The Morning Hark - 7 June 2022
Today’s focus …….PM Johnson survives for now, AUD hawkish surprise, global yields up trend continues
Daily roundup - all prices are at 7.40 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude August both up close to a percent in the Asian session to 120.45 and 117 respectively as they consolidate near their recent highs. Usual positive tones remain in play supporting the oil move with the relaxation of China’s Covid restrictions and already we are seeing a pick up in demand from the region. In addition, doubts still remain in terms of OPEC’s ability to reach their higher output target announced last week.
One further point in the commodity space is Bloomberg’s Commodity Spot Index measure which was up nearly 2% yesterday taking the index to a 40 year high driven by natural gas and wheat prices. Not encouraging news for the Fed.
EQ - Asia stocks took their cue from the US stock reversal yesterday, on the back of higher US yields, and traded lower. The Kospi down two percent at 345 whilst the Hang Seng slips a further percent to 21,400. The Nikkei however faired better flat on the day at 27,950 buoyed perhaps by BoJ Kuroda’s comments of unwavering commitment to “powerful” monetary stimulus. The US indices both continue their slide from yesterday down close to a percent with the S&P and Nasdaq at 4100 and 12,510 respectively. Not sure we’d like to see the S&P below 4050 at this juncture. Similarly, the Nasdaq below 12,200 opens up a move towards the recent lows.
Gold - Gold futures flat overnight at 1843. Gold suffered yesterday on the back of surging US yields and a subsequent pick up in the USD. Remember 1830 is the downside level we have in focus.
Whilst we are speaking about the metal sector there was bad news for the London Metal Exchange yesterday surrounding the nickel debacle which we wrote about frequently back in the spring. If you remember back in March, in the early days of the conflict in Ukraine, nickel spiked 250% higher causing several suspensions in trading and subsequently, after days of confusion, a cancellation of trades by the LME. Much criticism of the exchange ensued especially surrounding large trades placed out of China and alleged cronyism over the decision to cancel trades. The LME has denied all accusations but the issue remains and it now finds itself facing two large lawsuits over its handling of the debacle. Jane Street, a market maker, yesterday joined the activist hedge fund Elliot Management in its pursuit of damages totalling close to half a billion dollars (I post a more detailed read below).
FI - US yields remained bid in the Asian session with the US10y futures yields trading at 3.05 consolidating the gains we saw in yesterday’s afternoon session. The 3% handle was captured with aplomb and the highs of the year, towards 3.20% look very much open as the next target. The 10y German Bund yield continues to be the one to watch as it again closed higher at 1.323.
FX - The USD surged yesterday with the higher yield move with USDJPY obviously taking a large part of the strain. It’s now trading at 132.70 and has posted a 20 year high towards 133. The move was met by verbal warnings by Japanese officials that FX must reflect fundamentals and that sudden moves in FX are not desirable. The usual rhetoric from the Japanese which will at best slow the momentum but will have no lasting effect until such time as there is physical intervention which still looks a long way off for now. One further point is that with the rate differentials between the two countries as wide as they are, in relative terms, and only going to get wider the price action, could be argued, actually does reflect fundamentals. The broader USD Index now trades at 102.69 with the risk proxy currencies suffering with NZD down half a percent at 0.6460 although the AUD’s move lower was less severe supported by the hawkish RBA up smalls at 0.72. EUR back through 1.07 to 1.0690 and GBP at last lower with all the political uncertainty. It spent much of yesterday rallying before facing the inevitable and weakening into the mid 1.24’s.
Others - Bitcoin and Ethereum followed stocks lower in the afternoon session yesterday before taking a big hit with one of those Asian opening candles down that we often highlight. Again a fairer to push above 32,000 flipped sentiment and momentum seems to have built up in Bitcoin as we broke the downside levels we spoke about at 30,600. As has been the pattern of late its Ethereum that looks the sickest as it continues to be seen as a DeFi proxy, given a lot of DeFi protocols are written on top of the network, post the Terra/LUNA crash in early May. The pair trade now at 29,500 and 1,755 respectively.
The RBA surprised the markets with a 50bp hike in rates to 0.85% claiming that “inflation is likely to be higher than we expected a month ago” and that it expects “to take further steps in the process of normalising monetary conditions”. The market reacted sharply with the Australian OIS curve pointing to a further 200bp of hikes by the end of the year. Seems a tad aggressive but with yields pushing higher globally who’s to doubt it. The AUD spiked higher but succumbed to the US yield play and stronger USD.
Well we got the vote of confidence in the UK and PM Johnson survived but with far from a ringing endorsement of his leadership. Playing by the rules that’s him safe for another year in terms of confidence votes. However, history tells us that levels of support as low as that mean it’s going to be a tough time if he decides to limp on. Previous PM’s May and Major had a higher level of support in their confidence votes and limped on for a few months before bowing to the inevitable. With two by-elections coming up in a couple of weeks time, which are expected to be major losses for the Conservatives, perhaps the pressure will be too much by then and he will be forced to step down. Or does he take the nuclear option and take the country to the polls to get a seal of approval from the people? Good luck with that. What is guaranteed for now is a rash of speeches and policy announcements to deflect attention and why not throw in a reshuffle of ministerial seats as well to keep the press busy. Either way, a lot of political uncertainty will hang heavy on GBP. Couple this with the BoE in a tight spot trying to balance between fighting inflation and staving off a recession, the poor fiscal backdrop with the Covid overhang and uncertainty surrounding the Northern Ireland protocol after Sinn Fein’s win in the local elections and it doesn’t look pretty. Overnight as a sharp reminder of the state of play for the UK consumer the UK BRC measure saw May like for like sales falling 1.5% YoY.
📅⠀The main highlights for the day ahead in terms of data and speakers:
EU S&P Construction PMI May - previous 50.4 (08.30 BST)
UK S&P Services PMI May - consensus 51.8 vs previous 58.9 (09.30 BST)
Canadian Ivey PMI - previous 66.3 (15.00 BST)
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📚⠀Articles discovered on Harkster or social media exploring some of the current key macro themes in more depth:
LME and Nickel
🔥⠀Top 5 trending links on Harkster yesterday:
Prometheus Research - Week Ahead
Stuck in the Middle (Mr Blonde) - Stuck in the Middle
Pinecone Macro Research - Supply is Healing 🔒
Pepperstone - Key inflection point for the ECB at this week's meeting
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