The Morning Hark - 7 Sep 2022
Today’s focus ……JPY and CNH continued weakness, oil slip, Fed and BoE speakers to the fore.
All prices are at 7.35 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures down over a percent again in Asia currently trading at 91.60 and 85.10 respectively as the sell off continues. The OPEC+ production cut was faded and some yesterday as oil took a nose dive. All the usual excuses were rolled out with China Covid restrictions, the rampant USD and global recessionary fears as the JP Morgan global composite PMI went into contraction. As we have said frequently of late volumes are poor at best, conviction is dazed and confused with top and tail option strikes being put on and open interest continues to fall. All in all a recipe for extended moves and if risk remains on the backfoot oil looks vulnerable.
EQ - Equity markets show a sea of red in Asia continuing the sell off we saw in the US session yesterday. The Nikkei, Hang Seng and the Kospi currently trading at 27,497, 18,894 and 308 respectively.
The Nasdaq and S&P both down smalls in the Asian session at 12,004 and 3902 respectively.
First support for the S&P at 3890 then 3860 with near term resistance into 3920.
The sell off yesterday was started on the back of the stronger than expected ISM non-manufacturing print which saw US yields spike higher and weighed on stocks and especially the tech sector.
Gold - Gold Dec futures continuing their decline overnight in Asia down smalls at 1708 knocking on the door of the year’s lows. Support still lies with the year’s low around the 1700 level but feels only a matter of time. Topside remains that noisy zone of 1750/55. Gold can’t get a break with the strong USD and high yields and that cycle has to break for any relief for the precious metal. 1690 then 1650 seem to be the destinations of choice.
FI - US yields took a breather overnight as they consolidated close to their recent highs with the US2y and 10y yields currently trading at 3.49% and 3.33% respectively. The inversion slowly getting traded out. ISM data was the catalyst for the rally which tipped into stocks and the USD.
European yields followed the US markets closing at 1.641 and 3.95 for the German and Italian 10y yields respectively. However the UK lead the way in Europe with a strong rally in yields with the 10y touching levels last seen back in 2011 and closing at 3.10%.
FX - The USD continues to test the patience of the monetary authorities around the world with the USD Index pushing ever higher to fresh highs. It currently trades at 110.50 having touched 110.69 earlier in the session. The JPY and CNH suffering with the JPY continuing to weaken at an alarming pace having touched 144.38 earlier in the session. It currently trades a touch above 144. This year has seen a 26% decline in its value as the BoJ continues to defend its YCC policy and again increased its bond purchases overnight with an additional JPY50bn of ammunition added to the armoury. Again I refer to the excellent tweet from the FX Macro Guy below explaining the intervention rhetoric from the BoJ and where we are on that escalation path. It’s not far off physical intervention time but 150 looks too tempting for the markets.
Remember intervention from a central bank can be an effective tool but generally only for a short period of time. Coordinated intervention, when several central banks become involved, is a much more effective tool and certainly has more potential for turning the tide. The problem we have here is that the fundamental reason for the JPY weakness is driven by rate differentials and until such time the Fed signals a pause or pivot or the BoJ abandon their YCC policy the fundamental issue remains. As an illustration you only have to look at the forward market for USDJPY 1y which is trading at a 600 pip discount.
The other Asian victim is the CNH which almost met our 7 target overnight. The market was taken by surprise by the strongest on record fix beat versus the market’s estimate with a 454 pip miss but despite this it has been one way traffic as the CNH continues to weaken. We currently trade at a touch below 6.98. Once again it’s hard to see an end to this puzzle with US rates on the up and without a Fed pivot in sight.
Elsewhere more weakness from the majors with the EUR and GBP both on the backfoot again at 0.9902 and 1.1485 respectively. Unsurprisingly with risk taking a pounding AUD, NZD and KRW all lower at 0.6722, 0.6017 and 1384 respectively
Others - Bitcoin and Ethereum both joined in the fun yesterday with the bid stack getting filled for them both currently trading at 18,802 and 1523. Getting to interesting levels here in crypto. In Bitcoin 18,500 needs to hold or we see the recent cycle low at 17,600 fairly swiftly and probably take it out. Similarly for Ethereum where 1500 and 1420 are the corresponding levels. The merger may see a rally especially after the clean out we’ve had over the last few sessions but that merely looks a good sell opportunity.
Leading up to tomorrow’s meeting we had the ECB sources round of rumours with comments that whilst a 75bp hike is a bit more likely it is not the path of least resistance. Further more there were reports that Lagarde is in favour of 50bps rather than 75bps. It’s obvious that a considerable debate is still ensuing our view remains in the 50bp camp.
All the talk yesterday moved from relief package numbers to the strains appearing in the mechanics of the energy markets and in particular their trading operations. An Equinor, Norwegian energy firm, senior executive warned that European energy markets are at risk of grinding to a halt on the back of impending $1.5tn of margin calls unless European governments extend liquidity in order for the energy companies to continue to supply their commitments. Given the European clearing banks are the ones, in the main, that supply that liquidity for the market this is obviously a serious issue not only for the energy sector.
Yesterday’s non-manufacturing ISM came in slightly higher than expected and the reaction was probably exaggerated further as we had just had a weaker than expected S&P services PMI print. The contrast was stark to say the least with the ISM strongly in expansionary mode whilst the S&P was very much in contraction. The main differences in the surveys seem to be centred around utilities and public administration and as such that explains some of the divergence. Either way the market sided with the ISM take, probably the weaker side of the market, and went for it cementing more of a belief that the Fed will go 75bps in a few weeks.
Bank of Canada
BoC later today and although 75bps is expected out in the wings there are some looking for 50 or a further 100bp hike. Policy statement wise no matter the outcome of the magnitude of hike we would expect a further hawkish statement with a nod to further hikes on the way
New PM Truss has been busy with her broom late into the evening yesterday as she pretty much swept out all Sunak supporters from around the cabinet table and installed her loyalists into the seats of power. Well she’s laid her cards on the table whether in a show of strength or a politically naive first step time will only tell. As we said yesterday she hardly had a resounding mandate for power but let’s see.
The numbers remain eye-watering after the leaked £130bn household relief package she is claimed to be supporting a further £40bn for businesses to keep the lights on. Let’s face it no-one likes drinking their pint in the pub in the cold and dark and then having to stagger home in a darkened street. GBP still feels a sell on rallies to us.
The Day Ahead
Other than the price action the main focus today will be the slew of Fed speakers we get from the early afternoon onwards. More of the same I’m sure with strong labour market, CPI appearing to be in a better place but its not over yet, terminal rate in the 3.5/4% region and higher for longer all getting rolled out in one way or another. Obviously Powell’s speech will overshadow anything said today but still worth keeping an eye on. Will a further few percent sell off in equities temper the tune a touch? It would be a surprise but there’s a lot of things creaking out there.
Elsewhere the Bank of Canada rate decision, where the market expects a 75bp hike, will garner some attention. Some European data out in the morning but the market has more important things to focus on. Finally BoE Governor Bailey appears before the Treasury Select Committee amongst others and clues for the coming BoE meeting and whether 75bps is a realistic prospect will be much relished by the markets.
Early tomorrow we get GDP growth data for q2 out of Japan and the RBA’s Lowe speaks after yesterday’s 50bp hike.
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Eurozone GDP Growth Rate QoQ 3rd Est q2 consensus 0.6% vs previous 0.5% (10.00 BST)
Canada Ivey PMI s.a. Aug previous 49.6 (15.00 BST)
Bank of Canada Interest Rate Decision 75bp hike expected (15.00 BST)
Barkin (14.00 BST)
Mester (15.00 BST)
Brainard (17.35 BST)
Barr (19.00 BST)
Bailey, Pill, Mann and Tenreyro (10.00 BST)
Japan GDP Growth Rate QoQ Final q2 consensus 0.7% vs previous 0% (00.50 BST)
RBA Lowe Speech (04.05 BST)
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