McConnell-Putin double act: the Squid Game

You know we are living in strange times when US Republic Senate Leader McConnell, and Russia’s President Putin, dangle potential rewards from their tentacles and lift markets vigorously, but here we are. Like the compulsively viewable, but ridiculously premised Netflix hit, both men have juicy rewards that millions want, all you have to do is play a few games to get it. Of course, there is some small print, but don’t worry about that.

In the case of Mr McConnell, it is money to fund the US government, lots of it. Sen. McConnell offered a short-term debt ceiling extension to the Democrats until December to allow them to use reconciliation to pass a more permanent measure. Note that word reconciliation. Republicans have no intention of any bi-partisanship regarding a more permanent measure. It will also coincide with trying to pass the equally acrimonious build-back-better multi-trillion-dollar spending package. The fixture congestion would probably kick the latter into touch. Planning for the mid-terms in 2022 is alive and well. The announcement of a two-month kick-the-can-down-the-road offer was enough for desperate buy-the-dippers to reverse course and lift US equities into positive territory.

In President Putin’s case it is energy, namely natural gas. He sparked a near 10% sell-off in natural gas prices overnight after he offered to “stabilise” the natural gas market in Europe by potentially pumping more supplies through the Ukraine. The Russian Vice-President also mentioned certifying Nord Stream 2 once again as a potential solution to Europe’s gaseous woes. President Putin also alluded to the benefit of long-term as to short-term supply contracts. Mr Putin’s comments were high on rhetoric but very low on detail such as how much and when. The message is fairly clear though, you can have all the gas you want in the future, you just need to sign here….

Taken in context, the jump in Wall Street equities overnight didn’t make a dent in the scale of the sell-off on a weekly basis. In the case of natural gases, the 10% fall only unwound the 10% hike in prices from the day before. Rays of hope, yes, but that’s all. Notably, US yields at the long end only flattened marginally and the US dollar kept on rallying, while gold continued to find safety dance bids ahead of the US data tomorrow.

Investors await NFP report

And that brings me back, once again to the US Non-Farm Payrolls. Despite the market chasing its tail and tying itself up in knots each day this week, thanks in part, to a slow data calendar, all roads lead to tomorrow’s US Non-Farm Payrolls. The price reversals were either modest or non-existent on the overnight Squid Game double act. The underlying factor making markets nervous is the trajectory of Federal Reserve monetary policy. In this case, will the Fed taper start in December, or get pushed back into 2022 along with the dot plot? Tomorrow’s US Non-Farm Payroll data should go a long way to answering that question with a print north of 500,000 jobs added locking and loading the taper. I am not expecting a taper-tantrum, but the signs are there to see in the Asian currency space, and I continue to believe the potential taper has not even started to be fully priced into markets. The world will still be a zero per cent one after the taper, but there will be a lot less money-free money sloshing around looking for a home. Don’t sell those US dollars just yet.

Today’s data calendars in Asia and Europe are even more non-existent than yesterday. South Korea’s Current Account and Japan’s Foreign Bond Investment have had no market impact, while the Bank of Japan’s Kuroda said he expects Japan’s CPI to pick up slowly, entirely consistent with the last 25 years I suppose. Patience is a virtue. Japan’s equity markets are entirely focused on Wall Street’s movements now anyway.

Tonight’s weekly US Initial Jobless Claims will allow some last-minute rejigging of Non-Farm forecasts for tomorrow. Overnight, the ADP Employment number rose sharply to 568,000 jobs, well above forecasts. The ADP has been a poor indicator for the Non-Farms of late, is this the month we see a return to the mean?

Otherwise, I expect the headline-driven chop-fest to continue into tomorrow night’s US employment data. All I can say is to be careful accepting the market’s seemingly easy rewards until then; the currency, bond and gold markets are telling us just that. Like the Squid Game, those rewards come with conditions attached and you may not get that perfectly charred calamari.

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