Bank Of France (BoF) Expects Lower GBP For Q3 And The Situation On Phosphate Fertilizer Mining Industry

Bank Of France (BoF) Expects Lower GBP For Q3 And The Situation On Phosphate Fertilizer Mining Industry

Summary:  Sentiment remains wobbly as US equity markets edged toward the cycle lows yesterday, with the interest rate sensitive Nasdaq 100 index even posting a new bear market low as US yields lifted higher once again. Fed Vice Chair Brainard voiced the first cautious comments we have seen in a while on the effects of the Fed’s policy tightening even as she argued that tightening will continue. Ahead of the largest US banks kicking off earnings season on Friday, JP Morgan CEO Jamie Dimon says he expects a US recession in six to nine months.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

US equities continued lower yesterday with S&P 500 futures touching the 3,600 level again before bouncing back a bit into the close. This morning the index futures are trading around the 3,608 level with the 3,593 level being the key level on the downside to watch. With the US 10-year yield back at the 4% level this morning we expect the pressure to continue in US equities and our thesis is also that the upcoming Q3 earnings season starting this week will lead to earnings downgrades and disappointments in the outlook.

Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)

Stocks traded in Shanghai and Shenzhen bourses stabilized and traded little changed from yesterday’s closes, with power generation and lithium producers gaining. Guangzhou Tinci Materials (002709:xsec) was 10% limit up and CATL (300750:xsec) rose 5%. CATL preannounced Q3 net income surging 169-200% Y/Y to RMB8.8-9.8 billion. China National Nuclear Power (601985:xssc) surged 7.2% after the company reported a 7.2% Y/Y electricity output growth in the first 9 months of the year. Hong Kong’s Hang Seng Index continued to slide, falling around 2% with China Internet names leading the charge lower. Alibiba(09988:xhkg), Tencent (00700:xhkg), JD.COM (09618:xhkg), Meituan (03690:xhkg), Bilibili (09626:xhkg) declined from 3% to nearly 9%.

USD and US yields/risk sentiment

USD strength continues as risk sentiment remains wobbly and the entire US treasury yield curve lifted once again, taking the 10-year treasury yield back to the key 4.00% cycle high area. USDJPY continued its tentative move above 145.00, closing in on 146.00 with no official response yet, while AUDUSD posted impressive new lows near 0.6250 overnight and USDCNH is pushing on the 7.20 level once again – the former range top from 2019 and 2020. EURUSD and especially GBPUSD have some more range to work with before posting cycle lows. The next test for the US dollar will be tomorrow’s FOMC minutes, but the event risk of the week will be Thursday’s September US CPI data point and whether traders feel a single month’s data can meaningfully shift the Fed’s stance, given evidence of a still very tight labor market.


Gold’s short-covering driven rally from last week continues to fade as the dollar regains strength and the US bond yields return to their recent peaks as the prospect for further and aggressive monetary-policy tightening weighs on the market. The latest COT report covering the week to October 4 showed funds changing their net position from the biggest short in almost four years to a small net long. With renewed dollar strength in focus the risk of fresh albeit more muted short selling exists with gold’s renewed upside push unlikely until the market feels convinced that the Fed has reached peak hawkishness. Support at $1658 with a break below signaling the risk of an even deeper retreat. Focus this week on US PPI and CPI prints.

Crude oil (CLX2 & LCOZ2) trades lower on renewed demand concerns

Last week’s OPEC driven price jump faded further overnight with the risk sentiment once again souring across markets on worries the global economy, including the US, will face a very challenging 2023. In addition, the authorities in China have signaled there will be no letup in their steadfast belief in the nation’s Covid zero policy, thereby potentially prolonging a slump in demand from the world’s biggest importer. For now, the time spreads in Brent continue to signal tightness with the December contract trading 9% above the June 2023 contract. Monthly oil market reports from the EIA and OPEC on Wednesday and the IEA on Thursday will be watched closely for any changes in the supply and demand outlook.

Wheat futures (ZWZ2 & WHEATDEC22) jump to a three-month high

The December benchmark wheat contract in Chicago surged to near the daily limit on Monday amid worsening Russia/Ukraine tensions and a worsening US crop outlook. Any slowdown in shipments of high protein wheat from the Black Sea may boost prices further and before the latest escalation shipments from Ukraine are already being delayed as the backlog of outbound vessels awaiting inspection in Istanbul has increased. The Ukraine grain export agreement comes up for renewal next month and with Russia losing the war the risk of further desperate measures may put the deal at risk. The rally in December wheat ran out of steam above $9.45 and may now pause ahead of a key crop report from the US Department of Agriculture on Wednesday.

US treasuries (TLT, IEF)

US treasury yields continued lifting late yesterday and overnight after a the bank holiday in the US yesterday. This has taken the 10-year treasury benchmark yield back close to the round 4.00% level that is a significant psychological milestone and near the 14-year high for the benchmark. Yields rose even as Fed Vice Chair Brainard voiced the first cautious notes we have heard in a while from an important Fed figure (see more below). The next key test for yields as we believe we are nearing “peak hawkishness” from the Fed soon, is more Thursday’s US CPI data point than tomorrow’s FOMC minutes, which may contain few surprises, given nearly all Fed members are on the same page in supporting the current tightening regime.

What is going on?

The UK government brings forward its budget plans to 31 October

The UK government will announce its fiscal plan at the end of this month, more than three weeks earlier than initially scheduled. The plan is built on the ‘mini-budget’ of 45 billion pounds presented in September. It triggered a rout in financial markets which forced the Bank of England to step in the market. The advance release is aimed to appease markets and to provide insights on how the government will pay for tax cuts and what their long-term impact would be. On 31 October, the Office for Budget Responsibility will also publish its latest forecasts, including an impartial assessment of the macroeconomic consequences of the ‘mini-budget’.

Fed Vice Chair Brainard signals peak hawkishness approaching, but still higher for longer rates

Lael Brainard sounded a small note of caution on Fed’s tightening, saying that it will take time for rate hikes to bring inflation down while also highlighting slowing growth, cooling labor market and financial vulnerabilities. Still, she reaffirmed that monetary policy will be restrictive for some time. Charles Evans remained in favor of front loading, saying that the Fed should quickly reach levels where policymakers feel comfortable pausing to reduce the risk of overshooting.

BoE on course to end buyback operations but announced fresh liquidity measures

The Bank of England announced it remains on course to end its temporary buy-back auctions at the end of the week and is switching to liquidity support via expanded collateral repos, also for a limited period to help banks with customers that are not entirely hedged against LDI exposure. Gilts plunged as investors remained worried, with 30-year yields rising above 4.7% and 20-year touching a high of 4.9%. Meanwhile, the medium-term fiscal plan is to be published on October 31, just before the next MPC rate meeting, which at the least means a more informed decision may be possible.

The Bank of France lowers its Q3 GDP forecast

Yesterday, the Bank of France lowered its Q3 GDP forecast to 0.25 % versus prior 0.3% mostly due to poor industrial activity. Without much surprise, industrial companies are in a tough spot because of the energy crisis, supply chain disruptions, and a tight labour market. So far, the recession is not the central bank’s baseline. However, most economists expect France will not avoid a recession next year (with a drop of GDP between -0.2 % and -0.7 % in 2023 depending on the forecasting institutes).

Chicago wheat futures jumped nearly 3% in early trading

... underpinned by concerns over the Russia-Ukraine war slowing grain shipments from the Black Sea region. This after Putin accused Ukraine of orchestrating the explosion on the bridge over the Kerch Strait, a key prestige project for the Russian President. The developments cast even more uncertainty over shipments to the world market through Ukraine’s export corridor in the Black Sea, which comes up for renewal next month. Dozens of grain-hauling vessels are already backing up while awaiting inspection at Istanbul under the terms of the deal.

TSMC shares down 8% on more US restrictions on semiconductors

The US has added new restrictions on exports of semiconductors used in AI and supercomputing, in addition to new restrictions on equipment used in semiconductor manufacturing to any Chinese companies. It is estimated that that the new restrictions will cost the company 5-8% of its revenue.

Paul Tudor Jones is getting ready for a recession

The famous macro trader said in an interview yesterday that his trading firm is getting ready to deploy its recession playbook. The key dynamics according to Tudor Jones are recessions last 300 days, equities fall 10% on average, short-term bond yields will start to go down before bottom in equities, term premium will increase both in equities and bonds, earnings multiples will compress, and the Fed will either halt or slow rate hikings.

JPMorgan Chase CEO Jamie Dimon joins recession crowd

In a speech yesterday Jamie Dimon added a negative jolt to the market saying that a global recession was likely in the next 6-9 months due to the rising interest rates and the war in Ukraine.

What are we watching next?

Fertilizer supply at risk amid fresh Russian tensions and Hurricane Ian aftermath

Amid fresh tension from Russian upon Ukraine, fertilizer producers have once again been put in the spotlight on supply concerns. Equities in APAC involved in phosphate/fertilizers rose today as a result; so, it’s worth watching stocks in the sector across Europe and the US. The phosphate fertilizer mining industry’s supply has already been put at risk after Hurricane Ian hit Florida, impacting more than 1 billion ‘stacks’ of supply. Russia is the world’s largest supplier of nitrogen-based fertilizers; however, its supply was slimmed from embargoes after launching attacks against Ukraine.

The economic calendar for the week picks up on Wednesday

... with the latest set of FOMC minutes, but the highlight of the week will be Thursday’s US September CPI report, after the August data surprised with significantly higher than expected inflation. Friday we get a look at US September retail sales after core spending has been on a declining trend, measured month-on-month, since early this year.

Earnings to watch

The Q3 earnings season kicks off this week, with the most important day being Friday, as seven large US financial institutions reporting. The key focus points will be to what extent US banks are able to increase their net interest margin, which they did in Q2, and the levels of credit provisions in Q3.

  • Wednesday: PepsiCo
  • Thursday: Progressive, Fast Retailing, Tryg, Walgreen Boots Alliance, Fastenal, BlackRock, Delta Air Lines, Domino’s Pizza
  • Friday: Shanghai Putailai New Energy, YTO Express Group, PNC Financial Services, JPMorgan Chase, Morgan Stanley, Citigroup, UnitedHealth Group, Wells Fargo, US Bancorp, First Republic Bank

Economic calendar highlights for today (times GMT)

  • 0700 – Czechia Sep. CPI
  • 1000 – US Sep. NFIB Small Business Optimism
  • 1245 – ECB Chief Economist Lane to speak
  • 1600 – US Fed’s Mester (Voter 2022) to speak
  • 1645 – Switzerland SNB Chair Jordan to speak
  • 1700 – US 3-year Treasury Auction
  • 1800 – UK Bank of England’s Cunliffe to speak
  • 1835 – UK Bank of England Governor Bailey to speak

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Bank Of France (BoF) Expects Lower GBP For Q3 And The Situation On Phosphate Fertilizer Mining Industry

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