of last week with the Nasdaq now at 11,570 and the S&P at 3,815.
Gold - Gold futures consolidating their gains from Friday up smalls to 1811. Gold held the 1875 support we mentioned on Friday and managed to get above the 1800 trading pivot in the afternoon session. Thin volumes and weaker US yields helped the move higher. We continue to watch the price action from the sidelines.
FI - US bond market is closed but global futures are all a touch softer pointing to a small uptick in yields. As the US10y remains comfortably below 3% the next support on the downside is 2.70%. On the European front yields continue to retrace with the German and Italian 10y yields closing the week back to 1.23 and 3.10 respectively levels last seen early last month.
FX - The USD holding steady with the USD Index at 105.08. Very quiet session with USDJPY trading back in the mid 135s at 135.44, EUR to 1.0427 and GBP 1.21.
Others - Bitcoin and Ethereum had a quiet weekend which was probably much needed given the recent turmoil. The pair trading currently at 19,150 and 1055 respectively.
Quick recap of Friday’s data showed Eurozone manufacturing PMIs a touch better than anticipated, the UK’s a touch worse and the US a touch better again. On the negative side we got a higher Eurozone inflation rate at 8.6% for the flash June number and the US ISM survey was a miss across the board. On top of that we had the Atlanta Fed revise their previous day’s estimates for q2 US GDP down to -2.1% from -1% previously. This placed the US firmly on recession watch. Reflecting on these early June numbers and the half year we have just had there appears no respite on the horizon for either the markets or the central bankers.
The Fed are on a hiking path and made it clear that they will remain aggressive until such time as they get inflation down/under control. The market is pricing in cuts for the early part of next year however estimates for inflation are pointing to an 8% handle into q4 of this year so something will have to give. The market and Fed are now over a percent apart for their forecasts for rates for the end of next year. Will we get another Jackson Hole pivot?
The ECB, as we have surmised on numerous occasions in these writings, is in a state of confusion whether they should be doves or hawks on rates and have decided to do both and chosen the two speed model as one of their anti-fragmentation tools. Tiptoeing around 25bp hikes ain’t gonna wash in a 8%+ inflation environment. In addition will the market test the ECB’s resolve and push those peripheral spreads wider again versus the German 10y?
The BoE well where do we start. Not only do they have to deal with, what in their own words will be, 11% inflation they also have to contend with a stuttering economy. The cost of living crisis grows by the day, strike action appearing to come from all angles and when you do try to escape the country you get stuck at an airport!
Finally the BoJ who out of all of the central banks seems to be in the most precarious position and thats saying something! Their yield curve control policy has got them into a position where they now own more than half of all the JGBs issued as they try to draw a line in the sand for yields. You only have to look at the charts from November 2021 when the Australians abandoned their similar policy to control the 3y bond yield or when the SNB exited their peg versus the EUR which they abruptly abandoned in early 2015 to show how explosive the move will be when the Japanese eventually exit their policy.
Friday also saw Nomura revise their GDP forecasts for other major economies having the previous day predicted the US would tip over into a recession upon the release of its q2 GDP print. In the report they suggest that the UK, Japan, Eurozone, Australia, South Korea and Canada would all join the US in recession in the coming quarters.
All adds up, I’m afraid, to a tough few months ahead for the central banks and the markets.
Recap on the Crypto week makes for depressingly reading with the knock on effects of the Three Arrows Capital liquidation especially painful to relay. The damage has spread with Voyager Digital (digital prime broker), BlockFi (lending and borrowing platform), blockchain.com (trading and lending), Derebit (crypto derivates exchange), Bitmex (centralised exchange), Genesis (digital prime broker), Finblox (savings platform), 8 Blocks Capital (trading firm) amongst others claiming to have had exposure to 3AC and to some the consequences appear to be fatal. One thing to note you look at this list is that the firms that have been exposed, failed or are in a serious position are all of a centralised nature. With no legal precedent in the space the creditors look to be in a no win situation. The crypto critics are quick to point out that even with MF Global and Lehman the creditors got paid in full albeit many years after the event. On the flip side of the argument the crypto natives are quick to point out that, thus far, the decentralised equivalent firms in the space have survived the crisis and acted, albeit with much volatility, in a manner in which they should act. There is full transparency with collateral used automatically, with no human thought or intervention, to exit positions which have become loss-making beyond their collateral. In the further reading section below, I’ve posted some excellent articles on the space for a deeper dive and I’d especially point you to Arthur Hayes’s excellent piece which gives a little more narrative to 3AC’s origins and subsequent demise.
SBF/FTX has swooped in to help a number of the wounded on the battlefield with Voyager and BlockFi both taking a credit line (and perhaps more), they offered to help Celsius but stepped back after they had a peep round the curtain. Some reports even pointing to them having interest to buy distressed miners although this has been subsequently denied. When the dust settles how much of the market will FTX/SBF/Alameda own and will its powerful position push the US, in particular, to quicker and more draconian regulation? One for the future.
The Week Ahead
The week and beginning of the month starts relatively quietly for what we feel will be a pivotal month for the markets. Main focus will fall on the US employment report on Friday and the release, on Wednesday, of the FOMC minutes from the June meeting. Jobs wise consensus is for a moderation in job gains to around 270k but still showing a strong underlying market. The June FOMC meeting brought a 75bp hike and a commitment to remain aggressive. Expectations are for the minutes to point to a similar hike for July with all eyes on hot inflation. There are also a number of Fed speakers throughout the week so it will be interesting to see if there has been any shift in their views over the last three weeks since the June meeting which has seen a deterioration in some of the economic prints out of the US. Elsewhere we have the services and construction PMIs from the major countries, RBA rate decision, Canadian payrolls and China inflation data. In addition several ECB speakers so any update on their two speed approach to the fragmentation tools would be helpful and BoE speakers also chime in with they thoughts on the UK landscape.
One point of note for today is the BoC business outlook survey for q2 which should give us some feel for the growth and inflation path for the Canadian economy with still the base case scenario being a 75bp hike for the July meeting.
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📅⠀The main highlights for the week ahead in terms of data and speakers:
Canada S&P Global Manufacturing PMI Final Jun consensus vs previous 56.8 (14.30 BST)
BoC Business Outlook Survey Q2 (15.30 BST)
Nagel (15.00 BST)
de Guindos (16.00 BST)
Australia S&P Global Services PMI Final Jun consensus vs previous 53.2 (00.00 BST)
Japan Jibun Bank Services PMI Final Jun consensus 54.2 vs previous 52.6 (01.30 BST)
Australia Retail Sales Final May consensus 0.9% vs previous 0.9% (02.30 BST)
China Caixin Services PMI Jun consensus 49.5 vs previous 41.4 (02.45 BST)
RBA Rate Decision 50bp hike expected to 1.35% (05.30 BST)
Germany S&P Global Services PMI Final Jun consensus 52.4 vs previous 55 (08.55 BST)
EU S&P Global Services PMI Final Jun consensus 52.8 vs previous 56.1 (09.00 BST)
UK S&P Global Services PMI Final Jun consensus 53.4 vs previous 53.4 (09.30 BST)
US Factory Orders MoM May consensus 0.5% vs previous 0.3% (15.00 BST)
Bailey (11.00 BST)
Tenreyro (17.30 BST)
Germany Factory Orders MoM May consensus -0.6% vs previous -2.7% (07.00 BST)
EU S&P Global Construction PMI Jun consensus vs previous 49.2 (08.30 BST)
Germany S&P Global Construction PMI Jun consensus vs previous 45.4 (08.30 BST)
UK S&P Global Construction PMI Jun consensus 55 vs previous 56.4 (09.30 BST)
EU Retail Sales Final May consensus 0.4% vs previous -1.3% (10.00 BST)
US S&P Global Services PMI Final Jun consensus 51.6 vs previous 53.4 (14.45 BST)
US ISM Non-Manufacturing PMI Jun consensus 54.5 vs previous 55.9 (15.00 BST)
FOMC Minutes (19.00 BST)
Williams (14.00 BST)
Pill (09.10 BST)
Cunliffe (13.30 BST)
Germany Industrial Production MoM May consensus 0.4 vs previous 0.7 (07.00 BST)
Canada Ivey PMI Jun consensus vs previous 72 (15.00 BST)
Waller (18.00 BST)
Bullard (18.00 BST)
Mann (09.30 BST)
Enria (08.00 BST)
Lane (10.45 BST)
Canada Unemployment Rate Jun consensus 5.1% vs previous 5.1% (13.30 BST)
Canada Employment Change Jun consensus 22.5k vs previous 39.8k (13.30 BST)
US NFP Jun consensus 270k vs previous 390k (13.30 BST)
US Unemployment Rate Jun consensus 3.6% vs previous 3.6% (13.30 BST)
US Average Hourly Earnings YoY Jun consensus 5.1% vs previous 5.2% (13.30 BST)
Williams (16.00 BST)
Lagarde (12.55 BST)
Villeroy (17.45 BST)
China Inflation Rate YoY Jun consensus 2.5% vs previous 2.1% (02.30 BST)
Schnabel (14.30 BST)
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
RIA Advisors - S&P 500 Monthly Valuation & Analysis Review – 06-30-22
The Macro Trading Floor - Russell Clark: Brace For Structurally Higher Inflation 🎧
EPB Macro Research - [Chart Of Interest] New Orders CRASH In June
Adam Tooze - Chartbook #133 Under the hood of the power dynamics of inflation
FX & Macro Weekly - Outlook for Week 27/2022
Discover market commentary & research from 400+ sources on Harkster.com or our iOS app.
📚⠀Further reading on the current key macro themes:
Coindesk - Genesis Faces ‘Hundreds of Millions’ in Losses as 3AC Exposure Swamps Crypto Lenders: Sources
The Block - FTX walked away from a deal with Celsius after seeing state of its finances: sources
Bloomberg - Blockchain.com Cooperating With Investigations Into Three Arrows
Bloomberg - Crypto Lender BlockFi, in Talks With FTX, Also Gets Ledn Offer
Arthur Hayes - Number Three
ZeroHedge - ECB Will Buy Italian, Greek Bonds Using Proceeds From German, French Bonds To Avoid Crash
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