The Morning Hark - 8 Nov 2022
Today’s focus …US Mid-terms and speaking of battlegrounds its CZ v SBF to the death but its hardly Tyson Holyfield?
What do the Midterm results mean for the economic outlook?
As the results feed through, follow up-to-date economic analysis on Harkster’s dedicated "US Midterm Elections" feed. It already includes pieces from Fortune, Axios, RIA Advisors, WSJ, Coindesk, The New Yorker, Bond Buyer, FiveThirtyEight, the FT and many more.
All prices are at 7.40 GMT, with changes reflecting movement from midnight GMT
Oil - Brent and Crude January futures off smalls overnight in Asia, with the pair currently trading at 97.70 and 90.50, respectively. Nothing of note over the last few sessions as the usual recessionary fears and China covid stories are offset with supply worries surrounding the Russia price cap.
EQ - Indicies mixed in Asia with the Hang Seng off smalls at 16,554 with further covid woes this time out of the global manufacturing hub of Guangzhou. However, the Kospi and Nikkei futures fairing better, currently trading up at 313 and 27,863, respectively.
The Nasdaq and S&P off smalls overnight in Asia trading now at 3809 and 10,992 respectively.
The US indices enjoyed a better day yesterday as predictions point to Republican gains in the mid-terms, which is seen as giving risk a boost at least in the short term.
Gold - Gold Dec off smalls at 1672 overnight in Asia. Not much to add here with the range remaining with a topside target at 1700 with 1650 remaining the support and pivot below. If you really want a micro trading pivot within that range, then 1675 looks like the place, but that’s only if you really want something to do.
FI - US yields subdued overnight in Asia with the US2y currently at 4.72% whilst the 10y at 4.22%.
European yields continue to trade in a subdued manner with the German 10y yields trading currently at 2.337% and similarly Italian 10y yields at 4.477%.
UK gilts up smalls with 10y yields closing at 3.632%.
FX - The USD recovering somewhat in Asia with the USD Index currently up smalls at 110.50 after its sell off yesterday as risk continued to rally to start the week. All the majors a touch softer from yesterday with USDJPY, EUR and GBP currently trading at 146.93, 0.9988 and 1.1463, respectively.
Others - Bitcoin and Ethereum suffering as the CZ/SBF spat continues and ripples out into the wider market. Both down over 5% at 19,804 and 1485 respectively. I discuss the spat in more detail below.
US Mid-term Elections.
I repost our mid-terms preview below if anyone missed it yesterday, as well as adding additional articles at the bottom, which go into the elections in more detail. The Vox and The NewYorker articles, in particular, are worth a read. Today we look at the timelines of when to expect/or not some results and the key states where the election will be played out.
Timeline wise from a European point of view, we should start to get the East Coast votes filter in around midnight (19/20.00 ET). Early signs of the Republicans doing well, or otherwise, could come in races where that are meant to run the Democrats close like the Senate seat in North Carolina.
By 3 am (22.00 ET) the Midwest will have closed, and if the Republicans are doing well, some media outlets may want to jump the gun and predict a victory. If, however, it’s still close as the clock moves over to the West Coast we could be involved in another drawn-out US election process that could tip over into the weekend and beyond.
Remember, some states allow votes to be counted as long as they have a post mark of the day of the election so not much point in holding your breath if it’s close in those states. Looking back at the 2020 election, 16 states had not called as of midnight ET on the day of the election. Indeed Pennsylvania, one of the key swing states, did not call until several days after the election so it could be a long drawn-out process especially if it is close. Georgia and Arizona, the other key battlegrounds for the Senate, had a similar drawn out process in 2020 with them taking up to 10 days post election to call.
Some other things to look out for. Republicans generally have a majority in the “in-person voting” so quite often take leads which are then whittled away by the larger proportion of mail voters who tend to be Democrats. So beware of the early predictions.
Georgia could potentially go to a run off, if neither candidate wins a majority of the vote, which wouldn’t take place until the 6 December.
As for the House, a potential bellwether is the North Carolina District 13. Being on the East Coast it’s an early closing poll so could give us a steer as to how things are shaping up. The district is split between urban city (tend to be Democrat) and rural counties (more Republican leaning) and as such the suburbs hold the swing votes. The two candidates are microcosms of what the core voters of each party are looking for a moderate Democrat versus a Trump backed conservative. Let’s see what falls.
Recounts automatically take place in narrow margin races generally 0.5% or less.
Then of course there is always legal recourse! Speaking of which Trump has overshadowed the last day of electioneering by stating that there will be a “big announcement” on 15 November. We wonder what that might be??
The Democrats currently control both chambers of the US Congress (the Senate is evenly split, but Vice President Harris casts the deciding vote in a tie). All 435 seats in the House of Representatives will be at stake as well as 35 of the 100 Senate seats. President Biden’s position will obviously not be at stake until the elections in 2024, so the Democrats will continue to control the White House but control of the two chambers is up for grabs.
The House is strongly favoured to go back to the Republicans but the Senate remains in the balance with Georgia, Nevada and Pennsylvania particularly close. The first two are Republican prime targets whilst Pennsylvania is Democrat target.
If the Democrats retain the Senate but the Republicans take back the House then the passing of legislation would become all but impossible leaving Biden a lame duck President. Further implications would be for the funding of federal government and the debt ceiling. The Republicans would lean towards spending cuts for any agreement on funding and debt ceiling lifting. Fiscal stimulus will certainly be curtailed which potentially has positive implications for inflation.
If the Republicans take both then expect some pretty ugly politics especially if it is a decisive victory which would raise the likelihood of Trump throwing his hat back in the ring for 2024 and all that that would entail. On the back of such an outcome political tensions will rise. With more power behind them, and especially the Trump loyalists, the Republicans could push to shut down the January 6 committee, take a run at Hunter Biden, bring immigration front and centre for the run up to the presidential elections and even try to flip the tables and impeach Biden for any number of reasons; his business links to Hunter, the botched withdrawal from Afghanistan, the immigration crisis amongst others. It’ll be a messy two years.
From a market’s prospective nothing in the near term to drastically change the landscape but if it were to be a Republican big win then the fiscal stimulus pipes would be shut down making it more likely we would see Fed rate cuts in the latter part of 2023 as it tries to stimulate a struggling economy. In addition releases from the SPR, or what’s left of it, would certainly dry up so oil should get a boost on this outcome.
On the other hand if the Democrats some how held onto their majority, and even increased it, then speculation would grow that they would embark on more fiscal stimulus to bolster their “Build Back Better” agenda. That would suggest the markets pricing in higher yields and subsequently a higher USD with a higher peak in Fed Funds.
I post below a selection of articles on the US mid-term elections, from Harkster, which go into greater detail the various potential outcomes and what bearing they might have on the political landscape and the markets beyond. Remember to log into the app for lots more great reads across all the important issues that are currently driving the markets.
The situation, unsurprisingly for crypto, is moving fast. After yesterday’s tweet by CZ, disclosing their intentions to sell their FTT tokens, the war of words has escalated further. Alameda and SBF responded with the usual “nothing to see here” rhetoric, with the Alameda CEO showing CZ at $22 bid for his holdings (a fair market price at the time) and SBF tweeting out a “were all friends here” and “lets build the community” warm fuzzy type olive branches as well as denying all problems.
Certainly, the bank run numbers would suggest fear is in the air with roughly $500m flowing out of FTX and into Binance over the last few days. The token Sol, which Alameda had significant holdings in, has sold off 25% in the last few days in what seems a liquidation for support of the mothership. The mothership itself is down 33% and now well through the $22 “floor” from yesterday trading now around $18 having at one point touched $15.
I post at the bottom an excellent ZeroHedge piece which goes into greater detail and also Miles Deutscher’s twitter thread which is even better for more detail on the timeline and some of the underlying numbers involved.
Crypto, as we know, is very tribal not only as a sector to the outside world but also within it and this is a further example of this behaviour with Twitter divided as to who is the “good guy” in all this. Ultimately you have a big beast owner of one opaque exchange trying to make another big beast’s opaque crypto conglomerate go into insolvency. Some may say that what goes around comes around and sadly this “rooting” out of the weak is an all too familiar financial markets tale. In crypto, it always seems to be more brutal as it’s not so much the companies, currencies, countries, etc that are being rooted out but the personalities themselves. They love the publicity on the way up but not so much on the way down, I guess.
One thing for sure this kind of behaviour is a sure fire way to erode further the trust in the sector and increase the chances of more draconian regulation coming down the pipe. Well done guys!
On a lighter note, CZ v SBF in a playground scrap wouldn’t exactly distract many from their playground “jumpers for goalposts” football games.
WSJ article continued the China hokey cokey story with reports that they were considering steps towards a reopening after 3y of restrictions. However, the timeline was no cheer for the markets, given it was touted as the end of next year. Again with cases hitting 6m highs, winter coming and a general lack of natural immunity are they going really down this road anytime soon?
Other news out of China was President Xi’s trip to Saudi Arabia, which is touted for mid December. Seen as a further snub to the US and potentially a realignment of the new world order. Remember the article I posted a week or so ago regarding the breakdown of globalisation and the return to a more tribal/politically aligned trading world. Potentially further steps towards that and again a China reopening isn’t going to benefit the West to such an extent as it has done in the past.
The latest UK fiscal package lotto number is now reported to be £54bn. The latest raid is meant to be focused on inheritance tax but there appears to be some “giveaways” in prospect with pension and benefit increases to rise in line with inflation.
The Day Ahead
Little of note on the day with September retail sales out of Europe, which will hardly turn the dial. In the early hours, we have the Japanese Tankan for November and China October CPI which is expected to show some moderation in the yearly figure.
Also, some central bank speakers and, of course, the US mid-term elections.
FXMacro Guy keeps on giving and I include his weekend tweet with some reading recommendations for the markets. I can speak first hand that there’s some great reads in there so well worth a look.
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EU Retail Sales MoM Sept consensus 0.4% vs previous -0.3% (10.00 GMT)
Japan Reuters Tankan Index Nov previous 5 (23.00 GMT)
US Midterm Elections
Enria, Nagel (07.15 GMT)
Enria (08.40 GMT)
Wunsch (17.30 GMT)
Pill (09.00 GMT)
China Inflation Rate MoM Oct consensus 0.3% vs previous 0.3% (01.30 GMT)
China Inflation Rate YoY Oct consensus 2.4% vs previous 2.8% (01.30 GMT)
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FX Macro Guy - Outlook for Week 45/2022
Pepperstone - A traders’ week ahead playbook – China and US CPI the core trading themes
Christophe Barraud - Week Ahead: U.S. Midterms, U.S. CPI, BOE/ECB/FED Speakers, Singles’ Day in China
Blain's Morning Porridge - US Mid-Terms the big issue this week – and they don’t bode well for a bounce in stocks or bonds.
Discover more market commentary & research from 500+ curated sources on Harkster →
FXMacro Guy Weekly Review and Daily Tweet
Substack - Outlook for Week 45/2022
Twitter - Top 10 trading books
US Markets and the Mid-terms
Zero Hedge - Morgan Stanley's 3 Keys Takeaways For Investors From Election Week In America
Zero Hedge - Republicans Will Sweep Both House And Senate: Stifel
Axios - Democrats risk losing 100% winning record in Texas' 28th District
S&P Global - US MIDTERMS 2022: Makeup of next US Congress weighs on permitting reform push
The New Yorker - Why Republican Insiders Think the G.O.P. Is Poised for a Blowout
Vox - We won’t know all the midterm results on election night. That’s normal.
Zero Hedge - Top 10 House Races To Watch On Election Night
@tedtalksmacro - FTX vs BINANCE
Zero Hedge - Cryptos Plunge As FTX-Binance Battle Escalates
@milesdeutscher - Here's how it all went wrong for SBF and FTX.
Discover more market commentary & research from 500+ curated sources on Harkster.
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