The Morning Hark - 8 Apr 2022
Today’s focus ……..ECB hawks, commodity pressures and the USD is king?
Daily roundup - all prices are at 7.30 BST with changes reflecting movement from midnight GMT
Oil - Both Brent and WTI futures up close to a percent for the session at 101.25 and 96.75 respectively. Oil took a breather in Asia after a further sell off in the European afternoon session. The IEA emergency release of oil stocks amounting to approximately a million barrels a day from May until the end of the year is weighing heavy on the oil price. Continued lockdowns in China also have a dampening effect through reduced demand. Two things to note on the flip side however are the need at some point for these stocks to be replenished and secondly the possibility of a Europeans ban on Russian oil imports which is still being debated in the halls of Brussels.
Elsewhere in the commodities space the travails of the LME continue with reports that inventories in the exchange’s warehouses have dropped to the lowest levels since records began over 25 years ago. Trafigura was widely reported to have taken out large quantities of its zinc deposits leaving the inventory of zinc stocks 60% down from mid March levels. This backdrop leaves the exchange susceptible to further short squeezes the like of which we saw in early March in the nickel pit. Adding fuel to the fire JP Morgan yesterday released a piece suggesting that commodity prices could go a further 40% as investors reallocate into the sector as an inflation hedge.
EQ - Very quiet Asian session for the equity markets with little change for the major indicies. Yesterday saw some interesting price action in the US with initially stocks selling off, testing the Nasdaq 14,400 level we spoke about yesterday, before a sharp reversal after the rejection of the move lower. Little of note news wise to validate the move. Next week will see the start of Q1 earnings season.
Gold - Futures flat on the session at 1931.
FI - Yields continue to push higher with the US10y close to its recent highs at 2.66. The US OIS curve is pricing in a very high probability of 50bp hikes for the next three Fed meetings taking us into the middle of the summer. The Fed then will have an almost two month break between the late July meeting and the one in September. I guess the market is thinking by front loading an additional 150bps by the summer break the Fed will have some time to assess the effect on markets and the wider economy such hikes will have. Remember too by August the full $95bn quantitive tightening program will most likely, markets permitting, have been fully phased in. Given the continued tightness in the labour market there will be little political pressure on the Fed at this point in its tightening cycle so why not get as much done as possible as quickly as possible. If ex Fed Dudley’s thoughts are correct and the Fed will tighten until investors start to suffer then, if this is indeed their remit, why would they dial down the 50bp hikes why not just keep going on that path?
FX - The USD remains close to its highs with the USD Index knocking on the 100 door. The EUR continues to trade softly and would have to test the 1.08 level for the Index to break through the 100 level. For context those are levels in the EUR last seen in the early days of the pandemic.
The other mover of note was the RUB which had a 7% rise with the continued demand for Russian oil and gas lending support to the currency. Some context to the move suggest its manipulation with volumes at a 10 year low exaggerating any move and the fact that the currency is not in a truly functioning market with Russia having blocked capital outflows form the country.
Others - Bitcoin is back in its nailed to the wall mode at 43,600 with little more to add.
The volatility measures for equities (VIX) and rates (MOVE) again trade independently. The MOVE backing off a tad to 122.67 but still remains at elevated levels and the VIX closed at 21.55. At the risk of sounding boring this gap remains a mystery.
Light on the news front out of Ukraine as Russian forces regroup in the East of the country and Kyiv starts to try and return to some form of normality. Peace talks remain sidelined and look hard to resume at present with the recently reported atrocities exposed in the wake of the Russian retreat. German Chancellor Scholz is in London and a joint commitment of more military aid is expected today from his meeting with PM Johnson. In addition the PM is expected to push his German counterpart on the banning of Russian oil and gas imports although how much his words will be heeded is another matter.
The ECB is worth having a look at today with the release of its March meeting minutes yesterday where the abiding theme was on the hawkish side. There were many references to upside risks to inflation and calls for immediate further steps towards normalisation. Stepping back and looking at the Eurozone state of play; we have unemployment around 7% which for Europe is historically low and inflation higher at 7.5% but yet rates are still negative and asset purchases are continuing. Optically it doesn’t look right but I guess a lot of European policies don’t look right! Obviously, the war in Ukraine is a strong headwind for the ECB to come out more aggressively but potentially the market is so focused on what is going on in the US space, and why not given the volatility, that the ECB is somewhat of an afterthought.
As we discuss above in FX the EUR is at extended levels and whilst understandably the USD is king at present a look at the EUR versus some its other peers (GBP, AUD) may be worth noting. One potential fly in the ointment (or opportunity to get EUR even cheaper) is the French presidential elections with the first round of voting on Sunday and polls beginning to narrow with Le Pen starting to close on Macron.
📅⠀The main highlights for the day in terms of data and speakers:
Canadian employment report at 12.30 BST. Previous 336.6k Consensus at 80k. Remember the Bank of Canada is on the horizon with its meeting next week and a high probability of a 50bp rate hike. Obviously any downside miss for the report will temper any enthusiasm for such a magnitude of hike but that is not our central case.
ECB speakers all on the dovish side of the debate with Panetta, Stournaras, Makhlouf and Herodotou all up.
Good luck and a good weekend to one and all.
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📚⠀Articles on Harkster and from outside exploring in more depth some of the themes above:
Bitcoin and tax season
MacroTactical Crypto - MacroTactical Crypto #15⠀
🔥⠀Top 5 trending links on Harkster yesterday:
Alhambra Partners - Goldilocks And The Three Central Banks
The BondBeat - overnight flows; "If Stocks Don't Fall The Fed Needs To Force Them" -Dudley; Japan 'SHEDS $50 bn bonds' in 10wks ...
Saxo Markets - Current views on gold, copper and crude oil
Christophe Barraud - What are Spreads Saying?
The Macro Strategist - The Macro Brief: Charts to Ponder Pt. 1 - Fed's Osprey, Junkman's Pullback and Gold's Warning
Discover more on harkster.com
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