Analyst sees a 98% chance of global recession.

Headlines

• UK bonds and the pound’s declines continue.

• A housing downturn.

• Tech has further to fall.

• The cost of shipping goods from China has dropped to the lowest level in more than two years

• Analyst sees a 98% chance of global recession.

• China’s yuan approaches a 14-year low.

My View

Sterling crashed to a record low of $1.0350 against the dollar with investors, spooked by government tax cut plans and overall spending package boosting government debt by around £200 bn. The UK spending will cause deeper current account deficit, a large fiscal deficit, and a capital account deficit. The BoE did very little to placate investors, although the pound has managed to rally back to $1.08 (WoW!) However, should there be another selloff I would expect the BoE to raise rates again immediately rather than wait until November. A weak GBP also increases import costs which will add more to inflation. Everything in the UK is now much cheaper due to the cheap pound which could attract a lot of buyers to products, services and takeovers of UK companies!

The markets are seeing some profit taking this morning. There are still plenty of central bank speakers this week though so more action to come. I am still surprised it has taken investors so long to wake up to the fact that central banks are prepared to drive economies into recession to beat inflation, and when they finally stop raising rates they will not drop again until 2024.

The crypto market seems to have been the steadiest asset class in recent weeks. BTC is back over $20k this morning.

I bought oil spreads over the last two days when oil was in the $76s, as I expect the US to replenish their strategic reserves below $80.

With raw material costs dropping from energy to shipping, we should see PPI begin to drop, however, with companies pushing profit margins to the highest for decades, over 15%, it will be longer before they are reflected in CPI.

Later at 5 pm UK time, I have been asked to appear on the Ninja Trader – Traders Workshop chat show, where I will discuss my long career (boring) and the macro-outlook (interesting). https://youtu.be/__PWWAxPQX4

Global News

Global risk assets extended their selloff on Monday as fears of faster inflation and global recession continued to rise. An index of global stocks traded near the lowest since 2020, while S&P 500 futures fell 0.8% as of 6:08 a.m. New York time on concern that Federal Reserve rate hikes to combat persistently elevated inflation will hurt the economy. UK markets were in focus as the pound crashed to an all-time low. Treasuries extended their worst bond slide in decades as a dollar gauge rose to yet another record. European equities also dropped after sliding into a bear market on Friday. Oil fell again, with Brent sliding below $85 a barrel at one point.BB

The great tech selloff of 2022 is far from over as investors brace for earnings misses that may spur a more than 10% plunge in the Nasdaq 100. More than two-thirds of 914 respondents in the MLIV Pulse survey think profits of the technology companies will disappoint the market throughout 2022. The Nasdaq 100 is down about 31% so far this year, wiping out trillions of dollars in market value, as investors reassess the post-pandemic value of many business models. Meanwhile, retail and professional investors are also bearish on the metaverse.BB

UK bonds sold off for a second day on Monday, with traders ramping up bets on the scale of interest-rate hikes by the Bank of England. The plunge in UK gilts sent 10-year yields above 4% for the first time since 2010. The pound, meanwhile, recovered from the day's lows of $1.0350 as the probability of sliding to parity with the dollar this year hit 60%. The UK’s foreign currency holdings are a fraction of the huge stockpiles built up by some of its peers, making unilateral intervention to prop up the pound a tall order.BB

As largely expected, a centre-right coalition led by Giorgia Meloni has secured a clear victory in Italy's election. Meloni will now form a government which will count on a stable majority. For now, concerns about budget decisions and relationships with the EU are quite muted, and both Italian bonds and the euro have bigger short-term issues to deal with.

Meloni to get a mandate to form a government

The undisputed big winner in this election was Giorgia Meloni, the leader of Fratelli d’Italia. With 26% of the votes, she prevailed in her coalition by a huge margin over Lega (9%) and Forza Italia (8%). There will be no leadership issue, and she will very likely get the mandate from President Sergio Mattarella to form a new government.

This will not happen before mid-October, though, after the first gathering of the houses and the election of their speakers. A new Meloni government could thus be installed by the end of October.ING

Another downturn in US home prices may be in the cards, but the banking system is in a much better condition to handle it, the founder of Paulson & Co. told Bloomberg. John Paulson became a billionaire after his hedge fund effectively shorted more than $25 billion of mortgage securities at the dawn of the global financial crisis. Separately, Ken Griffin’s plan to move Citadel’s headquarters to Miami has hundreds of its employees readying to dive into the real estate market.BB

Apple started manufacturing iPhone 14s in India sooner than anticipated after a remarkably smooth production rollout that slashed the lag between Chinese and Indian output from months to mere weeks.BB

Sterling has fallen close to 10% on a trade-weighted basis in a little under two months. That's a lot for a major reserve currency. And traded volatility levels for the pound are those you would expect during an emerging market currency crisis.

Unlike equity markets where in excess of a 20% fall from a peak is called a bear market, definitions in FX markets are a little looser. Suffice to say that GBP/USD is the worst performing G10 currency this year at -20% year-to-date, just pipping the Japanese yen to that position. (Japan intervened last week to support its currency for the first time since 1998).

Typical emerging market currency crises since the early 1990s have seen exchange rates fall anywhere near 50-80%. The large size of these adjustments has typically been a function of the breaking of an exchange rate regime/peg. The UK has learned from its experiences in ERM II in 1992 and has operated a free-floating FX regime ever since – arguing against sterling following some of the outsized EM FX adjustments outlined above.

However, the 3.5% decline in Asia overnight and the now 28% levels for one week traded GBP/USD volatility (close to the highs in March 2020) certainly marks trading out as ‘disorderly’. Disorderly markets normally prompt a response from policymakers. ING

The global economy will expand just 2.2% in 2023, down from a previous forecast of 2.8%, the OECD said. Europe will be hardest hit amid the dual shock of the war in Ukraine and the ensuing energy crunch. Russia's invasion will cost the global economy at least $2.8 trillion in lost output by the end of 2023.BB

Meloni's next move. Far-right candidate Giorgia Meloni won a clear majority in Italy's election to become its first female PM. She struck a conciliatory tone after the win, pledging to govern for all Italians as she was poised to lead the country's most right-wing government since WWII. One of her first challenges is to submit a budget to the EU and parliament, and have it approved by year-end.BB

The EU will unveil in the coming days new sanctions against Russia following the recent discovery of more potential war crimes, Putin’s efforts to push through sham referendums in Ukraine and his nuclear threats. The package will further tighten export controls on electronic components that go into weapons used against Kyiv. It is seen as one of the most efficient measures to hit Moscow’s war machine as the country needs more arms to equip the 300,000 soldiers it’s seeking to recruit. But setting an oil-price cap as agreed by G-7 leaders seems more elusive and will need more time. Details could come only next week as some member states including Hungary still need to be convinced.BB

The ECB will continue increasing borrowing costs “over the next several meetings” even with economic activity expected to “slow substantially,” President Christine Lagarde said. The next rate hike will be at least a half-point as “inflationary trends are intensifying,” according to ECB governing council member Gediminas Simkus. BB

Irish Budget | Companies in Ireland will receive help with their energy bills in an early budget to be announced today, amid a raft of measures aimed at tackling the cost-of-living crisis. In addition to the 6.7 billion-euro plan set out in the summer, the government will announce a cost-of-living package of one-off supports to be paid before the end of 2022. BB

 The ECB’s chief economist has advice for governments wishing to support vulnerable groups amid soaring prices without further fueling inflation: tax the rich. States should support the income and consumption of those households and businesses that suffer the most, Philip Lane told Austria’s Der Standard newspaper.BB

Made in EU | The EU should consider giving subsidies only for electric cars produced in Europe or for those meeting strict green standards, French Finance Minister Bruno Le Maire said. The bloc is looking at options to respond to the US plan to support only American-made e-vehicles, a measure seen as breaching WTO rules.BB

Putin is preparing to formally annex around 15% of Ukrainian territory after referendums on joining Russia in areas controlled by Russian forces or Russian-backed separatists. Neither the West nor Ukraine can stop Putin claiming the regions, though the United States and its allies say they want Ukraine to defeat Russia on the battlefield - and will help it do so by supplying weapons, but not NATO troops. The United States is prepared to impose additional economic costs on Russia in conjunction with U.S. allies if Moscow moves forward with annexing portions of Ukrainian territory, the White House said. - Reuters

Commodities

With the EU Commission’s plan to impose a gas-price cap likely delayed, the institution is set to only share a technical document on the feasibility of such a measure this week in spite of the pressure from some member states, we’re told. As the energy crisis drags on, the economic hit risks dwarfing the fallout from the global financial crisis.BB

Oil stocks to rise on slower demand, OPEC cuts needed to bolster prices  - Global oil stocks are set to rise next year amid weakening demand and a stronger U.S. dollar, executives at an oil conference said on Monday, adding that OPEC will have to cut output to reduce supply if they want prices to remain supported. 

U.S. farmers urge Washington to challenge Mexico's looming ban on GM corn - Farmers in the United States are urging their government to challenge a looming Mexican ban on genetically modified (GM) corn under a regional free trade agreement, warning of billions of dollars of economic damage to both countries. 

EU crop monitor raises Russian wheat crop estimates, cuts maize - The European Union's crop monitoring service MARS on Monday raised its projections for Russia's 2022 wheat crop to a new record high, but lowered its grain maize crop forecast to take account of hot and dry summer weather.

China copper smelters hike Q4 2022 TC/RC floor to a five-year high - China's top copper smelters lifted their floor treatment and refining charges (TC/RCs) for the fourth quarter of 2022 to a five-year high as rising concentrate supply is expected to outpace the expansion in smelting capacity. 

Argentine state-run miners launch first-time lithium project - Units of Argentina's state oil firm YPF will next month begin lithium exploration in a first-ever entry into the sector by state-run miners as the government aims to benefit from surging demand for the battery metal, according to a statement on Monday.

Gas from Russia's Nord Stream 2 pipeline leaks into Baltic Sea - Danish authorities on Monday asked ships to steer clear of a five nautical mile radius off the island of Bornholm after a gas leak overnight from the defunct Russian-owned Nord Stream 2 pipeline drained into the Baltic Sea.

Australia - a land of promise and hurdles for offshore wind developers - Under a new government, Australia is shaping up to be the next big market for offshore wind developers, attracting interest from the likes of Shell, Denmark's Orsted and Norway's Equinor. But the industry, starting from scratch Down Under, faces a slew of challenges.

Ukraine urges EU to help make emergency food routes permanent - Ukraine on Monday urged the European Union to support its plans to make the emergency paths for grain exports through the bloc permanent, with investment in at least five border terminals and a pipeline through which sunflower oil would flow. 

South Korea’s NOFI buys estimated 135,000 T corn in tender -traders - South Korean animal feed maker Nonghyup Feed Inc (NOFI) has bought an estimated 135,000 tonnes of animal feed corn in an international tender that closed on Monday, European traders said.

Japan will honour on Tuesday its assassinated former Prime Minister Shinzo Abe, a polarising figure who dominated modern-day politics as its longest-serving leader, with a rare state funeral that has become nearly as divisive as he was. Abe's killing at a July 8 campaign rally set off a flood of revelations about ties between lawmakers in the ruling Liberal Democratic Party (LDP) he once ran and the Unification Church, which critics call a cult, sparking a backlash against current premier Fumio Kishida.

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

 
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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