The Morning Hark - 6 Sep 2022
The Morning Hark - 6 Sep 2022
Today’s focus ……the European energy crisis, UK relief package and cabinet announcements, BoJ coming to a cinema near you soon? and anyone for Soy$?
All prices are at 7.55 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures diverged in Asia currently trading at 95.50 and 88.80 respectively with Brent off smalls but Crude up over two percent. Despite all the noise in the space we are basically back to our opening levels seen yesterday. A lot of the volatility and price extension was due to the poor holiday liquidity in the market.
EQ - Equity markets all down a touch overnight in Asia with the Nikkei, Hang Seng and the Kospi currently trading at 27,622, 19,211 and 313 respectively.
The Nasdaq and S&P both up smalls in the Asian session at 12,188 and 3943 respectively.
We are sitting at the first resistance for the S&P at 3940 with further at 3975. Downside towards 3920 and 3890.
Gold - Gold Dec futures up smalls overnight in Asia at 1731 as gold continues to trade in a tight range. Support still lies with the year’s low around the 1700 level. Topside remains that noisy zone of 1750/55.
FI - US yields had a good rally overnight with the US2y and 10y yields up close to two percent currently trading at 3.47% and 3.25% respectively.
European yields a touch firmer to start the week closing at 1.564 and 3.945 for the German and Italian 10y yields respectively. The spread continuing to extend as we edge closer to the ECB.
FX - The USD softer in Asia despite higher yields with the USD Index trading at 109.56. GBP has taken a good chunk of the gains post the proposed relief package trading currently at 1.1593 after posting a 37 year low yesterday. We feel a lot of the move is down to short covering by an overextended market. The EUR also had some relief as it tries to drag itself back to parity trading now at 0.9972 as the market starts to mull over the possibility of a 75bps rate hike. I post at the bottom a twitter thread by the always interesting Jens Nordvig stating why he believes the ECB has to be aggressive on Thursday. USDJPY has taken heed of the rate differentials though and trades to fresh highs at 141.18. As we climb ever higher we’d expect to see the Japanese authorities start to escalate the severity of their chatter in terms of intervention and as ever the FX Macro Guy is all over it and I post his tweet at the bottom on the escalation path of the authorities’ comments and we are getting close to the end of the list.
USDCNH remains a stones throw away from 7 trading currently at 6.95. This despite some fighting talk from the authorities. The central bank deputy was warning the market to not bet on the Yuan’s one way move and described the bank as having ample room to move on monetary policy. There was once again chatter that the economic stimulus package would be rolled out this month and finally the authorities reduced the FX deposit reserve requirement ratio for the second time this year to 6% from 8% previously all with little effect on the exchange rate. With 65 million people in Covid lockdown it’s probably hard to shift that dial.
Others - Bitcoin continues to sit steady at 19,853 but Ethereum has had a decent six percent rally to 1666 as we get closer to the merge. I post an article at the end explaining the merger and all that it entails for those with an interest. Also I post a Binance story whereby they are basically discontinuing the use of other stablecoins, on their platform, other than their own version to “enhance liquidity”.
Energy Crisis
Oh my that was quite a day of headline bingo. The G7 agreement on Russian price cap proposals which were announced on Friday seems to have revved the engines for markets as Russia declared all gas supplies to Europe would not resume until such time as Western sanctions are lifted. In addition OPEC+, despite sources claiming that Russia had originally opposed the idea, did cut oil production by 100k b/d. In addition, and probably more menacingly, the chairman of OPEC+ is claimed to be considering calling a meeting at anytime to “address market developments” which sounds like a veiled message that further cuts are coming. Remember OPEC was actually struggling to meet its production targets anyway and given the extent of the cut it’s hardly going to move the dial but it certainly is symbolic and oil, in the liquidity circumstances, did react.
Elsewhere European countries are tripping over themselves to throw numbers at the problem. Portugal announced a €2.4bn inflation aid package, the Dutch proposed a €16bn windfall tax, Germany earlier muted a €65bn aid package and the incoming new UK PM is supposedly proposing a €130bn assistance on upcoming energy bills. On top of that Macron was calling for a EU wide windfall tax on energy companies and the EU is pushing for a Eurozone wide gas price cap. All in all it’s going to be a long winter of headlines let alone anything else.
I post at the end a piece by Tracy Shuchart (@chigrl) which, as ever is excellent, on the fundamental issues with the Russian oil cap proposals.
European PMIs
Yesterday’s PMIs out of Europe failed to lift the gloom with Germany, the EU and the UK all missing expectations and printing lower than the previous months. Five out of the six prints came in below 50 with the only outlier being the UK services measure, which historically is always stronger, but even it is getting close to the line. Indeed the money line in the comments from those surveyed leaves little to the imagination as to where we are heading “demand for consumer facing services, such as restaurants, hotels, travel and other recreational activities is collapsing under the weight of the cost of living crisis”.
RBA
RBA as expected hiked 50bps. The RBA board stressed that they expect further hikes in the coming months. In the statement there was a nod to the fact that previous hikes had not yet fully fed into the economy especially via mortgage payments. In addition wage growth and their specific effect on inflationary pressures was highlighted. As we said a very similar, albeit much smaller, backdrop to the US. Next risk event is Thursday’s speech by the RBA Governor Lowe.
UK
The energy crisis package muted by the papers this morning will grab much attention but the long lasting effect will surely be a higher for longer outlook for both inflation and hence rates. A somewhat robbing Peter to pay Paul approach to the cost of living crisis. The month ahead has a huge number of risk events in play for the markets with the announcement of her cabinet first and fore most, tomorrow then sees the Bank of England Governor Bailey in front of the Treasury Select Committee, the potential triggering of Article 16 (NI Protocol), slew of tier 1 economic data, the BoE and an emergency budget all within the next two weeks or so.
As for her cabinet press reports today suggest that Sunak will not find a seat around the cabinet table, and given he polled 43% of the membership and Truss’s victory margin was the narrowest since the membership had the final say, the decision doesn’t look like doing much to unify a rather fragmented party. I guess she has bigger fish to fry. I post Politico’s take down below.
Markets wise UK 10y gilts hit their highest level yesterday with them hitting 3% for the first time in 8 years and the spread versus its German counterpart to above 140bps an extension last seen back in 2015. The BoE’s Mann was on the tapes yesterday calling for forceful action in the coming meeting with 75bps now firmly the base case for markets.
On FX a relief rally for GBP with some uncertainty taken out of the market with Truss’s win and the chatter about the relief package. However with all the risk events on the horizon still looks like a sell on rallies to us.
The Day Ahead
Post Labour Day the traditional “back to school” trades start to get touted around the street but this year feels different with so many spinning plates out there the theme seems more all about keeping your head above water.
The final US services PMI read for Aug expected to show more deterioration and the non-manufacturing ISMs which although seen lower look set to remain well above the 50 line.
Also I’d imagine a lot of price cap and Russian oil headlines as well as in the UK names dribbling out as a new cabinet starts to form.
Early tomorrow we get GDP growth data for q2.
One final point I post below an interesting article from the FT regarding US housing which argues, a point we have made several times previously, that its a canary in the coal mine for the jUS labour market and with the recent inventory build we have seen of late in the US we could see an unemployment rate hitting 5% over the next 18 months or so. It also argues that like the RBNZ potentially the Fed should start to bring the housing sector into its policy mandate portfolio. One for the future.
Finally one last article below as Argentina introduces a new currency the Soy$. Interesting development and worth a read and watching.
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Tuesday
US S&P Global Services PMI Final Aug consensus 44.8 vs previous 47.3 (14.45 BST)
US ISM Non-Manufacturing PMI Aug consensus 55.1 vs previous 56.7 (15.00 BST)
US ISM Non-Manufacturing Prices Aug previous 72.3 (15.00 BST)
Early Wednesday
Australia GDP Growth Rate QoQ q2 consensus 1% vs previous 0.8% (02.30 BST)
Good luck.
UniCredit - Sunday Wrap
Ecoinometrics - Ecoinometrics - The real impact of quantitative tightening
Mish Talk - Huge Stagflation Risk In Play on the Midterm Election Results
The Commodity Report - The Commodity Report #67
Notayesmanseconomics - 2022 and 23 look like being years led by energy based economics
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UK PM
UK in a changing Europe - The Johnson legacy: the economy
Politico - London Playbook: Liz, meet Liz — Who’s in and who’s out — Spotted at the victory party
ECB
FX Macro Guy - ECB Crib Sheet
Jens Nordvig - Tweet thread
European Energy Crisis
Tracy Shuchart - Russian Oil Price Caps
BoJ
FX Macro Guy - BOJ guide tweet
US Housing
Ethereum merger
Soy $
Binance
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Back to a choppy, bad trading environment this week I think.