The Morning Hark - 6 July 2022

Today’s focus ……Equity round trip, UK PM but for how long, stale Fed minutes and a crypto run down

Daily roundup - all prices are at 7.55 BST (British Summer Time) with changes reflecting movement from midnight BST

Oil - Brent and Crude September futures up over a percent on the day at 104.60 and 97.90 respectively as they recover some of their poise from yesterday’s brutal sell off. The recessionary fears that we said darkened the horizons for the oil sector yesterday turned abruptly into storm clouds as the oil markets saw a close to 10% sell off as demand concerns came to the fore in what was seen as a full macro risk off move.

Fundamentals went out the window in what was definitely a flow driven market. The Saudis announced yesterday that they were hiking their Asian official selling price, as expected,  to record levels due to massive demand. In better news late last night the Norwegian Government stepped into the country’s oil strike dispute and demanded that there were mandatory talks between the two sides. The intervention prevents what could have been a disastrous scenario for Britain and Belgium who, in a worst case scenario, would have had their natural gas supplies cut off from Saturday. 

The recessionary bellwether copper that we highlighted yesterday worked its magic and seems to have led the charge In the commodity sector breaking the 3.50 level that we highlighted yesterday well before oil and gold tipped over. This level will be key to stay below to maintain the downside momentum. 

EQ - Despite all the noise and PnL destruction the levels we wrote about yesterday at our open are not hugely different from what we have today. Asian equities all down a percent or so with the Nikkei, Hang Seng and Kospi trading at 26,125, 21,420 and 304 respectively. 

The US indices down a touch in Asia with the Nasdaq now at 11,765 and the S&P at 3,820. Obviously doesn’t tell the full story with the indices selling off over two percent yesterday before staging a reversal which brought the S&P back to almost flat and the Nasdaq up a percent. Recessionary fears that gripped the market proved the momentum for the down move with lower yields helping growth stocks for the return trip. As we have mentioned many times before volumes remain well below average levels and hence with lighter liquidity the moves tend to be of a sharper nature. 

Gold - Gold futures up smalls to 1767. Tight rage no more as the 1800 level broke with little pause before 1770. The surging dollar, the aggressive Fed rate hike path, India import duties amongst others all blamed for the move but it seems a technical break and momentum selling was the main issue as the market went into “any bid will do” mode across the markets. Leaves gold at its lowest levels in 9 months although stabilising for now. 

FI - Global yields up a touch overnight. US2y and 10y yields to 2.85% and 2.84% respectively as they stabilise after yesterday’s sell off. The 2/10y remains a touch inverted as the market starts to price in a peak in rates for November of this year and cuts in the early part of next year. As we have said before not quite how the Fed sees the world. 2.70% remains our downside support for the US10y. The European rates space followed the sell off with the German and Italian 10y yields closing at 1.184 and 3.175 respectively. German yields suffered the most and the spread between the pair has widened again knocking on 200bp.

FX - Rampant is the only word to describe the USD as it smashed through the recent highs in the USD Index posting as high as 106.66 and stabilising close to that level as we speak. EUR was the main casualty sinking to a 20 year low and versus the CHF breaking through the levels last seen on a depeg day back in 2015 and pressing on to push through parity! It currently stands against the two rivals at 1.0270 and 0.9930. Again momentum trading and hit any bid mode didn’t help the currency neither has the eroding confidence in the ECB with its prolonged antagonising over ending QE, starting the hiking process and now attempting a fudged two speed anti-fragmentation process. Speaking of eroding confidence unsurprisingly GBP has not been spared sinking into the low 1.19s assisted by the farcical scenes in Westminster with senior resignations, a Prime Minister who seems to have severe memory loss issues and a front bench looking sparser by the hour. Maybe the conservatives need to adopt the Premier League’s five sub rule! Anyway, I’ll leave Politico to pick the bones out of it below in ‘Further Reading’ for those that have some reading time today. Suffice to say, as always, political uncertainty never does GBP any favours. 

Others - Bitcoin and Ethereum followed the equities round trip yesterday with the pair trading currently at 20,120 and 1140 respectively not far off where we started at yesterday. 

Again for those that have time, I post below in the ‘Further Reading’ section, Imran Lakha’s excellent Twitter thread on the crypto market after its recent woes and how the landscape looks now with the help of on-chain and options analysis. He also touches on the crypto mining space and the pressure that is building there with many inefficient operations being forced to go offline. Well worth a read.

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So much for that quiet day we touted yesterday! That didn’t turn out as planned although we did say the moves would be driven by flow given the lack of any significant data points. Recession front and centre everywhere you look with the rates market leading the charge in trying to force the Fed’s hand. It’s quite funny to look back especially on the day that we get the FOMC minutes from the June meeting. I’m sure it’s reasonably fresh in the memory that was the 75bp hike meeting. The 75bp hike that Powell had taken off the table and then, since the Fed was in the quiet period, used the new forward guidance tool, The Wall Street Journal, to signal such a hike. The market “demanded it” and fully priced it in and god forbid if the Fed didn’t deliver. The Fed duly delivered on a tail wagging the dog basis or was it the other way round? Anyway here we are a mere 3 weeks later and we have a rates market screaming for a pause in November as we reach the terminal rate and cuts please in early 2023. On that basis can the minutes deliver anything new? Are they just stale? If we look back at the markets from that date and look where they were roughly; we had the US10y having just knocked on the 3.50% door, S&Ps were around 3790, Nasdaq 11,600, USD Index 105.50 and Crude 115. Basically, stocks haven’t moved so something seems out of kilter? 

Anyway the minutes we expect to read on the hawkish side but whether this is relevant now to a market which is fully focused on the growth side of the argument and as such will be happy to look through the perceived stale words. Perhaps more relevant will be the services PMI and Williams speech. Either way with the markets as they are, UK politics similarly in a state of flux and Cristiano Ronaldo seemingly on strike it’s not going to be dull.

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Let me know if you found today’s post useful by hitting the ‘Like’ button at the bottom. Thank you!⠀

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📅⠀The main highlights for the day ahead in terms of data and speakers: 

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Wednesday

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 54.3 vs previous 55.9 (15.00 BST)

FOMC Minutes (19.00 BST)

Fed Speakers

• Williams (14.00 BST)

BoE Speakers

• Pill (09.10 BST)

• Cunliffe (13.30 BST)

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Good luck. 

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🔥⠀Top 5 trending posts on Harkster.com yesterday:

1. The BondBeat - while we slept -- 5yy --most interesting chart; 'moment of truth, or denial?'; glass half empty; stocks vs bonds, worst H1 on record ... CONFIRMED (can we move on, now?)

2. Pinecone Macro Research - Walk in the Pines #74

3. Brent Donnelly - Week 20: Don't get squozen

4. ING - Rates Spark: What could possibly go wrong?

5. New York Fed - The U.S. Dollar’s Global Roles: Revisiting Where Things Stand

Discover more market commentary & research from 450+ curated sources on Harkster.com.

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📚⠀Further reading on the current key macro themes:

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Crypto Woes

• Arthur Hayes - Number Three

• Imran Lakha | Options Insight - Crypto Roundup Thread

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UK Politics

• Politico - London Playbook: Boris on the brink — No. 10 vs. No. 11 — Lest we forget

• Blain’s Morning Porridge - The UK? Who would want to be Chancellor now, and what did Boris promise him?

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EUR

• The Gryning Times - A message from $Euro

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