The stranger things put

The bear market rally looks well and truly back on track this week, thanks to one of the stranger things I have seen in 2022, Netflix losing only one million subscribers in Q2 instead of 2 million and forecasting an additional one million subscriber additions in Q3. Minus one plus one equals um, zero, the last time I looked. But it is not for me the second guess the bullish herd mentality of the equity market, especially as they continue to grapple with the reality that 20-years of central bank monetary puts have come to an end.

The Netflix results were apparently backstopped by Stranger Things 3 being released. I’ll not argue with that as I love Stranger Things and remember the 80’s and all the music very well. Mrs Halley is less enamoured with season 3, complaining about the slow pace and the convoluted plot threads. That’s what makes a market I suppose. I have a feeling that omicrons’ rampage across the world has left many subscribers working or isolating from home, delaying the pressing of the cancel subscription button.

Either way, with the street hungry for good news to feed the buy-the-dip appetite, Wall Street has a huge day, which saw investors piling back into big tech as well, lifting the Nasdaq by over 3.0%. I heard more peak inflation noise being bandied around, with Reuters reporting that Nord Stream 1 natural gas flows from Russia to Germany would resume this week as scheduled. Additionally, hopes were raised around negotiations to ease Russia’s seaborne blockade of Ukrainian food exports.

Peak inflation is as good a reason to pile into equities and other risk sentiment asset classes as any I suppose. I personally believe we could be near peak inflation, but any hopes that it is suddenly going to fall quickly are naïve, far more likely is that it stays elevated for quite some time to come. The other issue I have from the above paragraph is having to use the words “hope” and “Russia.” I’m not sure how many times investors have to be slapped around the face on this point.

Will Russia turn on Nord Stream 1?

To emphasise this, let’s circle back to the Reuters natural gas story. It did mention that its sources said the flows, when they resume this week, will not return to previous levels, and by this, I mean its 160 million cubic metre-per-day capacity. Vladimir Putin, on his return from fellow economic powerhouse, Iran, is already setting the scene for reduced flows resuming, blaming faulty pumping units again according to Reuters. They also reported that Mr Putin said in Iran that “not all issues had been resolved yet” vis-à-vis Black Sea grain exports.

So, Joe Biden left Saudi Arabia empty-handed on commitments by the Saudis to pump more oil, and Vladimir Putin is saying Nord Stream 1 gas flows will remain low and that Black Sea grain shipments have “issues” to overcome. And markets are pricing in peak inflation with a precipitous drop in H2 2022. I do admire the optimism. In large directional macro moves of the type we have seen in equities and currency markets the past few months, it is not unusual to see quite aggressive short-term reversals of those trends. I am yet to be convinced that we are seeing anything more than a bear market rally at the moment. Europe’s day of reckoning may come earlier when Nord Stream 1 is due to be switched on tomorrow. For the rest of world, that may come at next week’s FOMC policy meeting.

Over in China, the mortgage payment strike by disgruntled apartment buyers is grabbing the headlines. The government is seemingly moving to push the funding gap to beleaguered developers onto local governments and state policy banks, meaning the fallout so far has been limited on equity markets. Perhaps more concerning is new Covid-19 cases reached 1,012 in China yesterday, according to official data. A flesh wound anywhere else, but in China’s covid-zero world, a cause for concern around potential new lockdowns. Readers should monitor developments here closely. Covid-zero means covid-zero in China, not lock down Shanghai and Beijing once and done. Mainland equities have only rallied modestly today, and your answer probably lies there. In other news China left its one and five-year Loan Prime Rates unchanged, but this was completely expected.

There is no other data of note due out in Asia today, the Reserve Bank of Australia Governor Lowe spoke earlier today. Mr Lowe said he expected CPI to keep heading higher, that employment was past its theoretical maximum, and that interest rates would have to keep going up. Mostly, it was of no surprise to markets now, and the Australian dollar and local equities are ignoring it to hitch their reins to the US peak-inflation, we can trust Russia, less-worse earnings, sentiment rally overnight, like everyone else.

This afternoon, German PPI is expected to rise to an eye-watering 33.90% YoY for June, as hints of a 0.50% rate hike by the ECB tomorrow gave the euro a boost overnight. The United Kingdom releases inflation for June, expected to climb to 9.30% YoY, with Core Inflation at 5.80%, PPI rising to 23.20% and Retail Prices rising 11.80%. With UK employment data yesterday surprisingly strong, some serious pressure is going to fall on the Bank of England now to accelerate rate hikes lest material sterling weakness return.

US Housing Starts for June edged slightly lower overnight, and tonight we receive Existing Home Sales, which are expected to fall slightly to 5.38 million. In this environment, a bigger fall as rate hikes bite is likely to be interpreted as peak inflation/less Fed rate hikes equals buy equities and sell US dollars. Counterintuitive I know, but I don’t make the story up, I just report it and try to make sense of it.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes.

He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays.

A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others.

He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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