This Week In Markets: 30th August - 2nd September 2022

Hello and welcome back. Hope if you're based in the UK you had a fantastic long weekend. But a quick summary of some of the key things to look out for in markets this week. And of course, starting with, you guessed it, Christine Lagarde, and a lot of focus on the eurozone and the continuous energy crisis that Europe is facing, and subsequently the impact that it's going to have what the markets are expecting from the ECB meeting next Thursday on the 8th of September. We'll talk about that a little bit more in detail over the next couple of minutes. We're also going to touch on the prospect of potential intervention by the Japanese authorities as their local currency continues to weaken to a 24-year low in the Japanese yen. And then a couple of things to look out for this week, including eurozone inflation data on Wednesday and unemployment data on Thursday, both particularly important inputs for that ECB decision-making next week. And then we've got US non-farm payrolls happening this Friday, of course. So let's just take stock of things and, and have a look at what is going on in the eurozone. And at the moment, money markets are pricing in the increased prospects now of the ECB acting to the margin of 75 basis points. And of course, that would be a much larger increase in tune with what we've had with the Federal Reserve, of course, with their back-to-back 75 from the ECB's 50 that they executed at their last meeting. Now, a lot of this has come, of course, amid pretty hawkish commentary. We had ECB board member Schnabel at the weekend talking about this idea that central banks must tighten policy even into a recession to combat inflation. Sounds pretty familiar, right? Sounds like Jackson Hole and Jerome Powell, who said that basically it could get a little bit painful as they try to tackle rampant inflation with tighter policy, i.e., higher rates. And the ECB have kind of sharpened the sword on the hawkish rhetoric, which has consequently led to that repricing of expectations. Now, a couple things here to be aware of. For one, this is looking at the European gas market, and obviously you can see here this pretty much parabolic move we've had to the upside. European gas prices last week hit a record €343 per megawatt hour. And that's more than double the figure that we had at just the end of July a month ago. It's 7 times the price in the same period of last year. And economists have warned that eurozone inflation will hit double-digit rates in the autumn and remain higher for longer. So again, sounds pretty familiar, much in a similar vein to what the Bank of England have been saying in recent months. And the prospect that that means then, and it's likely to as price pressures continue, it's going to dampen economic growth and therefore people becoming increasingly more bearish about the prospects for the eurozone economy. So here, one of the things we're looking at is speculators have built up basically net short positions in the euro. And these are figures which we can track week to week. They're released by the Commodity Futures Trading Commission, otherwise known as the CFTC. And it showed that it marked the largest bearish positioning for the euro, as you can see here. Since the start of the pandemic in the first week of March 2020, when things were at their most severe on the onset of COVID So you can see here there's a lot of pressure on at the moment. And that means that despite the euro bumping up a little bit as markets have recalibrated towards a more hawkish tilt from the ECB, in some respects even more of a market reaction effect to that, given the fact that the Fed have been quite continuously hawkish for some time, has propped the euro up a little bit to get the week under way. But the idea here is that beyond that point, going into the autumn, with inflation going to hit double digits, with rates going to rise further, it's going to be painful experience for Europe. And ultimately, that's going to lead to a more deeper and long-lasting contraction, i.e., recession for the eurozone. Hence the bearish euro positioning. The other thing to talk about in a little bit more detail was this, and it's the Japanese yen. And the reason why I want to talk about that is that if you have a look at this chart, This is looking at dollar-yen. So obviously the higher this moves, the weakness of the yen or strength of the dollar, or in this case both. It certainly is a case of interest rate differentials. And just like the euro has been moving lower, in this case dollar-yen has been moving higher. Because if you think about a lot of the commentary that we've had of late, you've had the BOJ Governor Kuroda repeated last week the need for continued easing. This obviously in stark contrast to what we've had from Jerome Powell's tough talk on inflation, which has fueled, as we know, a lot of the equity sell-off that we saw at the back end of last week and early, um, this week. So couple things to be aware of here. Um, why is the yen weakening of importance? Well, the scale of the move has repercussions for the domestic economy as yen-based import prices are surging at a record annual pace, and that's putting further pressure pressure on household balance sheets. So will the Bank of Japan intervene? And as you can see here, this graphic goes back really over the last 30 years, and there's a couple of key areas they have done previously intervened at 130, but the price has gone well above there at the moment, and we're closing in at the psychologically important 140 mark. The idea here is about a strategy of the central bank using verbal intervention first They, of course, have said something similar back in June, which is when we had a joint three-party meeting between the Ministry of Finance, the BOJ, and the Financial Services Agency. And they're basically suggesting that they would look to intervene. So probably the first port of call to look out for this week, if we knock on that 140 door, we'll get more conversations between those three parties, and that will make the markets perhaps lean that something more credible, i.e., a full board intervention might well take place. That has happened before, of course. The last time Japan propped up the yen was during the Asian financial market crisis of 1998. That was when the yen hit 146 to the dollar. It has previously done so at 130, but as I said, we've gone beyond that point. So something that's on my radar for this week. Very quick run through then of some other things to be aware of. WTI crude has dropped actually into the recommencement of trade Tuesday after it did rally sharply on Monday. Now, part of the 4% plus increase we had on Monday came about some potential supply interruptions in Libya. There was also a lot of bullish commentary coming out of the likes of Goldman Sachs, the US bank. And just to show you what they said, they urged investors to pile into commodities as most recession risks Coursing through global markets they see as overblown in the near term, arguing that raw materials stand to rebound amid a profound energy crisis and tight physical fundamentals. Nonetheless though, I think at the moment, as we look at prices going into Tuesday's session for the rest of this week, we've already seen a large portion of that move up yesterday in US oil, WTI, pull back. So I think as much as Goldman's might be right in their analysis. I think in the short term, the emphasis is still on the demand consequence of this recalibration for weaker economic growth going forward, which is spooking a lot of oil traders and subsequently weighing on oil prices of late. The next OPEC+ meeting, it's not that far off, it's due in less than a week. That will be on the 5th of September, so next Monday. Looking at the week ahead, a couple of other things to be aware of. For one, just to conclude with the oil side of things, there has been, of course, continued apprehension about the supply of gas flow, particularly, as I mentioned, going into mainland Europe from the Russians. Gazprom informed NRJ of a reduction in gas deliveries from today due to a disagreement on the application of some contracts. So they've continued to use contractual disputes as reasons to kind of move the needle a little bit on the flow of gas. And it was previously reported that Russia's Gazprom was set to halt the Nord Stream pipeline gas flows for 3 days of maintenance starting from tomorrow. So we've been in similar situations before. It makes the market a little bit more anxious. However, I'd say it's not the first time this has happened. So the markets have become a little less sensitive to it. But of course, just given how acute the energy crisis is at the moment, we have to watch this particularly closely. The other thing then for the week is the fact that from a data perspective, I've already mentioned it's a big week for the eurozone. You get the likes of the inflation metrics coming out Wednesday, the unemployment data on Thursday, and then ahead of US nonfarm payrolls, which of course comes on Friday. That in itself is expected to come in— the consensus estimate on the street is for 290,000. You can see here the Deutsche Bank, ING is going for 250. This would be a market slowdown from around the 528,000 we had in the prior month's reading. And although that figure is a little bit softer, I don't think it's really going to move the needle at all on the current expectations of the Fed's kind of targeted focus on controlling inflation at this point in time. So I wouldn't expect a downside number, is pretty much priced in to a certain extent, I guess the best way of putting it. And I don't think really it's going to cause a great deal of fluctuations in the markets beyond the initial knee-jerk reaction is my, my kind of base case. As per usual, it does mean then we get private payrolls, ADP, on Wednesday. We also get the August ISM manufacturing number coming out on Thursday as well. Final few things just to quickly mention. In the UK, it's the final week before then we start to get the announcements on who is going to win the Conservative leadership contest. Of course, Liz Truss is seen as the front runner at this point in time. The announcement is going to come on Monday next week, September 5th, and then we will get the next Prime Minister in play as of the next working day. So at the moment there's been lots of talk. The UK Chancellor was speaking, I think it was yesterday, talking about potential different packages to try to counteract the cost of living crisis emanating from the energy situation. An increase that consumers are having with their bills at the moment. However, very short on details because it really can't be concluded until we know who actually wins that leadership race. The other things are still keeping an eye on COVID situation in China, uh, fairly fluid. Several big Chinese cities escalated their COVID-19 restrictions in overnight trade. Shenzhen closing more businesses and Dalian locking down millions more for testing. So That as well continues to be a, a real headache for the potential inflation, uh, situation with supply chain disruptions potentially, and more so the economic slowdown and the impact that it's having locally on the Chinese market reverberating out into the global economy. And then finally, from a stocks perspective, just to mention, as it only came out a short while ago, we've had the latest here where Elon Musk has added a whistleblower as a new reason to cancel his $44 billion Twitter takeover deal. This has come from following news that we've had from the Tesla boss subpoenaing basically a former Twitter employee who had accused the social media company of poor spam policies and security vulnerabilities, and Musk using that as a pivot to his latest reason to exit that negotiation at this point in time. Of course, Twitter and Musk, they're due to appear in Delaware in court on October 17th. So further news flow pertaining to this, these matters, I expect to probably increase if anything as we get closer towards that date. But at the moment in pre-market when I'm recording this, Twitter is down about 1%, Tesla up about 2.5% on the back of the news and the latest in that ongoing saga. All right, that is it. Let you get on with the week, but don't forget to like and subscribe to the channel. Be much appreciated. I'll see you again for the next session. Take care.