Weekly Note 2022.10.10

How hard is hard?

I’ve had some discussions on what kind of year 2023 may look like this past week, and while I’ve been under the thinking that we may not have as hard a landing as previous hard-landing dubbed recessions, but I am beginning to open myself to the possibility that the Fed and other central banks could be doing too much and all roads are pointing to one:

Confidence slumps around the globe as cost of living crisis bites — High food and energy prices have fuelled business and consumer pessimism, Brookings-FT tracking index shows (FT).

Some food for thought but I’m still erring on the side for the potential be a mild and brief recession, when comparing to previous episodes. Would be interested to hear your thoughts in the comments.

X-ASSET SUMMARY

• Equities —still managed a positive week despite the strong late week reversal as yields climbed back towards Sep-highs. On the window at the moment but sights are set on longs pre-CPI on the softer core expectation by a tenth of a ppt, while headline expected to be strong also by a tenth ppt.
• Commodities —strong rebound in crude after OPEC announced 2m/day cuts, strong week for precious metals particularly for Silver but strong resistance area above. Interested in fading Crude this week expecting focus to shift back to the demand side after rallying on OPEC cuts.
• Rates —bounces in bonds continue to get faded but yields are at the high end of my perceived range. Risk appetite should continue stay weak while the MOVE index remains near the highs.
• Currencies — USD strength continues, petro-ccys supported by the Crude rally but could struggle ahead, while AUD remains out of favour as a result of a more dovish RBA, EMFX showing some resilience particularly MXN while ZAR isn’t expected to show a recovery anytime soon. Favour NZD MXN longs for the risk-on side, USD longs vs EUR GBP ZAR shorts for risk-off. Engaged in EURNZD this morning — trade may turnout to be short-lived, but I like looking for the big turn south in EUR-crosses in the coming week(s). AUDNZD also particularly appealing given the big move in rate differentials.

MAJOR HEADLINES

US

• US employment growth cools in September — Fall in unemployment rate to historic low of 3.5 per cent helps keep pressure on Fed to raise rates (FT). September Jobs Report Shows Slower Wage Gains (WSJ). U.S. Jobless Claims Rose Last Week but Remain Historically Low (WSJ). U.S. Job Openings Fell in August, Layoffs Up Slightly — Openings fell by 10% in sign that the labor market is starting to cool (WSJ).
• Fed officials back further rate rises to tame high inflation — Cook and Waller push back on speculation US central bank could pause rate increases (FT). Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn — Rapid rate increases provide less time for central bankers to study their economic effects (WSJ). Opec oil production cuts bad for global economy, says Yellen (FT).
• A Jittery Stock Market Heads Into Earnings Season (WSJ). Strong Dollar Pressures U.S. Manufacturing Rebound — Overseas producers gain pricing power; 3M, General Electric expected to take exchange-rate hit on foreign sales (WSJ). Costco Not Ready to Cut Prices as Shipping, Commodities Costs Fall — Rising labor costs and prices that were locked in with suppliers months ago are keeping inflationary pressures on the retailer (WSJ). Small Businesses Getting Squeezed Out in Push for Warehouse Space (WSJ). Less Growth Seen for 2023 U.S. Ad Spending (WSJ). Utilities Have a High-Wire Act Ahead — Rising fuel prices and interest rates could test utilities’ ability to increase their earning potential without overly burdening customers (WSJ).

EUROPE

• German Production Falls as Higher Energy Prices Hit Manufacturing — continued contraction in Manufacturing PMI and higher Producer Prices (WSJ). London faces consumer growth slowdown, warn West End retailers — Businesses in capital’s main shopping areas are becoming more reliant on overseas visitors (FT).
• Germany’s relief plan could trigger a UK-style bond meltdown in euro nations (CNBC). Italy’s Bonds Come Under the Spotlight After UK Budget Fiasco — New government set to send draft budget to EU by Oct. 15, Traders are on edge after UK fiscal plans triggered meltdown (BBG). Credit Suisse’s Wild Ride Is Starting to Spook Some Clients — As the bank finalizes its revamp, markets worry about the cost, Now some wealthy clients are starting to pull their money (BBG). Kwarteng Heads to IMF With Alarm Bells Recalling 1976 Bailout — The meeting will be a focal point for grumbling that the UK economy, once a bastion of fiscal prudence, is now destabilizing global markets. The British experience in suggesting large unfunded tax cuts also will be held up as a model of what other countries should avoid in a period when markets are on edge (BBG).
• Truss Looks to Address Conservatives Lawmakers to Quell Mutiny (BBG). Truss overrules Kwarteng on number of UK investment zones — Liz Truss has overruled her chancellor and insisted the UK should not set a limit on the number of applications for low-tax investment zones despite internal Treasury concerns the projects could cost billions of pounds in lost taxes (FT). How Liz Truss is out of sync with the British public — Polling suggests there is little appetite for PM’s policies to improve economic growth (FT). Scholz’s SPD Wins State Election Dominated by Energy Crisis (BBG). Scholz Defends Massive Borrowing [200 billion euros] Plan to Tackle Energy Crisis (BBG). Attack on German Rail Network ‘Targeted, Professional,’ Police Say — Cables were deliberately cut at two different locations, No one has claimed the attack and no suspects identified (BBG).
• Key Russian Bridge to Crimea Shut As Blast Hits Fuel Train — Putin opened the bridge in 2018 to connect Crimea to Russia (BBG). Putin orders enhanced security around Crimean Bridge (RT). Putin blames Ukrainian ‘terrorism’ for Crimea bridge explosion (FT). Russia Scrambles to Reconnect Supply Lines to Crimea After Bridge Explosion (WSJ). Russian forces ‘running and panicking’ during eastern retreat — In Torske and other villages in the occupied eastern Donetsk region, most Russian troops hastily fled — but others were caught in Ukrainian onslaught (AlJazeera). Russia Escalates Strike on Southeast City as Ukrainians Advance -Zaporizhzhia city hit by Iranian drones, at least 12 civilians were killed in two days in the city (BBG). NATO Once Feared a Putin Victory. Now It Worries Over His Defeat — Russian leader closing off possible routes to settlement, US, Europe seek win for Kyiv, not so sure on loss for Putin (BBG). Trump calls for ‘immediate’ Ukraine peace talks — former US president says nothing will be left on the planet unless the conflict is settled (RT).

ASIA

• Japan’s foreign exchange reserves fall by record $54bn — China’s foreign currency holdings also dropped in September as the strength of the dollar rose (FT). Yen Traders Show Resilience to Risk of More Japan Intervention — One-week implied volatility is well below last month’s high, Dollar-yen risen back towards September’s intervention level (BBG). China Services Activity Drops as Covid Lockdowns Curb Spending — Caixin services purchasing managers’ index fell to 49.3 last month from 55 in August far lower than the 54.4 median estimate (BBG).
• Taiwan to Pledge More Economic Resilience, Democratic Ties — President Tsai to make speech on National Day on Monday, Tsai will reiterate Taiwan’s determination to defend itself (BBG).
• US hits China with sweeping tech export controls, Restrictions will limit Chinese companies’ access to advanced computer chips and slow their progress in artificial intelligence (FT). Taiwan Tensions Spark New Round of US War-Gaming on Risk to TSMC (BBG). The US-China chip war is reshaping tech supply chains — complete decoupling is a fantasy, but component makers are already shifting production (FT). China’s chip industry set for deep pain from US export controls — Experts predict ‘tsunami of change’ for semiconductor industry as Washington wields tools tested on Huawei (FT). Samsung hit by first profit fall in three years as global chip demand slows — South Korean technology group’s shares are down about 30% so far this year (FT).
• Xi Convenes Final Party Meeting Before Leadership Congress — Seventh plenum to review Xi’s pivotal congress speech, Event brings Chinese leader one step closer to third term (BBG). China on high alert as Covid cases rise ahead of Communist party congress (FT). China’s Tolerance for Xi’s Unyielding Covid Fight Is Cracking (BBG). China Hails Elon Musk’s Proposal for Taiwan Unification — Tesla CEO suggests Taiwan become a special administrative zone (BBG).

EQUITIES

Relief for equity markets last week. Friday NFP sell-off is likely to keep markets on the backfoot heading into the week but not sure how much more hawkish market pricing can get from hereon while a soft CPI on Thursday could potentially mark another short-term bottom.

SPX rally hesitated ahead of the 3800 handle and the NFP report resulted in a big rejection of the pivot area.

Energy is up almost 20% from prior week lows, and when Energy stocks are ripping, that usually doesn’t bode well for the wider market. Interestingly however, XLE vs SPX and XLK is pack to its recent pivot area which last marked the mid-year low in US stocks.

Growth (RPG) not leading the last rally could have been cause for concern, especially while rates were backing off at the front-end of last week. It is backing up into an interesting relative value area however, and the number of stocks above the 20 and 200 dma in the Russell 3000 is close to the 20% figure, below of which tends to be good oversold signals.

COMMODITIES

Apart from Agriculturals (Green), commodities complex is looking weak with the Bloomberg Commodities index (Grey) flattening out, and some technical breaks appearing in Energy, PM and IM. Although structural shortages generally persist in commodities trade, future demand concerns likely to weigh on price which at some point, could appease the broader market.

RATES

US nominal yields were higher while interestingly TIP yields inched lower as of Friday wk/wk.

Bond volatility remains elevated but interesting to see that it has dropped on Friday after the NFP report.

CURRENCIES

• Antipodes — NZD favoured over AUD, AUDNZD short looks particularly appealing given the big move in rate differentials.
• MXN showing great resilience trading above the recent weekly ranges and in my view one of the better currencies to express the pro-risk side.
• USD thematically still a long on dips paritcularly against EUR and GBP.
• ZAR (along with EUR and GBP via crosses) is my preferred short. Eskom recently suspended its rolling blackouts and just after one day, reinstated them; and Europe continues to rack up massive debt to handle its Energy crisis amid high inflation.

Have a great week trading.