Weekly Note 2022.08.29
The pivot that never was…
Apart from Kuroda, there was a very hawkish mood among Central bankers at the Jackson Hole symposium (summary of headlines) finishing off with Powell delivering a much needed warning of a market getting ahead of themselves. With the market stripped of any hope of a pivot by Powell, I struggle to see where a revival in bullish sentiment is going to come from…
I’ve had some feedback in recent months regarding my ‘lengthy’ news section to which I’ve said, not only is this first and foremost a journal for myself, summarizing the news is intended to serve as an easy future reference of everything influencing markets and what I consider a good journal needs whenever I need to look back on the charts/notes.
- Dow Falls More Than 1,000 Points After Powell Speech — largely wiped out the market’s gains since late July. “It appears investors were naively hoping for a Powell-pivot, but instead he doubled down on the Fed’s inflation-fighting credibility” (WSJ). Powell Heaps Pressure on Risk Sentiment as More Catalysts Loom — With further catalysts for volatility ahead — from the shutting of the key Nord Stream gas pipeline to Europe for maintenance to a ramp up of the Fed’s balance sheet rundown to crucial US labor data — caution is likely to be high after Friday’s post-Jackson Hole stock slide. The slump further shriveled a global bounce in shares from June bear-market lows that was predicated partly on bets of a Fed shift to rate cuts next year as growth slows (Bloomberg). Just as Wall Street Piles In, Tech Stocks Face Fresh Rates Storm — Investors fear the 10-year yield may rise anew to 3.5%-4% (Bloomberg). Bridgewater’s Jensen Sees Stocks, Bonds Dropping Up to 25% on Fed QT — Assets not pricing hits from Fed’s tightening and rate hikes, ‘Unfortunately the inflation will be more stubborn’ (Bloomberg).
- U.S. Consumer Spending Inched Forward in July, “Consumers are not retrenching” (WSJ). Inflation Eased in July, According to the Fed’s Preferred Measure (WSJ). U.S. GDP Fell Less Than Previously Thought in Second Quarter, Jobless claims eased slightly (WSJ).
- Republicans Still Favored to Win Back House Control but Outlook Tightens — Polls, nonpartisan analysts suggest Democratic enthusiasm strengthening heading into critical Labor Day stretch (WSJ). Biden Unveils Plan to Free Students from ‘Unsustainable Debt’ — relief that forgives as much as $20,000 in loans for some recipients (Bloomberg). Student Loans Highlight Democrats’ Divide in Tough Election Year — Progressives support plan, some moderates against forgiveness, Democrats equate debt cancellation to business tax perks (Bloomberg). Goldman Sachs estimates imply a modest 0.1 percent point boost to GDP in 2023 (Barrons).
- ECB Needs ‘Resolute’ Hike of at Least a Half-Point, Kazaks Says — Second-round effects are emerging, Latvian central banker says, “The increase needs to be strong and significant, and at the current moment, I would say 50 or 75 basis points” (Bloomberg). It’s Action Time for ECB With Weak Euro a Key Point, Rehn Says — ‘Significant’ hike in interest rates needed in September, Too early to publicly discuss quantitative tightening (Bloomberg).
- A Violent Stalemate Sets In as Battle Lines Harden in Ukraine’s East — Russia’s troops have been exhausted by grinding offensives and Ukrainian resistance, but despite a promised counterblow in the south, neither side is able to advance (WSJ). U.S. Pledges Another $3 Billion for Ukraine Defense, the War’s Largest Aid Package (WSJ). Finland, a Country Built on Military Self-Reliance, Prepares for NATO Collective Defense — nation that once prized neutrality pledges support for Ukraine against Russia and looks to build its role in alliance (WSJ). Russia Moves to Reinforce Its Stalled Assault on Ukraine (WSJ). Ukraine Grain Exports Surpass One Million Tons Under U.N. Deal (WSJ).
- European Energy Rationing This Winter Is Looking Less Likely (WSJ). Germany to Reach October Gas-Storage Target Already Next Month (Bloomberg).
- Goldman slashes British growth forecast, predicts Q4 recession (Reuters). Cost of UK’s Winter Triples as Energy Price Cap Leaps (Bloomberg), U.K. Energy Bills Set to Jump as Country Awaits New Leader — Energy regulator announces an 80% rise in energy prices, prompting promises of government help for consumers (WSJ). UK’s Thousands of British postal workers walk out over pay (Reuters). Staff at London’s Stansted airport to vote on strike over pay (Reuters). Strike by waste workers in Scotland fills streets with garbage (Reuters). Summer of Misery Was Just a Prelude of What’s to Come — Workers in schools, hospitals and courts are threatening to walk off the job in coming weeks, setting up more chaos this fall (Bloomberg).
- U.S. and China reach landmark audit deal in boon for Chinese tech companies (Reuters). Chinese state media lauds U.S.-China audit deal as ‘symbolic’ for ties (Reuters).
- Chinese Province Bordering Beijing Expands Covid Lockdown (Bloomberg). China’s Industrial Profit Falls on Covid-19 Measures, Bad Weather — A record heat wave and drought has prompted Beijing to offer massive economic support for power generation, agriculture (WSJ). The power crunch in China’s Sichuan and why it matters — Sichuan accounts for 30% of China’s total hydroelectric generation and it normally delivers a massive power surplus to the rest of the country. But it is now receiving electricity from other provinces after weeks of minimal rainfall and extreme temperatures in excess of 40 Celsius (Reuters).
- China Developer Bond Guarantees That Sparked Rally Gather Pace — A plan by Chinese authorities to provide state guarantees for some developer bonds is picking up steam, after helping to fuel one of the strongest rallies in the nation’s junk bonds this year (Bloomberg). China regulators tell banks to ramp up lending — the informal message, issued via phone calls over recent months to commercial, rural and even foreign banks, was to lend more money to productive businesses and put less of it in financial investments (Reuters). China Starts Stealth Fightback Against Powell’s Strong Dollar — Currency fixing shows strongest bias since February 2020, onshore yuan had touched a fresh two-year low Wednesday (Bloomberg), stronger-than-expected fixings for three days through Friday (Bloomberg)
- Dried-Out Farms From China to Iowa Will Pressure Food Prices — US crop tour reveals the damage done by severe drought, Lack of rain is also taking a toll on Europe, China and India (Bloomberg).
- OPEC President Is Open to Cutting Oil Production — Consensus is growing for an idea first proposed by Saudi Arabia that it could pump fewer barrels. The move toward reducing output comes as the U.S. and Iran inch closer to reviving a nuclear deal that would bring Iranian oil back onto the market, an outcome Washington hoped would depress the cost of energy (WSJ). [idea is to reduce by 2.9m bbl/day while Iran’s capacity is 2m]
- Emerging Markets Burn Through Currency Reserves as Crisis Risks Grow — Biggest drawdown since 2008 leaves little buffer against the rising dollar, surging borrowing costs and high food and energy prices(WSJ)
- Australian retail sales jump 1.3% in July, a sign of resilience (CNBC). Australia’s Wages Climbed 4.1% in July, New SEEK Index Shows (Bloomberg). Australian Business Backs Union Calls for More Pay Before Summit — wage price index growing just 2.6%, less than half the pace of inflation (Bloomberg).
Equities and Bond futures all finished below prior week lows, Energy and Food commodities trading around the highs, metals under pressure; USD holding strong and resilience in some commodity/high-beta FX.
Global equities was mostly lower last week as US and European markets caught Powell’s speech before close. It’s Risk-off red across the board in Asia to start the week.
MSCI World charts make a strong case for a retest of June lows…
SPX validated prior week’s reversal and NDX has confirmed a false breakout — very strong bearish signals…
German DAX and UK FTSE indices also convincingly signalling a local top…
Seasonality likely to put off any hopeful sentiment…
And sentiment has in fact been very bearish on ES with shorts piling up throughout the summer rally to levels not seen since the Covid crash.
Sentiment via options market also weaker than it was at the start of last week when vol spiked on Monday’s gap-down. Taildex and Skewdex both higher.
SPY gamma profile showing a big block of puts underneath last week’s close and US markets looking set to gap down at the open today and could begin the week with some accelerated selling.
400 in SPY and 4000 in SPX are key handles to watch for further downside, and given the big shift in momentum on Friday, it shouldn’t take much…
Agricultural and Energy futures keeping the uptrend in tact, Precious metals sold off as rates surged higher on Powell’s speech, Industrial metals largely flat for the week.
Sentiment in commodity market seems to be shifting from fears of slowing demand to ones of tightening supply; e.g. severe weather affecting crop yields as well as Energy sources, OPEC considering a cut to offset potential Iranian Oil hitting the market, and Gazprom to turn off the taps for maintenance.
Yields finished the week flatter…
IEF and TLT is hinting we could see a bull flattening trend continue…
but treasury futures not supporting the idea with rates moving higher so far today. I’m no rates expert but my view is that further curve flattening will come from front-end rates moving higher while long-end yields stays mostly flat if not mildly higher as a reflection of the market pricing in a longer period of high inflation/rates as well as a pushing back the cuts.
I think this chart explains some of that view with the longer-term 5yr inflation expectations moving gradually higher (Orange) while the 2yr breakeven (Green) has started to settle around the 3% mark reflecting a gradually slower pace of inflation.
TLT should stay supported as a result of continued policy tightening, but as I don’t think this will be your typical recession and the US economy could manage positive growth in some quarters, I have doubts as to how well long bonds can perform in the term and, that it might be too early to be bullish bonds (or JPY for that matter in FX), This article touches on some of these thoughts - Powell’s ‘Totality of Data’ Prolongs Bond Market’s Limbo State:
“People have faith in the Fed, and that anchors long-term rates with limited downside in the short term; The uncertainty is more in the front end, and people are worried about the Fed going too hard, which helps the long end.”
- Christian Hoffman, Thornburg Investment Management -
“There has been a huge push-back by the Fed on the market pricing in a policy pivot, and Powell sealed that stance; Rates have adjusted a lot higher in recent weeks, but they can still grind higher from here on strong data. If the Fed gets the policy rate towards 3.5% or 3.75%, it will drag the Treasury curve along for the ride.”
- George Goncalves, MUFG -
USD up against most currencies; AUD NOK MXN holding up well, their resilience of which I presume is related to strong Energy prices; ZAR interestingly positive despite key export commodities struggling.
GBP on index view is particularly weak while EUR index is showing some support at the lows. A lot of the month-end rebalancing flow models from the banks have been mentioning EUR buying, and being a popular funder for pro-risk trades, I could be enticed into trying a tactical longs (detailed below).
USD longs still a favoured theme especially after Powell’s speech causing short-term US rates to go higher, and more risk-off looming. JPY still not drawing my interest which struggles against high rates and the BOJ hellbent on keeping their dovish policy stance.
Took partials on long USD positions, still holding SQQQ, core view from remains largely unchanged; perhaps not as bullish on Energy as last week:
For this week, I am interested in EURAUD and/or EURNZD long ideas. I like the tactical element — month-end flows, stretched positioning, higher lows in risk-reversals, and some positive news that Europe may be close to having sufficient preparations and contingencies to help them through the winter; meanwhile AUD and NZD have developed an even stronger bearish bias trading under some key pivot levels.
Have a good week trading!