Weekly Note 2022.09.12
Coming back from ‘Chuseok’ in Korea where we’ve just had a long weekend break with bank holidays on the Friday and Monday. Chuseok is a mid-Autumn festival that traditionally celebrates a bountiful harvest which in modern times, is about family and extended relatives getting together, catching up and having plenty of (fattening) food. This weekend I spoke to a few relatives who were interested in popular stocks as well as crypto, and with Chuseok being celebrated on the eve of the Autumn full moon, I couldn’t help but having a few quiet jokes to myself about “to the moon” memes and references.
This does tie in with a few thoughts I’ve had about markets this weekend however and the direction it is projecting for the coming week — UP, expecting last week’s momentum to have some follow through this week up until quad-witching where there is $3 trillion notional of options rolling off this Friday. As a close friend and colleague once said to me long while ago — meme stocks (or shitco’s as I like to call them) rallying is a good indicator of BTD sentiment, and I think he makes a good point that is fitting to the kind of action we are seeing now.
LAST WEEK’S ACTION
A complete reversal of prior week’s selling in equities closing around prior week highs; UST futures continues to extend lows, Energy futures trading heavy while Precious metals and Food commodities gained. USD was softer on a more positive sentiment while JPY weakness continues to follow the weakness in bonds.
NEWS HEADLINES
US
- Conflicting Surveys Paint Mixed Picture of Services Providers (WSJ) — ISM said services sector grew faster in August than in July, S&P Global said services sector shrank faster in August than in July due to weak demand. Inflation Showed Some Signs of Easing in August (WSJ) — Prices fell for gasoline, airfares and lodging, though food and other costs kept climbing; Oil Prices Slump as Recession Fears Grow (WSJ); Jobless Claims Fall for Fourth Straight Week (WSJ). Heat Wave Hits Supermarkets’ Produce Sections (WSJ) — Heat is hurting quality and availability of lettuce, berries; retailers seek new suppliers, scale back offerings of lower-quality produce
- A Strong Dollar Is Front and Center for Wall Street (WSJ) — Investors are increasingly concerned that the rising U.S. currency will strain other economies; Zoltan Pozsar Sees a New Dollar Regime. His Longtime Collaborator Disagrees (BBG) — pushing a vision of a burgeoning monetary order that he calls Bretton Woods III, “I think commodity prices can go much higher from here, And a dollar can get devalued in terms of commodities in that sense”.
- Outlook for Tech Stocks Darkens After Rocky Stretch (WSJ) — A rally in technology shares helped the stock market snap a three-week losing streak. There are already signs that reprieve may be short lived. Investors are bailing out of technology-focused mutual and exchange-traded funds at the fastest clip since early February, when the tech selloff was first intensifying, they yanked about $2.4 billion from such funds in the three weeks ended Wednesday. Tech Rally Haunted by ‘Palpable Fear’ of Chip Industry Weakness (BBG) — Technology stocks are treading on shaky ground despite last week’s rally as chipmakers signal more trouble may be ahead in an industry notorious for its booms and busts. Biden to Formalize Curbs on Chip Exports to China, Reuters Says (BBG).
- Fed’s Powell Affirms Need to Act Strongly on Inflation (WSJ) — Central bank officials haven’t pushed back against market expectations of third consecutive 0.75-point rate increase later this month; Fed’s Waller sees ‘significant’ rate hike this month, backs data-dependent approach (CNBC) — ‘Inflation is far from our goal, so more action is needed.’He also said policymakers should stop trying to guess the future and instead stick to what the data is saying; Fed’s George Says Central Bank Must Press Forward With Increases (WSJ); WSJ Interview With Cleveland Fed President Loretta Mester — when I think about data dependence, it’s the group of data, and how it informs your outlook and the risks around the outlook. My view on policy is not necessarily the terminal rate being — because my SEP was around that — but it has brought it forward to thinking that we’re going to need to move a bit faster than I thought to get to that rate, given the persistence that we have in inflation. I don’t foresee us cutting rates next year. I think going a little bit above 4% by early next year and then holding it there. I thought it [Powell at Jackson Hole] was a very strong speech. And I think it was exactly the right message. Treasuries Suggest Fed Can Tame Inflation Without Killing Growth (BBG) — Market-based inflation expectations are ebbing back toward 2% Expected peak in central bank’s policy rate remains below 4%. “If inflation comes down to what breakevens are pricing today, then a soft landing is possible,” said Rick Rieder.
EUROPE
- ECB Raises Interest Rates by a Historic 0.75 Point (WSJ) — Rising borrowing costs will likely increase the risk of a slide into recession for Europe, whose households and businesses are wrestling with surging costs and sagging confidence. Euro Climbs to Three-Week High on Ukraine Gains, Rates Outlook (BBG); European Stocks Extend Gains as Focus Turns to US Inflation Data (BBG).
- European Manufacturers Reel From Russian Gas Shutoff (WSJ) — Europe’s energy crisis has left few businesses untouched, from steel and aluminum to cars, glass, ceramics, sugar and toilet-paper makers. Some industries, such as the energy-intensive metals sector, are shutting factories that analysts and executives say might never reopen, imperiling thousands of jobs; France, Germany and Other EU Nations to Advance Minimum Tax (WSJ) — Five European Union countries said they would press ahead with the implementation of a 15% minimum tax on large companies as soon as next year, despite a veto by Hungary; EU Ministers Call for Urgent Push to Intervene in Energy Market (BBG) — European Union energy ministers called on the bloc’s executive arm to devise urgent measures to tame the price of gas and get liquidity to traders hit by massive margin calls, as the energy crisis spreads financial distress.
- UK Economy Recovers Slower Than Expected From Bank Holiday Slump (BBG) — Industrial production and construction are both shrinking, Another day off on Sept. 19 may tip economy into recession; UK economy stagnates as cost of living crisis hits spending power (FT).
- Queen Elizabeth II, Britain’s Longest-Reigning Monarch, Dies at 96 (BBG); U.K. Begins Long Goodbye to Queen Elizabeth II (WSJ); King Charles III Formally Proclaimed U.K. Monarch With Pomp and Ceremony (WSJ); A New King and Prime Minister in Troubled UK (BBG); King Charles seeks to fortify UK with tour of nations (FT); Ardern Expects New Zealand to Eventually Become a Republic (BBG); Queen’s death reignites debate in Australia about role of monarchy (FT); Efforts to End Monarchy in Former Colonies Could Pick Up (WSJ).
- Ukraine’s Gains Deal Russian Forces a Heavy Setback (WSJ) — Ukraine’s military said Sunday it was recapturing villages in the area around Kupyansk and Izyum, two cities that Russian forces fled Saturday as Ukrainian troops advanced on them. Those two cities had been central to a key war goal of Russian President Vladimir Putin: to seize full control of Ukraine’s eastern Donetsk and Luhansk regions, together known as Donbas. Russian forces have used Izyum as a base to strike other towns in the area. Russia to press on ‘until all the goals’ are achieved in Ukraine, Kremlin says (FT).
ASIA
- Yen Traders Eye Further Official Warnings, Border Opening Moves (BBG); Renminbi heads for record annual fall against dollar (FT).
- Typhoon Muifa Heads for Asia’s Largest Port of Shanghai (BBG) — Asia’s largest container shipping hub may face another major storm as Typhoon Muifa bears down on Shanghai and nearby Ningbo. The storm follows close on the heels of Super Typhoon Hinnamnor, which brushed past the vital shipping hub last week, temporarily closing Shanghai’s major container port of Yangshan; China’s festival travel drops amid COVID curbs (RTS); Xi to meet Putin in first trip outside China since COVID began, article with video (RTS); China’s Plan to Revise Constitution Could Enshrine ‘Xi Thought’ (BBG); China emerges as IMF competitor with emergency loans to at-risk nations (FT).
EQUITIES
US particularly the Nasdaq led the recovery in global equity sentiment…
MSCI World is eyeing a test of the trendline with the ex-US chart (rhs) suggesting gains could be limited for the broader market…
Nasdaq printed a bullish engulfing on the weekly chart pointing to a potential return to the 13k area…
There is a lot of resistance ahead however on the Daily chart…
And $3 trillion of options rolling off this week…
And as it is quite often the case with OPEX, it tends to mark a reversal in the recent trend. [Note: this chart has not updated but we are now close to ‘Zero Gamma’ levels with SPX closing well above the 4k mark last week]
COMMODITIES
Commodities rebounded last week led by non-Energy. Market seems to be less concerned about a hard landing while a softer USD helped to support the rally.
RATES
US inflation breakevens have continued lower but its starting to coalesce around the 2.5% mark.
UST’s continued to stay under pressure with yields up across the board last week mostly driven by the rise in real (TIP) yields.
Rising yields was one reason I was surprised by the strong rebound in stocks last week but with inflation expectations moderating with more hawkish messaging from fed members, I’m inclined to interpret this as the market being encouraged by Fed’s enhanced credibility in bringing inflation down and to the extent of possibly achieving a soft-ish landing. This is also reflected by the market now pricing in 25bps of cuts next year down from 50bps of cuts a few months ago (still calling a bluff on Fed comments that they see no cuts next year).
CURRENCIES
I noted in the one of chat groups that I was observing a good amount of pro-European flows in Equities and Currencies, and the outperformance of European FX is clearly visible on this currency index view.
- USD — looks set to give back some strength as global sentiment gradually recovers, especially if CPI comes in softer this week.
- JPY — still not a long! I still see long JPY ideas and trying to anticipate the BOJ caving in being discussed and there really isn’t anything to suggest global yields will broadly come down nor the BOJ will intervene.
- EUR — is still a sell on rallies imo. EURUSD has reached a critical area today (Monday) and is on course to print a daily reversal bar and I don’t think USD will give up much of its gains against the Euro. Thus I think EUR shorts is best expressed via the crosses given the improved sentiment and commodities rebounding, such as EURCAD EURNOK EURSEK and possibly EURMXN.
- High-beta FX — CAD NOK SEK are the most attractive especially considering that the RBA and RBNZ are considered to be nearing the end of their tightening cycles. Last week I tweeted that AUDNZD could be following the downtrend in rate differentials lower, but this is already looking like a very wrong idea. I’m now coming to the view that AUD is simply benefiting from the huge improvement in their Terms of Trade via Natural Gas exports and China still continuing to purchase industrial metals.
That’s it for this week. Keeping it short as I want to catch up with the Monday action!
Have a great week trading.
