The Morning Hark - 5 July 2022
Today’s focus ……Quiet day ahead, copper the canary in the coal mine and Norwegian oil strikes
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 down small on the day at 113.00 and 106.70 respectively as they consolidate most of their gains from yesterday. Recessionary fears darken the horizons for the oil sector as demand concerns remain but the tightness of supply still seems to hold sway. We have discussed OPEC’s inability to meet their raised targets, Macron’s aside to Biden at the G7 concerning the UAE’s and Saudi’s ability to raise their production and of course there is the issue of the US’s need at some point to replenish their SPR. Let’s see what next week’s visit to the Middle East holds for Biden. However currently further concerns on the supply side of the market with Norwegian oil workers starting to strike today. This has the potential to cut around 6% of the daily oil production of the country. If demands are not met then there is a planned escalation which could impact as much as 15% of daily production by the weekend. Stepping back Brent’s September futures have remained in a relatively tight range of 108/115 for the last few weeks.
Might be worth keeping an eye on copper as the supposed bellwether of all recessions past and present given its correlation with PMIs and the EDZ2-EDZ3 curve and its predictions for impending rate cuts. The September futures contract is closing in on 3.50 a level last seen early last year and looks as though it could be a crucial level in terms of whether the move lower in copper continues or whether this is the level that we stabilise at. Let’s see.
EQ - Asian equities a mixed bag in quiet overnight trading with the Nikkei and Kospi up over a percent on the day at 26,420 and 310 respectively. The Hang Seng however is down smalls on the day at 21,865.
The US indices up a touch in Asia but still remain in the ranges we saw in the latter part of last week with the Nasdaq now at 11,670 and the S&P at 3,845.
Gold - Gold futures up smalls to 1810. Little to add in the gold space with a tight range seen for the last few sessions between 1805/15.
FI - Global yields up overnight with the US bond market returning after the long weekend. US2y and 10y yields have rallied strongly off the lows of last week to 2.92 and 2.94 respectively following the rally we saw yesterday in the European rates space with the German and Italian 10y yields closing higher to 1.336 and 3.235 respectively. The US bear flattening move at one point did see an inversion in the US2/10s before finding support.
FX - The USD flat again with the USD Index at 105.13. Quiet session again in FX the highlight being USDJPY which has continued to rally to 136.15 on the back of the recovery in US yields. EUR to 1.0435 and GBP 1.2110. AUD little changed at 0.6855 after the expected RBA 50bp hike.
Others - Bitcoin and Ethereum enjoyed some relief from the 4th July holiday and managed to regain some small ground but still remain firmly in the woods. The pair trading currently at 20,350 and 1165 respectively.
US Economy
Little of note in the last few trading sessions with the market languishing in the US long weekend and happy to take the breather. I guess if anything the US rates bounce stands out but given the oscillations we’ve seen in that space of late its hard to get too excited just yet. 3% on the topside for the US10y looks like a handy inflation/recession trading pivot for the market for now.
To try and raise the mood we do have some encouraging signs. Lots of chatter that Biden will roll back the Chinese tariffs on consumer goods in an attempt to ease inflation whilst remaining “tough” by announcing a new review on industrial subsidies which may affect the technology sector. There was a call between the Chinese vice premier and treasury secretary Yellen overnight which also brought some encouragement.
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RBA
Overnight saw better data out of Japan where the services PMI, although a small miss, did show its fastest pace of growth in nine years. More impressively China bucked a trend of three down months for the same series to post a positive print well above 50. Finally the RBA, as expected, raised rates by 50bp. The tone of the statement was cautious however with inflation predicted to peak later in the year and to revert to a 2/3% range next year. The RBA also noted the pressure on household incomes and the outlook for the global economy as a whole as weighing on the country’s growth prospects.
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Looking ahead . . .
Little of note to keep us busy today so it looks like a flow driven day in terms of price action. Fed minutes tomorrow and US payrolls on Friday remain the near term focus as the market grapples with the recession/inflation pivot. The US rates move has eased some of the pressure that was building with the market’s calls for rate cuts from the Fed in the early part of next year. However, we still remain in the woods of that one and it feels like a clash of sorts has to happen between the Fed and the markets if the data continues to roll over as we have seen of late and certainly since June’s FOMC. The conundrum for the Fed is that, having sat and watched inflation rip whilst calling it transitory, they now find themselves with sticky and high inflation and economic numbers starting to decline. That has been a hard nut to crack in the past but they now have the added complication of conducting QT at the same time as trying to manage the economy. Not easy but it’s hard not to see a situation where their Make Inflation Low Again policy starts to play second fiddle to try to stop a hard landing but will it be too late. Looking into the horizon we have the Fed meeting in the last week of July and not another one until 21 September with Jackson Hole in the middle (25/27 Aug). That’s again looking like another big showpiece for the Fed.
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📅⠀The main highlights for the day ahead in terms of data and speakers:
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Tuesday
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)
BoE Speakers
Bailey (11.00 BST)
Tenreyro (17.30 BST)
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Good luck.
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🔥⠀Top 5 trending posts on Harkster.com yesterday:
Daniel Lacalle - If Central Banks Do Not Tackle Inflation, Deflation Will Come from A Crisis
Prometheus Research - The Week Ahead
The Gryning Times - Are we bottoming?
The Market Mosaic - The Market Mosaic 7.3.22
The Commodity Report - The Commodity Report #58
Discover more market commentary & research from 450+ curated sources on Harkster.com.
📚⠀Further reading on the current key macro themes:
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Crypto Woes
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
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ECB/Anti-Frag
ZeroHedge - ECB Will Buy Italian, Greek Bonds Using Proceeds From German, French Bonds To Avoid Crash
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Thank you sir, always compact and concise.