2022.03.14 Weekly Note

FED and BOE on deck — sticking to the script…

Markets are jittery and experiencing some extreme volatility as a result of the Russia-Ukraine impact on global politics, trade, and inflation. Also China, the only large economy that has been easing (something I’ve long before noted being nothing more than a ‘Band-Aid’, rather than providing a real stimuluatory impulse to the global economy) has imposed Covid lockdowns in many cities, while record daily case numbers have been reported in a number of countries as it still continues to shackle global recovery back to the pre-pandemic status quo.

NEWSFLOW

MARKETS

‘There’s just no way’: Analysts say alternative supplies wouldn’t be able to fully replace Russian oil (CNBC) Vandani Hari says only some Russian supplies could be swapped with that of OPEC members, but they would have to “simultaneously stretch themselves to their maximum capacity.”

Russia’s invasion to have ‘enormous impact’ on world food supplies (FT) Consumers around the world will feel the “enormous impact” of Russia’s war on Ukraine through sharply higher food prices and significant disruption to agricultural supply chains, according to industry executives and leading European officials.

Russian default no longer ‘improbable’, but no trigger for global financial crisis- IMF (Reuters) Georgieva told CBS’s “Face the Nation” program that sanctions imposed by the United States and other democracies were already having a “severe” impact on the Russian economy and would trigger a deep recession there this year.

China developers: record junk yields keep pushing limits (FT) Credit rating agencies continue to push Chinese developers on to the junk pile, as rating cuts continue. More companies, previously not seen as high risk, are surprising markets with bad news bringing another debt crisis there. This signals that mass defaults are coming.

Beijing weighs nickel rescue deal for billionaire owner of Tsingshan (FT) Beijing is exploring a plan to rescue the billionaire owner of Tsingshan Holding Group from billions of dollars of potential losses after a backfiring bet brought global nickel trading to a halt.

Big investors to shift billions from bonds into stock markets (FT) Declines for stock markets since Russia invaded Ukraine late last month will require large institutional investors to rebuild equity holdings in their portfolios to ensure these positions are consistent with their long-term asset allocation strategies. The rebalancing, which is expected to take place as the first quarter draws to a close at the end of this month, will send up to $230bn shifting from bonds to stocks, according to JPMorgan Chase.

UKRAINE WAR

Sky turned red’ as missiles hit Lviv military base (BBC) Russian jets fired around 30 cruise missiles at the site, also known as the International Peacekeeping and Security Center, at least 35 people were killed and 134 injured in the attack on the Yavoriv base; US journalist Brent Renaud is shot dead in the town of Irpin outside Kyiv, the first foreign reporter to die in this conflict.

Moscow says it killed ‘up to 180’ foreign fighters in air strike near Polish border (Telegraph) “As a result of the strike, up to 180 foreign mercenaries and a large cache of foreign weapons were destroyed,” Russian defence ministry spokesman Igor Konashenkov said. Ukraine said only 35 people had been killed and 134 wounded in the attack.

The White House approves $200 million in arms and equipment for Ukraine (NewYorkTimes) The latest arms package, which officials say includes Javelin antitank missiles and Stinger antiaircraft missiles, follows a $350 million arms package that the Biden administration approved last month. Altogether, the administration has authorized $1.2 billion in weapons for Ukraine in the past year, officials said.

Russia threatens to attack western weapons shipments to Ukraine (FT) Russia has warned that it will fire on western armaments shipments to Kyiv, raising the risk of a direct military confrontation between Moscow and Nato during the war in Ukraine.

Russia counts on sanctions help from China; U.S. warns off Beijing (Reuters) Siluanov’s comments in a TV interview marked the clearest statement yet from Moscow that it will seek help from China to cushion the impact. But U.S. National Security Adviser Jake Sullivan said Washington was warning China not to provide it saying “we will not allow that to go forward and allow there to be a lifeline to Russia from these economic sanctions from any country, anywhere in the world”.

US and China to meet in Rome for high-level talks focusing on Ukraine (FT) Washington expected to raise Beijing’s refusal to condemn Moscow’s invasion of its neighbour

COVID…

South Korea, Germany, Vietnam account for 41% of weekly cases (UPI) South Korea gained a world-high 1,993,625 infections, a 44% spike in the past week; Germany set a daily record with 300,270 cases Thursday and added 1,303,308 cases at a 20% rise last week; Vietnam reported 1,108,498 new cases at a 35% increase; Also setting daily records in the past week were Austria at 49,323 Friday and New Zeland at 23,936 Tuesday.

Germany’s situation ‘critical,’ Lauterbach says (DW) Despite planning to further relax COVID-19 rules, Germany logged a record high number of coronavirus infections in 24 hours on Thursday, and a figure almost as high, 252,836 cases, on Friday.

Hong Kong leader vows more help for 300,000 residents in home quarantine as death toll surpasses Wuhan’s (SCMP) Chief Executive Carrie Lam Cheng Yuet-ngor sought to reassure residents on Sunday that the mainland’s support in tackling the city’s fifth wave of infections would continue and the supply of goods and resources would be unaffected.

China imposes new curbs amid worst COVID outbreak in two years (AlJazeera) China has placed about 17 million residents under lockdown, as virus cases doubled nationwide to nearly 3,400 and anxiety mounted over the resilience of its ‘zero-Covid’ approach in the face of the worst outbreak in two years.

China Dismisses 2 Mayors and Shanghai Closes Schools as Case Numbers Rise (NewYorkTimes) China’s National Health Commission announced on Saturday that another 1,524 locally transmitted coronavirus cases had been detected in provinces across mainland China. That was up from 1,100 cases reported a day earlier, and a couple hundred cases per day a week ago. The mayors of Jilin City and the Jiutai district of the city of Changchun have both been dismissed, the state-run Xinhua news agency announced on Saturday, without specifying exactly when the dismissals had happened. Both places have had rapidly expanding outbreaks.

LAST WEEK’S ACTION

USD mostly bid last week while EMFX continues to be surprisingly resilient despite another surge in major yields and weak risk sentiment; huge swings in commodities with the Nickel short squeeze being the big story last week which more than doubled in price in just two trading sessions!

EQUITIES

Global equities continues to look extremely weak and on current momentum and near-term outlook, I would not at all be surprised to see it slip another 10% or more lower.

There is no denying equity markets are very oversold and around some potentially attractive levels to start buying risk. But again, given that it may still be some time before the market finds some global macro positives, we appear set to head back into the thick of the late-2018 and 2019 ranges (thick White line).

For US equities, that might look more 2021 beginning levels (upper White line) or the pre-pandemic highs (lower) should Geopolitical tensions go up another gear or two.

Technically, US equities have traded through prior week low’s. The (arguably) very overvalued Growth and Larger-caps have been weakest while inflation-linked and defensive stocks have been more resilient.

SPX closing at 4204.36 and sitting heavy atop the 4200 handle where there is a huge block of dealer gamma puts it at another cliff-edge.

SPX ATM-vols have dropped off but remains elevated, while premiums for downside protection also dropped sharply — Skewdex at lows not seen since the Mar-2020 crash. Either the market is simply attempting to pick up value when sentiment is max bearish or, is very complacent about potentially more downside and medium-term outlook.

BofA B&B indicator from has been ticking down from 4.2 on Feb-17th, 3.9 on Feb-24th, 3.4 on Mar-3rd, and 2.9 on Mar-10th.

If I assume correctly that these readings are based on the prior day close, the latest 2.9 would have been taken after a +2.57% rally in SPX and +3.58% in NDX on Mar-9th, most of which reversed to closing only +0.81% SPX and +0.26& NDX above the Mar-8th close.

RATES

Credit cracking…9th straight week of big outflows from IG + HY bonds
EM capitulation…largest outflows from EM debt since Mar’20

Riskier bonds have been seeing consecutive outflows and looks to be rotating into PM’s TIPS and Government bonds amid stagflationary fears…

Yields shifted back up reversing prior week’s move and then some while the belly of the curve is getting progressive flatter…

Inflation expectations ramping again, but what’s interesting is the 2y2yf and 5y5yf inflation still continuing higher with the hiking cycle about to begin…

COMMODITIES

Bloomberg Commodities Index (Orange) vs DXY (Green, inverted)

The sharp reversal in commodities after going parabolic is signalling a breather. Meanwhile Dollar strengthening has caused a sharp divergence between the two so far this year which could support further reversion in as well the FED rate hike this Wednesday…

Precious metals is technically pointing to some weakness and could falter on some more hawkish messaging this week.

CURRENCIES

US10yr Yield vs DX

USD has been the strongest in G10 driven by some risk-off and US yields driving USDJPY and USDCHF higher. There is also some hints of stress in credit markets as evidenced by some capitulation in riskier fixed income assets and spread widening.

Looking at the index charts, USDJPY trend looks set to continue while CHF would probably be best faded at the higher end of trading ranges especially with some SNB intervention chatter…

Commodity-dollars, particularly the antipodes are looking overbought with some decently robust reversal bars…

EUR and GBP looking oversold where I’d consider the GBP to be fadeable of the two as Bailey’s downplaying of future rate hikes could get reversed. UK data has been very strong since the last meeting and should be in full support for a hawkish outcome at this week’s BOE meeting.

EMFX particularly ZAR and MXN has been surprisingly resilient but zooming out, it looks as though they could struggle to make progress above this region given the global stagflation outlook and rising US rates of which they ‘should’ be sensitive to. There is also risk of USD flight emerging in some EM regions which the tendency to catch on pervasively like wild-fire.

TRADE VIEWS/IDEAS

  • Staying short Nasdaq EURUSD and EURJPY — I’ve not taken any profits last week and have only been adding shorts particularly to EURUSD and NDX. I may live to regret it but my P&L and average prices are still massively healthy and still don’t see any reason to turn back on the trade.
  • Staying short AUDNZD and AUDJPY — This is still a small position I’ve been very slowly building a position into. Reasons have been outlined in previous weeks but to summarize the themes: AUDNZD a rates and policy divergence play, AUDJPY risk-off and commodities pullback while China sentiment has turned more negative.
  • GBPAUD short — swing trade for the week initiated earlier about 4hrs into the week. Mixing up the themes behind AUDNZD and AUDJPY trades with a hawkish BOE in mind this week.

Have a good week trading!

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