Equities are selling off again with a lot of macro data points to digest ahead of CPI later today, including China’s Covid situation regressing and the hawkish pivot from several central banks this week triggering rates higher stock markets lower negative feedback loop. Not to mention the increasing number of corporate profit warnings, as inventories swell they tend not to age well.

With monetary policy feeding lower growth expectations, there is a degree of circularity stagflation concerns building as central banks continue surprising to the hawkish side with no end in sight until inflation moves more convincingly towards the target. Indeed, this week highlights a broader point about central banks’ implicit comfort in accepting lower asset prices.

But worryingly, the markets are now concerned US CPI did not peak in March, and indeed there may be even higher prints in the coming months. Continued strong inflation prints would put the FOMC under pressure to move faster on rate hikes which would provide massive soundboard for the hard landing crowd.

In any case, this stagflation narrative has begun to play out in broader macro, with curves flattening and commodities struggling to push on while the dollar remains bid. Therefore, it is unsurprising to see areas of the equity market sensitive to global growth get massively hit.

OIL 

 

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After shaking off the China lockdown, for the most part, the oil complex has accepted China’s stop and start economics; crude oil is taking a bit of a hit due to the stronger US dollar as stagflation concerns knock down broader markets again.

And another stifling point for energy bulls is since the ongoing global release of strategic reserves and the recent increase in OPEC+ production quotas are doing little to cool oil prices, they think US policymakers could grow increasingly desperate ahead of the November elections and may even allow Venezuelan export to Europe, which could be a price capper.

But the clearest read-through for oil markets, regardless of what stock markets are doing, is as we head deeper into the US summer driving season, tight oil and product markets should still support oil.

Meanwhile, an explosion and fire at the Freeport LNG terminal support natural gas prices and provide a bullish knock-on effect across the energy spectrum. The US has been the biggest exporter of LNG this year and has played a significant role in alleviating some pressure on Europe as Russian gas exports have declined.

The Freeport outage will support prices in the near term and recovering Asian demand may mean fewer LNG cargoes for redirection to Europe ahead of the 2022/23 winter season. The gas storage situation in Europe is looking less dire than at the start of the year, but there are still considerable risks in the coming months which mean it may be too early to count on gas prices beginning to normalize.

FRIDAY’s FOREX FOLLIES 

EUR

The Euro is falling like a faulty hot air balloon where the action speaks louder than words.

The ECB’s message was clear about leaving the door open for more extensive hikes due to wage growth concerns and admission of faulty forecasting. But crucially, the much-talked-about spread control tool was merely hot air. After all, any buying program would have been hard to justify in the context of exit from APP and negative rates and PEPP reinvestments just will not cut it.

Markets have priced out a 50 bp hike in July, while a 25 bp hike in July was already a foregone conclusion as far as the market was concerned. Now that the ECB has laid out its intentions regarding July being on the table, it is now a case of action speaks louder than words

Why the ECB talked themselves into a corner by more or less committing to 25bp is not clear, but if they see the market become concerned about peripheral spreads, it is unlikely they would go 50bp in July before they have worked that out through some spread control tool.

CNH

Time for the USDJPY catch-up trade?

One of the potential drivers of the USDCNH rally was CNHJPY hitting 20. With CNHJPY back up around 20 after the latest move in USDJPY, it is worth adding longs again, given the previous inclination for FX traders to play catch up with the USDJPY

CAD

IN an ominous signal, the loonie is lower despite a hawkish Tiff. And for us, that cut our FX chops trading CAD on Bay Street, and who refer to the loonie as the ” truth,” it is a gnarly sign for global growth. 

Bank of Canada Governor Tiff Macklem sounded hawkish on the wires, saying chances of rates going above 3% have risen and more or more significant rate hikes could be on the cards, yet the Canadian dollar underperformed severely.

For the central bank fraternity intent on frontloading rates, as we turn to chapter two of the current playbook, it now reads that aggressive tightening risks a material decline in housing, consumer confidence, and consumption that will eventually drive their respective economies into recession and send stocks tumbling.

AUD

Even temporarily losing the China tailwind exposes the underbelly of the AUD, a housing bubble sitting atop an iron ore mine. 

RBA will continue front loading rate hikes, focusing firmly on getting inflation under control. As fixing periods end, these hikes will hit like a Mike Tyson punch in the face to Australian homeowners, some of the highest leveraged property owners on the planet. Aggressive RBA tightening risks a more secular decline in housing and a hard landing for the economy.

Originally published by Stephen Innes, Managing Partner, SPI  ASSET MANAGEMENT