Daily Insights 08/09/2022

Headlines

• Bitcoin is flirting with a test of this year's lows following a crypto selloff that again pushed the sector's overall market value below $1 trillion. 

• Dollar rally continues

• California avoids blackouts

• Return-to-office picks up.

• Bank of Canada hikes by a further 75bp

• Europe preps an unprecedented energy plan to avoid catastrophe.

• The EU will pursue radical steps to avoid an economic catastrophe including price caps and a clawback on power and oil companies' excess profits. It's seeking to reduce power demand in the bloc by 10% to 15%.

• Who's to blame for the shutdown of Nord Stream? Putin says it's the West. Adding flows to Europe may restart as soon as sanctions on Russia are eased, allowing it to return and service turbines.

• German Chancellor Olaf Scholz accused Russia of blackmail and dismissed an apparent leak in the key pipeline as pretense.

• In the UK, PM Liz Truss said she's against a windfall tax on energy companies, saying it would hinder investment in the economy.

• As the crisis plays out, a still defiant Putin said Russia will emerge stronger from his invasion of Ukraine as he lashed out at US and European "sanctions fever."

• GameStop reported mixed results but it announced a partnership with cryptocurrency exchange FTX US. Shares rose in late trading. 

• Chengdu extends Covid lockdown.

• Goldman lifts forecasts for Fed hikes.

• Biden stalls on Trump-era tariffs.

• White House warns on Brexit deal change.

• War may stretch into 2023.

• Biden talks to allies on next steps on Ukraine.

• Japan's economy shows strength.

Its ECB day and will they be brave and hike by 75 bps or will they compromise with the doves and only increase by 50 bps. If it is the latter, I expect to see the Euro drop!

Gold once again rejected the $1700s level and stocks enjoyed a late afternoon rally, oil dropped below $82 amid concerns of recessions, weaker demand from China and higher inventory levels. Powell is speaking today and so am I (haha!) at 5 pm UK time when I present the monthly webinar hosted by our friends at Fineco Bank. Register at https://finecobank.co.uk/public/live-events/registration/?id=TR6356

Global News

Global equities are on their worst slide in more than a decade, but even more selling may be possible, according to Goldman. Economic growth is set to weaken further and stocks have yet to reach a "decisive" low, the bank's strategists say. Prepare for a bumpy ride down.

Rates must stay high until inflation improves, the Fed's Thomas Barkin said. He told the FT that rates at 4% wouldn't surprise him. Voting FOMC members Loretta Mester and Lael Brainard speak later, and the bank's Beige Book may show early signs its policy is starting to moderate economic momentum.BB

The dollar continues its ascent, leading to weaker currencies around the world. Normally emerging-market currencies bear the brunt of dollar strength, but this year the effect has been more pronounced for developed-market ones such as the yen and the pound. Aggressive tightening from the Federal Reserve is pushing rival currencies lower, especially for those countries that are emerging from very low rate regimes, many of which are in the developed world. Gold, too, is in the firing line, as the greenback's dominance pushes the precious metal towards the "danger zone" of $1,700 per ounce.BB

The prospect of aggressive Fed Reserve monetary tightening lifted a dollar gauge to another record Wednesday. European stocks fell while S&P 500 futures rose 0.1% as of 5:43 a.m. New York time. The 30-year US Treasury yield was around the highest since 2014 and the yen slumped. Bitcoin is flirting with a test of this year’s lows. Crude erased a decline after Russian President Vladimir Putin underlined that his country won’t supply oil and fuel if price caps on the country’s exports are introduced.BB

Powell may be causing restless nights for investors across the world, but he’s likely sleeping a little more soundly, at least if he is following signals from the bond market. There, expectations for future inflation look to be falling nicely in line with the Fed’s aims, seen most clearly in so-called breakevens, which track the difference between yields on inflation-protected securities and regular Treasuries.

Two-year breakevens have tumbled from just under 5% in March to 2.2% Wednesday, within shouting distance of the Fed's 2% target. Longer-dated equivalents are also retreating. Inflation is showing signs of decelerating, the central bank said in its latest Beige Book report, and the recent slump in the oil price will give officials some comfort. But what brings relief to policy makers will not necessarily do the same for investors. The Fed seems committed to keep interest rates higher for longer. And a continued slide in inflation expectations is just as likely to signal bets on a recession, which would keep the pressure on risk assets like stocks and credit. BB

China’s exports to the US fell 3.8% in August compared with a year earlier, the first contraction since May 2020.

• What's happening: American consumers are tightening their purse strings as inflation soars and shifting purchases away from pandemic-related goods toward services.

• What it means: China's overall export growth weakened more than expected last month and imports stagnated, too, a clear signal the global economy is slowing.BB

The Bank of Canada continues to worry about excess demand and elevated inflation expectations despite recent weaker inflation and GDP readings. Further hikes are coming, but likely at a slower pace with the policy rate set to hit 4% before year-end. There is some room for a hawkish repricing, but benefits for CAD should not be seen in the near term.

The Bank of Canada (BoC) has raised its policy rate by 75bp to 3.25%, as was widely expected. This follows a surprise 100bp hike in July and brings the cumulative policy tightening to 300bp since February.

While acknowledging that inflation slowed to 7.6% last month and that second-quarter GDP growth was less than expected at 3.3%, the BoC argues that the economy continues to experience “excess demand” and a tight labour market. Moreover, while GDP did undershoot forecasts, this was more trade-related and residential construction-related with consumer spending and business investment looking “very strong”. Meanwhile, core inflation continues to rise with the data indicating a “further broadening of price pressures”.ING

Any attempt to roll back rules governing the UK's post-Brexit trade with Northern Ireland could hurt the chances of a bilateral trade agreement with the US, according to the White House. Press Secretary Karine Jean-Pierre said there is "no formal linkage" between the two issues but warned Liz Truss's new government against such a move BB

Christine Lagarde is likely to be quizzed about the region’s prospects, the weak euro and the increasingly alarming energy crisis. She then heads to Prague, where she’ll have the opportunity to exchange views with EU finance chiefs and central bankers over the next two days. BB

The EU is poised to push radical plans to tackle the energy crisis, including intervening to ease liquidity strains in the market. Commission President Ursula von der Leyen said energy ministers will discuss grabbing windfall profits from firms via a levy and price caps as well as mandatory demand reductions. This winter is looking bad, but next winter could be even worse. BB

UK Prime Minister Liz Truss said she will move ahead with legislation to rewrite parts of the Brexit deal. Asked what she would do if she couldn’t strike a deal with the EU, Truss replied she wants to protect the region’s peace agreement and fix the Northern Ireland Protocol she said “has damaged the balance” between communities. BB

Apple unveiled a new lineup of devices with few surprises beyond one major one: It didn’t raise its US prices. The new products include the iPhone 14, enhanced AirPods and a rugged Apple Watch. The new iPhone looks very similar to existing models and adds features such as satellite messaging. Most of the upgrades are on the higher-end models, including a 48-megapixel camera, always-on screen and a redesigned interface called Dynamic Island.BB

GDP beat. Japan's economy expanded more than initially estimated in the three months through June, thanks mainly to stronger business spending. GDP grew an annualized 3.5%, more than the expected 2.9% expansion and well above a preliminary reading of 2.2%. BB

Commodities

European aluminum is buckling under surging energy costs, with two more producers announcing cuts as the local metals industry reiterated it’s facing an “existential threat.” Speira will cut production at its smelter in Germany by 50% until further notice, while Europe’s largest aluminum smelter in France will reduce output by 22% by the end of the month. BB

Big oil and gas companies are spending tens of millions publicising their environmental work, while only about a 10th of their investment goes into low-carbon development, a report claims. A comprehensive study of public communications from five oil and gas firms by InfluenceMap, a climate finance thinktank, found that 60% of the publicity made at least one claim highlighting the companies' positive climate actions. But on average, the five companies devoted only 12% of capital expenditure to low-carbon activities - and this included some gas projects. – Guardian

UK Prime Minister Liz Truss to scrap fracking ban - Britain's new Prime Minister Liz Truss will on Thursday scrap the country's fracking ban and will seek to make more use of North Sea reserves, the Telegraph newspaper reported.  The reported moves are part of what her office said will be a "bold plan of action" to support households and businesses with soaring energy bills while also seeking to boost domestic energy supply. 

Top shale executive says U.S. oil output gains to disappoint - U.S. oil output this year is likely to disappoint, with even lower growth possible next year, said Scott Sheffield, chief executive of leading shale producer Pioneer Natural Resources. Oil supply has been thrust into the spotlight by Russia's invasion of Ukraine and sanctions on its oil exports. U.S. shale companies and the Organization of the Petroleum Exporting Countries have said they cannot pump more oil, pushing up prices. 

Putin to look at revising 'cheating' Ukrainian grain export deal - President Vladimir Putin said on Wednesday that Russia and the developing world had been "cheated" by a UN-brokered Ukrainian grain export deal, vowing to look to revise its terms to limit the countries that can receive shipments. Speaking at an economic forum in the city of Vladivostok in Russia's Far East, Putin took aim at the deal, brokered by Turkey and the United Nations, saying Ukrainian grain exports were not going to the world's poorest countries as originally intended.

Labour shortages set up Malaysia for third year of palm oil losses - Malaysian palm oil planters are letting thousands of tonnes of fruits rot as the third year of a worker shortage has left companies unable to increase their harvesting during the peak production season. Palm oil output in Malaysia, the world's second-largest producer, is forecast to decline, or at best remain unchanged, from last year's 18.1 million tonnes, according to planters and analysts. 

Nornickel dividend deal to lapse as Potanin, Deripaska avoid new row - A deal to cap dividends at Nornickel, the world's top palladium and refined nickel producer, will lapse at the end of this year as its co-owners avoid renewing a row which could anger the Kremlin, three sources familiar with the matter told Reuters. Moscow brokered a 10-year accord between Nornickel's two largest shareholders in 2012 - Russian businessman Vladimir Potanin and Rusal, then controlled by Oleg Deripaska - protecting its dividend payouts with a formula based on a ratio of its debt and earnings.

Workers at Chile's Escondida copper mine to strike over safety concerns - Workers at BHP's sprawling Escondida copper mine in northern Chile voted Wednesday to go on strike over what they described as safety concerns, the mine's union said. Unionized workers, who say that Escondida, the world's largest copper mine, has not responded to repeated complaints about potential safety risks, voted almost unanimously in favour of the action.

EU plans to cap Russian gas price as Putin warns West of winter freeze - The European Union proposed a price cap on Russian gas on Wednesday after President Vladimir Putin threatened to cut off all energy supplies if it took such a step, raising the risk of rationing in some of the world's richest countries this winter. The escalating standoff could drive up sky-high European gas prices further, adding to already eyewatering bills EU governments are paying to stop their energy providers collapsing and prevent cash-strapped customers freezing in the cold months ahead.

EU plans revenue clawback from non-gas power plants, document shows - The European Commission wants to claw back revenue from electricity generators that do not run on gas, aiming to use the cash to cushion consumers from soaring bills as they head into winter, a draft document seen by Reuters said. The plan is part of emergency measures being drafted by Brussels to reduce gas and electricity costs that have surged as a result of Russia cutting gas flows to Europe since the invasion of Ukraine.

Ukraine sailor permits seen crucial for grain exports, global shipping  - Ukraine's decision to allow its seafarers to leave the country despite wartime restrictions will free up vital manpower for both Ukrainian grain exports and the wider global shipping industry, industry figures told Reuters. The move, officially confirmed this week, is part of efforts by Ukraine to maximise its grain shipments via a UN-brokered corridor through the Black Sea, which lifted a Russian blockade of Ukraine's south coast when came into effect in early August. 

Argentine soybean sales spike after new exchange rate - Argentine farmers sold a total of 2.13 million tonnes of soybeans on Monday and Tuesday, surpassing in just two days the 667,000 tonnes sold last week after the government established a preferential exchange rate for soybean exports, the Rosario Stock Exchange said Wednesday. The sharp increase in sales comes after Economy Minister Sergio Massa's announcement on Sunday that set the exchange rate for soybean producers at 200 pesos per dollar, which is above the official 140 pesos per dollar rate. 

Crypto/Digital

Congress must act on stablecoins, according to a leader at the Federal Reserve.

"I believe Congress should work expeditiously to pass much-needed legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter," said Michael Barr, the Fed's vice chair for supervision a speech at The Brookings Institute, a think tank. "I look forward to continued partnership with other regulatory agencies and Congress to address the risks of stablecoins."

Barr is focused on oversight of financial stability as part of his role, though he is hardly unique among regulators in his view that "Stablecoins, like other unregulated private money, could pose financial stability risks."

"Crypto-asset related activity, both outside and inside supervised banks, requires oversight so that people are fully aware of the risks they face," he said.

The long-awaited Merge is almost here – Ethereum is anticipated to move from the Proof-of-Work (PoW) consensus mechanism to the Proof-of-Stake (PoS) consensus mechanism on or around September 15, 2022. This move will make Ethereum more secure, less energy-intensive, and better for implementing new scaling solutions.

During the Merge, Coinbase will briefly pause Ethereum (ETH) and ERC-20 token deposits and withdrawals as a precautionary measure. This pause will affect transfers on the Ethereum, Optimism, and Polygon networks. Deposits and withdrawals will be re-enabled after the Merge, but may have delayed processing for the first 24 hours. This will ensure your maximum safety as the new Proof-of-Stake Ethereum network begins to process transactions. We do not expect any other networks or currencies to be impacted.

After the Merge

An increase to the ETH staking yield is anticipated
After the Merge, we anticipate an increase in ETH staking yields as the rewards will incorporate transaction fees currently paid to miners under the proof-of-work mechanism. Any rate changes will be reflected under the ETH2 staking page if you are staking ETH at the time.

Staked ETH (ETH2) won’t be unlocked at the time of the Merge
Staked ETH (ETH2) balances won’t be unlocked after the Merge or be available to trade or transfer until the Ethereum protocol upgrade completes. The upgrade is anticipated to be completed by 2023. However, to give users more flexibility, Coinbase has a new token that lets you unlock the value of your staked ETH. You can now wrap ETH2 to cbETH to sell, transfer to your self-custody wallet, or use in DeFi.¹ There are zero fees for wrapping to cbETH and you continue to earn staking rewards so long as you hold the token – Coinbase

Mining infrastructure companies Hive Blockchain and Hut 8 Mining Corp. today released notices that detail how their businesses plan to pivot away from Ethereum mining.

As the mid-September window for the Ethereum merge draws closer, the final days of proof-of-work mining on Ethereum are here. The merge upgrade will transition Ethereum to a proof-of-stake system, which is forcing miners to rethink their business models.

Hive, a publicly traded company, plans to explore other blockchains to continue its mining operations. Hut 8 Mining, another major miner, will meanwhile pursue ventures outside of crypto.

Proof of work uses high-powered computers to solve complex algorithms, requiring great amounts of energy. On the other hand, proof-of-stake validates transactions through network users who have a large amount of the blockchain’s native token staked.

Computer hardware manufacturing company Hive Blockchain says it has analyzed alternative tokens that are mineable with its graphics processing units (GPU). Hive aims to use its “6.5 Terahash of Ethereum mining capacity in the event of Ethereum’s transition to Proof of Stake across various other GPU mineable coins."

Hive’s processing power produces significant results for the company. During August alone, Hive Blockchain’s GPUs yielded a total production of 3,010 ETH. This equates to about 97 ETH (or more than $150,000) per day.

IT services and consulting group Hut 8 Mining Corp., meanwhile, will be going in a different direction. Hut 8 recently installed more GPUs at their Canadian mining facility and will pivot away from mining.

The elimination of proof of work has brought the need for new opportunities for the computing giant. The company says it will focus on machine learning, artificial intelligence, and providing alternative services to its customers.

Hut 8 Mining formed a partnership with Zenlayer in August to bring the cloud service provider to Canada. Zenlayer’s edge cloud platform will be used by Hut 8 Mining to run applications for customers more efficiently.

In July, Decrypt took a look at the future of Ethereum mining and how mining pools may soon be a thing of the past. Ethereum mining pools may be shifting, just as the consensus mechanism will.

With ETH mining pools on the brink of obscurity, staking pools may be the next new wave of validation and community effort. Staking pools combine the resources of stakeholders to increase the chance of reward through network validation.

As for the individual miners currently profiting from ETH rewards, there is simply no easy answer for their future.

The merge makes Ethereum one of the first blockchains to convert from proof-of-work validation to proof of stake for more energy efficiency and further adds to the uncertainty in the future of mining. Miners who reaped the benefits from proof of work will likely be sidelined by the switch.

Market levels (all analysis is based on CME futures contracts)

DISCLAIMER.
The content of this daily newsletter should only be considered a guide and views, opinions or content contained in this email is provided solely for information purposes and does not constitute investment advice or a solicitation to trade or invest.

Chris Tubby
Senior Director Trading and Education
Symax Fintech