The Russia Has Announced The Intention To Withdraw Its Troops | Hopes For A Covid Zero Exit In China Fades

Saxo Bank Podcast: The Risk Of An Escalation In The US-China Confrontation, The Risk Of An Escalation In The US-China Confrontation And More

Summary:  Markets are increasingly spooked by the liquidity pressure in the crypto space, as the major crypto exchange and its associated trading house Alameda Research may be set to go bust without a multi-billion dollar rescue, and as total market cap in crypto currencies has plunged over $100 billion over the last month. Elsewhere, the focus was meant to be on today’s US October CPI release.

What is our trading focus?

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

US equities saw a hit to sentiment yesterday as Binance walked away from the deal to save the crypto exchange FTX setting in motion a plunge in cryptocurrencies. One of the largest shareholders in FTX, Sequoai Capital, is marking down its investment to zero suggesting little faith in the company and its ability to function. The risk-off moves spilled over into equity market with Tesla leading the declines among the mega caps down 7% with US President saying that Elon Musk relationships with foreign powers could be a national security issue. S&P 500 futures took out gains over the previous two sessions closing at 3,755 but the index futures are attempting to rebound this morning. Note the critical support level at 3,727 which could come into play later today if we get a negative surprise on the US inflation figures suggesting more sticky inflation.

Hong Kong’s Hang Seng (HSIX2) and China’s CSI300 (03188:xhkg)

Following the risk-off sentiments spilling over from the crypto space and then global equities, Hong Kong and mainland China stocks declined, with Hang Seng down 2% and CSI 300 0.6% lower. China EV and Internet stocks are the top losers.  Among Hang Seng Index constituents, LINK REIT (00823:xhkg) was the performer, gaining more than 2%. AAC (02018), Apple’s acoustic product supplier, surged 5.7% on earnings beat and analysts expecting the company gaining market shares from its arch-rival after the latter losing orders from a key foreign client (most likely Apple).

 FX: USD finds bids on weak risk sentiment. US October CPI release key focus later today

The US dollar clawed back some of its losses as cratering crypto prices are seeing widening contagion, and rising Covid cases in China continue to drive concerns that further lockdowns are on the way. The weakest currencies were those normally associated with risk sentiment, like the smaller G10 currencies, as AUDUSD trades this morning not far above 0.6400 after a spike to 0.6550 at the beginning of the week. Overall USD direction remains in play as the USD is somewhat down, but by no means out and today’s US October CPI to theoretically set the tone, although a liquidity crisis in crypto that continues to drive contagion elsewhere could yet steal the spotlight in the near term, with poor liquidity generally associated with USD strength. A weak US treasury auction yesterday is also a concern on that front (more below).

Crude oil (CLZ2 & LCOF3)

Trades lower for a third day as hopes for a Covid zero exit in China fades after the country increased restrictions in a key manufacturing hub and new cases in Beijing jumped to the highest level in more than five months. WTI has returned to the $85 handle, down 9% from Monday’s peak, while Brent trades sub-$93. In addition, the market has also been hurt by the loss of risk appetite filtering through from the carnage in cryptos and after the EIA reported US crude stocks rose by 3.9 million barrels to the highest since July 2021. This was somewhat offset by tightness in the fuel product markets with gasoline inventories dropped to an eight-year low. Focus on China, the general level of risk appetite signaled through the dollar and today’s US CPI print for October.

 Precious metals hold gains ahead of today’s US CPI print

Gold trades above $1700 for a second day with shallow correction attempts since Tuesday's surge so far pointing to underlying support. However, with most of that currently being provided by a drop in Treasury yields and a softer dollar, today’s US CPI print for October will be watched closely. Another upside surprise may cause a temporary drop before potentially supporting prices as the market will start wondering whether the FOMC will be successful in getting inflation control. Some support also emerging from the chaos across the crypto market where the risk of contagion to other coins from the FTX fallout remains elevated. Gold support at $1682 and silver at $21 followed by $20.27.

Crypto market: another plunge in crypto as Binance walks away from FTX acquisition

 The contagion in the crypto and equities we mentioned yesterday is already here, and getting worse as latest developments suggest that Binance backed away from its earlier pledge, tweeting Wednesday afternoon that it would not pursue the acquisition of FTX. It cited due diligence and a reported US investigation into the exchange. Bitcoin plunged below $16,000, while Ether followed and dipped to its lowest price since July, barely hanging on to the $1,100 level. According to a research note from JPMorgan the crypto market is right now facing a cascade of margin calls and liquidity disappearing in the system.

US treasuries (TLT, IEF)

US Treasury yields are sharply lower this morning, with the 2-year treasury yield closing below 4.60% yesterday, the lowest since the hawkish Fed Chair Powell press conference last Wednesday. Weak risk sentiment and contagion from the melt-down in crypto markets may finally be driving safe haven flows into what is traditionally the world’s most liquid asset: UYS treasuries. The 10-year treasury benchmark yield edged below 4.10% after a very weak 10-year auction, with bidding metrics the worst in years. The US Treasury is set to auction 30-year T-bonds today.

What is going on?

Wheat (ZWZ2) prices lower, along with Corn (ZCZ2), after USDA report

The USDA released its November World Agricultural Supply and Demand Estimates report, which led to mixed but mostly lower grain prices. While the overall wheat consumption outlook was raised, USDA said demand may drop in some EM countries due to high prices. Wheat prices plunged 2.5% with additional selling from the announcement Russia is moving its troops out of Kherson, a development that may clear the way for more crop shipiments out of Ukraine. The agency also lifted its soybean output and stockpiles outlook, but robust export demand lifted prices. Meanwhile, USDA expects to see the seventh-largest corn crop on record this year, with a new estimate of 13.93 billion bushels.

Foxconn still sees high demand for high-end electronics

 The electronics maker, and the biggest supplier to Apple, reported Q3 results today with operating profits and revenue beating estimates. The company still sees strong demand for consumer electronics at the high-end of the market, but sees overall consumer electronics falling in Q4 y/y.

US earnings recap: Beyond Meat and Rivian

The EV delivery van maker Rivian missed estimates on Q3 revenue yesterday due to supply constraints, but the EPS loss of $1.57 was less than estimated at $1.86. The EV maker still sees 2022 production target at 25,000 vs est. 26,166. Rivian shares gained 8% in extended trading hours. Beyond Meat missed big on both revenue and EBITDA, but tries to calm investors by putting out a positive cash flow level around the second half of 2023.

Russia said to be set to pull troops from embattled Kherson

 In the hardest fought area of the war after the Russian invasion of Ukraine, the Russian side has announced the intention to withdraw its troops to the Eastern side of the river after an intense battle to maintain control of the strategic city, which is the closest major city to the Crimean Peninsula and would bring many Russian targets, including key supply routes from Crimea, within range of Ukrainian artillery if Ukraine takes control of Kherson.

UK October Home Price Survey shows massive deceleration in UK housing

 The RICS House Price Balance has been tumbling in recent months as mortgage rates have spiked on the overall rate rise, but also as spreads have widened due to by poor liquidity in the market. The positive 30% reading in September was already a sharp drop from the very strong levels above 50% just two months prior, and the October survey was expected to show +19% (still shownig prices generally rising). Instead, it plunged all the way to –2%, suggesting that UK housing market pricing is decelerating at a record clip, with deeper negative readings ahead that will impact overall UK confidence.

What are we watching next?

US October CPI release today suddenly looking less pivotal?

The crypto panic has quickly stolen focus from the US CPI data release here, possibly to a sufficient degree that even an inflation print that is solidly below the expectations could fail to spark notable relief across markets, as weak liquidity concerns possibly keep the US dollar firm and equity markets weak even if yields ease lower. The ex-Fresh Food and Energy number is expected to come in at +0.5% month-on-month and +6.5% year-on-year, after the multi-decade high of 6.6% YoY in September, with the headline expected at +0.6%/7.9%, which would be the first sub-8.0% year-on-year print since February.)

Earnings to watch

Today’s US earnings focus is NIO which will be latest test for the EV market as maybe providing information on the factory situation in China amid rising Covid cases. The Chinese market is the most important market for Tesla so a dire outlook from NIO could translate into negative sentiment on Tesla shares.

  • Thursday: Brookfield Asset Management, Fortum, Engie, Credit Agricole, Allianz, Merck, Hapag-Lloyd, RWE, SMIC, Nexi, AstraZeneca, ArcelorMittal, Siemens Gamesa Renewable Energy, Becton Dickinson, NIO
  • Friday: Richemont

Economic calendar highlights for today (times GMT)

1330 – US Oct. CPI

1330 – US Weekly Initial Jobless Claims

1400 – US Fed’s Harker (voter 2023)

1400 – Poland Central Bank Governor Glapinski news conference

1530 – EIA’s Weekly Natural Gas Storage Change

1730 – US Fed’s Mester (Voter 2022) to speak

1800 – US Treasury auctions 30-year T-bonds

1830 – US Fed’s George (voter 2022) to speak

1900 – Mexico Central Bank Rate Announcement




Saxo Bank Podcast: The Risk Of An Escalation In The US-China Confrontation, The Risk Of An Escalation In The US-China Confrontation And More

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