The Morning Hark - 6 Oct 2022
Today’s focus ……Truss “moving on up” unlike the UK’s outlook, OPEC+ spat and the SNB give a franc warning
All prices are at 7.45 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude December flat overnight in Asia currently trading at 93.30 and 86.70 respectively as we await the post OPEC+ meeting fallout. Oil had a decent spike post announcement and has remained around those highs ever since. We felt that a cut above 1m was needed to sustain this rally and that seems to have been the case for now. I guess we await for any response from the US in terms of a further SPR release but as we’ve said before any release is only short term negative with the realisation that at some point it has to be replenished. Guess for the near term the focus will be on tomorrow’s US payroll data for direction.
EQ - Equity markets in Asia all up following on from the afternoon rally yesterday for their US equivalents. The Nikkei, Hang Seng and Kospi currently trading at 27,255, 18,055 and 293 respectively.
The Nasdaq and S&P holding onto their late gains from yesterday up close to half of one percent at 11,677 and 3806 respectively. Quite the roundtrip yesterday for equities with a near 2% sell off wiped out late in the session. Early weakness, as we noted on Twitter, seemed to stem from the hawkish RBNZ in contrast to the previous day’s dovish RBA. The weakness continued into the open and beyond and turned on a stronger than expected services ISM print which beat expectations whilst showing a weakening prices paid component but a stronger employment one. Seems to fly in the face of the “good is bad” trading theory but anyway. One other reason being touted by Wells Fargo is a large derivatives trade (I post an article at the bottom for those interested). The delta involved was small compared to the magnitude of move we saw but never let the truth get in the way of a good story. One thing that we can say is that poor liquidity certainly played its part in another volatile day. Tomorrow’s payrolls for us will confirm or deny this recent rally in stocks.
Gold - Gold Dec up smalls in Asia at 1732. Rollercoaster of a day for gold and as we said yesterday it largely took its cue from stocks with initial weakness taking us back through that noisy zone around 1720 before recovering later in the session and back through this zone and settling around the levels that we were at yesterday morning. Still feel watching stocks will give you direction here for now.
FI - US yields off smalls in Asia with the US2y and 10y currently trading at 4.14% and 3.75% respectively.
European yields rallied yesterday closing at 2.028% and 4.446% for the German and Italian 10y yields respectively. The spread starting to widen again over concerns for Italian ratings. Moody’s reported that further deterioration of Italy’s medium term growth profile could lead to a downgrade. UK gilts similar pattern with the 10y closing back above 4% at 4.031%.
FX - Like stocks a rollercoaster of a day for the USD yesterday with a strong rally of over one percent before giving up close to half that on the stocks late rally. The USD Index off smalls in Asia at 110.96. Similar price action for EUR and GBP which saw sell offs into the mid 0.98s and low1.12s before recovering some of their poise currently at 0.9909 and 1.1330. USDJPY remains fairly sidelined remaining in a tight range on the 144 handle currently at 144.55. With the risk rally our risk proxy currencies AUD, NZD and KRW are all up close to a percent at 0.6519, 0.5783 and 1403.10 respectively.
Others - Both Bitcoin and Ethereum continue to be impressively dull currently trading at 20,236 and 1367 respectively.
Fed talk
The Fed’s Bostic was taking no prisoners last night in a hawkish speech.
“Still decidedly in the inflation woods, not out of them yet”
“Should not let the emergence of economic weakness deter our push to lower inflation”
He sees rates between 4-4.5% this year and in terms of the speculation surrounding rate cuts in 2023 he warned the market to be “not so fast”.
He did temper his hawkishness a touch by suggesting that “moving too aggressively could introduce the temptation to abruptly shift course”. Overall more of the same and, prior to tomorrow’s NFP and next week’s CPI, a 75bp hike remains the base case for the early November FOMC.
I point you to the excellent FXMacro Guy’s daily tweet, which I post at the bottom, for a more comprehensive round up of the central bank speakers and yesterday’s highlights.
The UK
PM Truss survived her party conference with her speech adding little on policy but received enough “hurrahs” to let her limp back to Westminster and regroup. Indeed most of the focus was on her choice of walk on music and the various ways that could be interpreted! However her return to London was not before the US ratings agency Fitch downgraded the UK’s outlook to negative from stable but affirm its rating at AA-. They warn that the UK’s fiscal package “could lead to a significant increase in fiscal deficits over the medium term". They also cited the inconsistency between the fiscal and monetary policy as being a factor in their decision something which we have pointed out previously and still believe that the BoE v Government tug of war will continue to be detrimental to the UK economy.
In other UK news, the BoE once again accepted zero bids in their emergency gilt auction despite the UK30y yields rising well above 4% on the day. They released a statement to clarify their policy that their intervention in the market is “subject to a reserve price” which is not made public prior to the auction. They do not have a specific yield which they are looking to cap but rather they wish to create a backstop to ensure financial stability. For context 30y yields are about 60bp higher than the start of this week but still well below the highs we saw at the height of the panic. Glad we cleared that up then.
OPEC+
Well they went the full 2m bpd cut, their deepest cut since back at the start of the pandemic, and left the US licking its wounds. However when you take into effect the fact that there is a large current quota underproduction the effective cut is closer to half that size. Indeed the Saudi energy minister alluded to such when stating that the “actual drop will be between 1-1.1m bpd”. The fiery backdrop to the decision, with the public spat between the US and OPEC and even a Saudi minister refusing to answer a question from a Reuters journalist on the back of their reporting on supposed side chats between Russia and the Saudis, suggests now more then ever oil is becoming even more politicised. One other point to make is that the schedule for the cuts runs until the end of next year. We expect some response form the US which may take the shape of a further release from the ever depleted SPR and even fuel bans.
SNB
Interesting comment from the SNB’s Maechler who said that “if the Swiss franc becomes significantly weaker we are ready to use our balance sheet that means selling the foreign currencies we hold”. Similar to the comments from the SNB after last month’s rate hike meeting but worth keeping an eye on. For reference EURCHF and USDCHF were trading around the 0.9730 and 0.9875 level respectively at the time of the statement. Unsurprisingly the CHF has somewhat strengthened post comments.
The Day Ahead
Shocker of a print for German August factory orders which showed a 2.4% contraction a full 4% swing from last month and close to a 2% miss.
Very little else to excite today with some August retail sales out of Europe and the Canadian PMI. ECB minutes come from September’s meeting where they hiked a full 75bps with a hawkish statement. Any nod to the future rate path will be met with market interest with expectations for a further 75bp hike high. Also any chatter regarding reverse tiering and the onset of QT will be of interest.
Later we have a gaggle of Fed speakers but its hard to see anything significantly different to what we’ve heard over the past few weeks. Cook is a new governor so getting a flavour of her monetary leaning will probably be the most noteworthy. I guess the calm before the storm prior to tomorrow’s US payroll report.
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Thursday
EU Retail Sales MoM Aug consensus -0.4% vs previous 0.3% (09.00 BST)
ECB Minutes (12.30 BST)
Canada Ivey PMI sa Sept previous 60.9 (15.00 BST)
Fed Speakers
Evans (18.00 BST)
Cook (18.00 BST)
Waller (22.00 BST)
Mester (23.30 BST)
Good luck.
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OPEC
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Interesting about the SNB. Alf at the Macro Compass wrote a piece recently identifying they hold nearly 30% of their FX reserves in stocks. So could be quite an event for stocks if they start to unload. Their FX reserves being over 100% of GDP
The piece by Kuppy, OPEC's Counterattack, was really quite interesting!
"Indeed most of the focus was on her choice of walk on music and the various ways that could be interpreted!" What was the music?