The Morning Hark - 6 Dec 2022

Today’s focus …China continues to relax, RBA no surprises, and what about those Brazilians!

Dec 6, 2022

All prices are at 7.35 GMT/2.35 EST, with changes reflecting movement from midnight GMT

Oil - Brent and Crude February futures up close to one percent in the Asian session as oil recovers some of its poise after yesterday’s sell-off. The futures currently trading at 83.50 and 77.90, respectively. Firmer tone overnight was helped by the oversold nature of the move yesterday as well as the continuing China positive news. Yesterday’s bloodbath was started by uncertainty over Russian oil supplies after the Western ban and was fuelled further by the better-than-expected US data.

EQ - Asia futures mixed again overnight, with Hang Seng continuing to enjoy the China news, with currently the index close to a further two percent higher at 19,442. Nikkei flat at 27,792 but the Kospi giving back over one percent at 311.

The Nasdaq and S&P flat again overnight after yesterday’s sell-off on the US data trading currently at 11,797 and 4004, respectively. Approaching some interesting levels in the S&P with 4000 the obvious first support and the bulls would not like to see 3950 broken. Upside remains towards the 200 dma around 4060.

Gold - Gold Dec flat in Asia as it licks its wounds after yesterday’s sell-off. Currently sitting at 1783. Well, that didn’t last long as better-than-expected US data with strong factory orders and a much stronger services ISM put paid to gold’s recent rally. 1800 would now be a trading pivot, with us sitting on the first support at 1780.

FI - US yields flat overnight in Asia as they consolidate their post US data gains from yesterday. The US2y and US10y currently trading at 4.40% and 3.60%, respectively. We are watching the 3.50/3.65% range in the 10y for clues to the next breakout.

European yields following the US lead and firming a touch with the German 10y yields currently trading at 1.901% and Italian 10y yields at 3.785%.

UK gilts softer yesterday with the 10y yield closing at 3.103%.

FX - The USD up a touch in a quiet Asian session. The USD Index is currently trading at 105.42 and we have got some of the retracement off its recent lows that we were looking for yesterday. Let’s see if it can sustain its rally. The majors all a touch weaker with JPY, EUR and GBP currently trading at 137.30, 1.0480 and 1.2195, respectively.

Others - Bitcoin and Ethereum softer with the overall general tone as we sit at 17,005 and 1260, respectively.

RBA

As expected a 25bps hike by the RBA taking rates to 3.10% with an accompanying statement that was pretty much the same as the previous one. The main points:

inflation remains too high and further rate hikes are expected in the coming months;
wage growth is expected to accelerate;
job market remains very tight;
the path for a shift landing is narrow;
the RBA is not on a predetermined rate path; and
further rate policy will be determined by the incoming data and especially the inflation and labour reports.

The AUD traded a touch finer on the news but is still lagging the China “reopening” news which is maybe something to keep an eye on.

China

Lot of China chatter as the covid restrictions continue to ease and lots of rumours circulate of larger policy shifts are incoming. The latest one yesterday suggested that covid19 would be downgraded to a category B agent from a category A one as early as January with all the relief that that would entail for people’s everyday lives. However, in the here and now, restrictions in Beijing have been relaxed a touch with rules surrounding entering the airport terminal and for public places reduced, however bars and restaurants still require a 48 hour negative covid test result.

One inconsistency in the incoming data points to a drop in positive tests from the peak despite the recent protests which would have suggested that there would have been an increase given the “super-spreader” potential of the protests themselves. Wouldn’t be the first time that China fitted the statistics to the story rather than the other way round?

Yesterday’s Data

Worth highlighting yesterday’s data as the final services PMIs for November came in across Europe and the US, and all were pretty much in line and remain firmly in contraction. In sharp contrast, the non-manufacturing ISM, 56.5, beat both the previous and the consensus prints by a wide margin. Underlying were also positive with employment returning to expansionary territory at 51.5, prices softening a touch at 70 although new orders missed the previous month but still remain at a decent level of 56. It’s nothing but resilient the US economy and adds to the Fed’s worries.

Central Bank Speakers

Obviously, no Fed this week so it’s all eyes on the ECB. To be honest nothing earth shatteringly new from the crowd; Makhlouf suggested that 50bps for December was a “minimum” and wouldn’t rule out a further 75bp hike. He felt there was no justification to expand the balance sheet and was in favour of QT starting around the turn of q1 next year.

Villeroy keen on 50bp for December and further increases will come in the new year.

Lane a tad more conservative when claiming that more hikes were needed but a lot had been done already. He was unclear as to whether we had seen the peak in inflation or whether it would come early next year, but he did see it falling towards 6/7% in the coming year.

BoJ’s Kuroda was on the tapes too but do we still listen to him? He suggested that even if wages rise by 3% the BoJ will maintain its current easy monetary policy until inflation reaches 2% which seems sensible! Once the 2% target is “consistently” met they will consider exiting ultra-loose policy.

No Fed speak, but the WSJ Timiraos had a piece out that stated that whilst a 50bp hike would be agreed upon for the Dec FOMC, the higher wage pressures, could see the Fed pencil in higher interest rates in the new year making the February FOMC a potential debate between a 25 or 50bp hike.

SBF/CZ/Alameda

For once there is nothing to say.

The World Cup

Well, the Samba boys arrived and some! Whilst the South Koreans did little to help themselves the Brazilians did help themselves to plenty of goals. The Fab4 started up front for the first time at this World Cup, and they served up a first half of football that purred through the TV screen. When you get the two centre-backs combining on the edge of the opposition box to deliver a beautiful pass through for Richarlison’s goal then you know you’re on a beautiful thing. Korea were poor, but Alisson also highlighted why he is the perfect goalkeeper for this team as he gets a lot of practice at Man City standing about for most of the game doing nothing then making a brilliant save. They look a pretty complete side, but they will meet sterner tests than this. For now, let’s kick back and enjoy the dancing!

The other game offered drama, but not as much quality as the pass masters Croatia squeezed through against the team that never stops running; Japan. We said it would be a clash of styles and ultimately the all action running team cancelled out the passing team, and in the end, the experience of penalty shoot outs went Croatia’s way. Sadly it looked like Japan hadn’t even practised theirs, and a sad exit to a team that has provided us with some of the best memories of the World Cup and very clean dressing rooms! Croatia go on to face Brazil in the quarter-finals and the joy that Japan had down the wings doesn’t bear thinking about when you see the firepower the Brazilians have on the flanks!

Today sees the final games of the round of last 16. Morocco, one of the surprises of the tournament, come up against the beautiful to watch Spanish team in what should be a really exciting game. Which Spain will turn up though? The magnificent 7 team that thumped Costa Rica or the blunt rapier that stumbled through their next two games? What have the Moroccans left to offer after qualifying as only one of three teams to get 7 points in the group stages?

The last game of the round sees Portugal take on Switzerland. Ronaldo’s last game at a World Cup? The Swiss, who have been defensively sound and measured for much of their qualifying and in the early group games burst into life in their last game against Serbia. Let’s hope that version turns up against, let’s face it, a pretty ordinary Portuguese defence. If they do it could be quite a game.

The Day Ahead

The German factory orders for October just printed and brighter than expected with a 0.8% growth on the month versus 0.1% expected.

Very little on the docket with Canadian PMI the only “highlight” as well as one ECB speaker.

Early hours sees Japan December Tankan survey, Australian q3 GDP and just prior to us printing tomorrow we will get German industrial production for October.

I post a thread at the bottom from Michael Gayed, writer of the leadlagreport, who uses his various signals to suggest that a period of “risk off” could be imminent. A fascinating read!

A couple of other reads which I think are well worth your time, especially with such a quiet day ahead. Conor MacNeil from Investment Talk has his excellent weekly out, and I’d like to draw your attention to his 5 must-reads and 2 in particular. The Roaring Eighties: The Japanese Bubble is an excellent history lesson, and it is fascinating to look back on Japan as it was then and where it is now in terms of lost decades, negative rates and low inflation. Not only is it an excellent article but Conor has also attached further background reading on the subject. To put the bubble in context at its height all the land in Japan was worth close to four times the value of all property in the US!

The second article is “venture capital: red flag checklist” which is rather pertinent given what we have seen with the whole FTX debacle.

Investment Talk

The Most Anticipated Recession, Checklists for Fraud & The Japanese Bubble

Once every second Sunday I will curate the most interesting things I have consumed during the previous two weeks. These will be bucketed into 5x must-reads (works I wish to highlight and comment on) and other items of interest (an assortment of other works I have consumed…

6 months ago · 23 likes · 4 comments · Conor MacNeil

The other post is from Callum Thomas’s Weekly S&P500 #ChartStorm. Some really interesting charts to get stuck into. The S&P points out some key levels to keep an eye on, especially the 200 dma and its relevance to current markets. Also, some US recessionary indicators which of course are extremely relevant right now.

The Weekly S&P500 #ChartStorm

Weekly S&P500 ChartStorm - 4 December 2022

Welcome to the Weekly S&P500 #ChartStorm — a selection of 10 charts which I hand pick from around the web and post on Twitter. These charts focus on the S&P500 (US equities); and the various forces and factors that influence the outlook - with the aim of bringing insight and perspective…

6 months ago · 44 likes · 2 comments · Callum Thomas

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All times in GMT (EST+5 / CEST-1 / JST-9)

Tuesday

Canada Ivey PMI s.a. Nov previous 50.1 (15.00 GMT)

Japan Reuters Tankan Index Dec previous 2 (23.00 GMT)

ECB Speakers

af Jochnick (10.10 GMT)

World Cup - Round of Last 16

Morocco v Spain (15.00 GMT)

Portugal v Switzerland (19.00 GMT)

Wednesday

Australia GDP Growth Rate QoQ q3 consensus 0.7% vs previous 0.9% (00.30 GMT)

Australia GDP Growth Rate YoY q3 consensus 6.2% vs previous 3.6% (00.30 GMT)

German Industrial Production MoM Oct consensus -0.6% vs previous 0.6% (07.00 GMT)

Good luck.

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