German inflation | Frustrated consumers are reporting instances of shrinkflation to authorities and using digital tools to hunt for bargains.

• 10-year Treasury yields climb to highest since global financial crisis

• Apple may back off iPhone production boost

• Russia pressures continue

• Russian leaders declared victory in a series of stage-managed, UN-condemned “referendums,” as the Kremlin moved to annex a large chunk of occupied Ukrainian territory.

• The dollar soared to another record

• The yuan’s drop to the weakest since the global financial crisis in 2008 has fueled speculation China’s central bank will slow the pace of monetary easing.

• German inflation | Frustrated consumers are reporting instances of shrinkflation to authorities and using digital tools to hunt for bargains. 

• Hiking plans | European Central Bank chief Christine Lagarde led a flurry of officials speaking on rates. Most preferred a 75 basis-point hike, with the hawkish Robert Holzmann saying more would be too much for now.

• The BOE intervenes in the gilt market to stem a crash.

• Finland moots a fence to secure its border with Russia.

• The PBOC sounds stern about the yuan.

• Pyongyang ratchets up the tension.

• China's GDP stabilized this quarter, and the final three months of the year will be key to the economic recovery, Premier Li Keqiang said.

My View

With interest rates continuing to rally aggressively in the U.S it is no surprise stocks and other asset classes have been dropping. Apart from rates impacting any loans held by companies it has been tempting investors to do something they have not been able to do for over a decade…place cash on deposit or in Treasuries and actually see a return, even if it is less than inflation.

Bond yields continue to rise and a key point to remember here is why they are called fixed income. The term of the bond is fixed and so is the yield for the whole duration of the bond. Therefore, you know your return from day one until the last day, regardless of where rates go during the 10 to 30 years duration. This has been attracting capital investment away from other riskier asset classes and is likely to continue as rates increase for the remainder of 2022.

Irelands finance minister is promoting taking a slower approach to gaining full support for a Global minimum corporate tax…of course he is as Ireland will lose the advantage, they have enjoyed for years that has attracted major corporations to register their offices there!

The BoE intervention turned them from a seller of Gilts to a buyer to steady the market. Although monetary and fiscal policy are out of sync, the government are making positive steps to protect the consumer and they are hoping this will stimulate the economy. This leads to two questions – will it spike inflation? My answer is no, as households are struggling and need to pay bills, buying what they need…not what they want! The second is harder to answer – how will the UK pay for these fiscal actions which could cost around £200 bn…only time will tell.  I expect further pressure to build on GBP, partly due to the above issues but also due to USD strength. (only my personal view guys!).

Global News

Treasury 10-year yields rose above 4% to the highest level since the global financial crisis, spurred by speculation that Japan will intervene to strengthen the yen -- potentially funded by selling US debt securities.  An index of US sovereign securities extended its worst year since at least the 1970s BB

President Joe Biden’s loan-forgiveness plan will wipe out about one third of student debt owed to the federal government, with lower-income borrowers and those living in Southern states getting the biggest boost, according to analysis by the Federal Reserve Bank of New York.

The proposal would eliminate federally-held balances for about 40% of borrowers, canceling $441 billion in loans, the New York Fed said in a blog post Tuesday.

Borrowers living in neighborhoods with median household incomes below $83,000 — which is some 65% of the total — would receive almost three-quarters of the debt forgiveness, it said.BB

Hurricane Ian barreled ashore in southwest Florida with a massive and deadly surge of water and catastrophic winds that are poised to make it one of the costliest storms in US history. The Category 4 hurricane made landfall west of Fort Myers near Cayo Costa shortly after 3 p.m. local time. Nearly all of Florida, home to 21 million people, braced for widespread blackouts and floods.

More than 2 million people have been ordered or urged to flee the path of the storm, which is expected to cause more than $67 billion in damages and losses. A storm of this magnitude is a severe test for Florida’s infrastructure due to low-lying and densely populated coastal areas which are prone to flooding. It comes as the climate crisis has fueled extreme weather worldwide this year, including a European heat wave that killed more than 2,000 people and relentless drought across the American west. After Ian crosses Florida, it’s expected to impact Georgia and the Carolinas.BB

The BOE stepped back into the UK bond market in a bid to to calm things down, putting the ball in the government's court as Britain's economic credibility teeters on the brink.

·  The bank will buy long-dated gilts at a rate of up to £5 billion per auction. The move was prompted by fears that collateral calls this afternoon would trigger a further crash, a person familiar said.

·  The Mexican standoff between the government, on the fiscal accelerator, and the BOE on the monetary brake, was won by the government as the bank had to blink, Janus Henderson said.

·  Dizzying. The 30-year yield plummeted as much as 100 basis points on the news, the largest drop in data going back to 1996 on a closing basis. The pound surged at first, then yo-yoed.

·  Fallout. Moody's warned Liz Truss's tax-slashing plan may do permanent damage to public finances. Labour leader Keir Starmer said the government had lost control of the economy.BB

Events in the UK yesterday marked the first time this stagflationary macro environment risked evolving into a financial crisis. Fortunately, the Bank of England intervened aggressively in the Gilt market and market conditions have temporarily stabilised. However, there will be no room for complacency this autumn as volatility returns to 2020 highs

Traded levels of volatility continue to rise in FX and debt markets. Remember these represent expected levels of volatility and are really being driven by the big swings we are seeing in spot FX and bond yields. Interestingly, equity volatility is a lot more subdued with perhaps equity investors already defensively positioned for late-cycle equity losses.  

So far, this stagflationary environment and the aggressive response from central bankers - especially the Federal Reserve - have seen financial assets adjust as one would expect at this stage in the economic cycle. Up until recently, conditions in FX and debt markets had been reasonably orderly and there was no hint of financial stress in the system. Sadly the same could not be said of frontier markets, where the likes of Sri Lanka defaulted earlier this year.  

Yesterday, however, saw the Bank of England's Financial Policy Committee take the decision to break the 'doom loop' at the long end of the UK Gilt market as margin calls on pension funds and the need to raise cash risked a downward spiral for long-dated Gilts. In effect, this is the first big intervention from a G10 central bank in this cycle to avert a financial crisis. It may not be the last. It serves as a reminder to policymakers around the world that any perceptions by the market of a policy misstep will be heavily punished. And with the Fed to keep hiking into a slowdown - probably taking rates to the 4.25/4.50% area into 1Q23 - these conditions may well be with us for the next six to nine months.

What does this all mean for FX? The dollar will continue to be favoured - especially if it is soon to be paying 4% on deposits. And tighter liquidity conditions as central banks battle inflation around the world mean still higher levels of FX volatility. This will discourage a return to carry trade strategies meaning that high-yielding FX and commodity currencies will not be given the benefit of the doubt. We, therefore, continue to favour defensive strategies in FX - which means backing the dollar and looking for the Swiss franc to outperform in Europe as the Swiss National Bank (SNB) guides it higher.  

Out of interest as well, the US trade balance has narrowed back to levels last seen in October 2021 - meaning that the dollar's Achilles Heel - the trade deficit - does not look as vulnerable as it could. Expect there to remain strong demand for the dollar on dips  ING

Apple shares fell as much as 3.3% in premarket after a report said it's backing off plans to increase production of its new iPhones this year after an anticipated surge in demand failed to materialize. Instead, it'll aim to produce roughly the same level as the prior year and in line with its original forecast this summer. China, the world’s biggest smartphone market, is in an economic slump that’s hit its domestic mobile device makers and affected iPhone sales. Global demand has also been suppressed by surging inflation, recession fears and disruption from the war in Ukraine.BB

On opposite sides of the planet Tuesday, hundreds of thousands of people were evacuating from coastal areas in advance of landfalls of storms expected to be the most powerful in decades.

Such scenes from the west coast of Florida, bracing for Hurricane Ian, and central Vietnam, in the path of Typhoon Noru, showcase the kinds of hits to the economy that Treasury Secretary Janet Yellen warned on Tuesday are likely to be more common as climate change progresses.

“Shocks that were unthinkable even a few decades ago are now presenting with alarming frequency. There’s been at least a five-fold increase in the annual number of billion-dollar disasters over the past five years compared to the 1980s, even after adjusting for inflation,” Yellen said in a speech.

Supply-chain disruptions could become commonplace, unless businesses — as seems likely — adopt climate-change adaptation strategies that boost costs. Households probably also will have to devote resources to things like flood insurance, the Treasury chief noted.

Fiscal authorities, too, will see strains. Not only will there be calls for relief spending, but “state and local governments may increasingly be forced to devote scarce resources to disaster mitigation, potentially at the expense of investments in areas like education and worker training,” Yellen said.

Perhaps unsurprisingly, investor interest has climbed in so-called catastrophe bonds, which insure against natural disasters. In a year when both equities and government securities have slumped into bear markets, cat bonds have a positive total return. Issuance of these bonds reached a record of almost $13 billion last year.

Yellen offered hope: She touted legislation enacted over the past year that provides $430 billion for climate and clean-energy programs. The idea is that this will catalyze the deployment of private-sector capital as well, and speed the transition away from fossil fuels.

But if it turns out the world is too late in heading off even more powerful warming trends, the types of supply-chain shocks, and their inflationary impulse, will be a consideration for households, businesses and governments alike.BB

The Bank of England just announced temporary and unlimited purchases of long-dated bonds to aid financial stability, escalating its response to the UK’s market turmoil.BB

US housing recession is already here

Rising mortgage rates and a lack of affordability are prompting a steep drop-off in demand for housing. At the same time inventory for sale is on the rise. A combination of falling transactions and prices will intensify the recessionary forces the US economy is facing.

The stimulus-fueled surge in prices looks to be over

House prices nationally have increased more than 40% since the start of the pandemic as massive fiscal and monetary stimulus fueled demand for homes. Working from home has also opened more opportunities of where to live, yet at the same time, supply was limited with new construction slow to catch up.

Some hot spots in the south and west of the US have experienced prices gains of more than 60%, but even the weaker performers in the north and east of the country have seen price rises in excess of 25%.  However, the demand momentum appears to be rapidly fading with affordability, amidst record prices and rising borrowing costs, the key issue. Supply is picking up too with a July month-on-month fall in prices, the first in over ten years, likely to be the start of many. ING

North Korea fired two short-range missiles, its second test launch in four days, ramping up tensions before Kamala Harris is set to visit the peninsula's DMZ today. Kim Jong Un also appears ready to conduct his first nuclear-weapon test in five years.BB

All developing-nation asset classes are on track to post negative returns this year as a global flight from risk wipes trillions of dollars off valuations.

·  A strengthening dollar, the yuan's relentless slide and the war in Ukraine have been a toxic mix for emerging-market currencies.

·  The MSCI gauge of EM currencies has slid about 4% since end-August, on track for its biggest monthly loss in more than a decade. 

·  But as losses from EM stocks surpass those seen at Covid's height, the MSCI's relative strength index is under 30, signaling "oversold." BB

The Biden administration is alarmed over the market turmoil triggered by the UK's economic program and is encouraging Liz Truss's team to dial back planned tax cuts. Treasury officials fear there could be potential spillovers to the broader economy, people familiar said. Cutting taxes and boosting spending will neither cool inflation nor secure longer-term growth, commerce chief Gina Raimondo said.

·         And Tories are displeased. MP Robert Largan echoed Simon Hoare's earlier criticism of Kwasi Kwarteng, saying he made a mistake in cutting the top tax rate. Lawmakers are openly discussing the chancellor's future and whether he should quit, a person familiar said.BB

The US and Germany remain stuck on efforts to send battle tanks to Ukraine, as officials contend with logistical issues and Europe’s own defensive requirements, along with concern about escalating tensions with Russia, according to people familiar with the discussions. Ukraine’s allies have held talks at various levels in recent weeks on whether to send NATO-standard battle tanks to Ukraine, but no decision has been taken.BB

Drone Crashes | The EU is planning new rules to make it easier for people to sue for damage triggered by failures of artificial-intelligence technology, whether it be drone crashes or invasions of privacy.  Draft liability rules unveiled yesterday would lower the burden of proof and ease the access to evidence for people who have suffered damage from AI-driven systems, where pinpointing blame is hard due to the technology’s complexity. BB

ECB President Christine Lagarde said borrowing costs will be raised at the next “several meetings” to ensure inflation expectations remain anchored and price gains return to the target. Addressing an event in Frankfurt, Lagarde said bringing inflation back to the 2% medium-term goal is the ECB’s main mission — despite increasing concerns about recessions in Germany and the 19-nation euro zone.BB

Debt Sales | Germany’s federal government will increase debt sales by €22.5 billion in the fourth quarter to help fund spending to soften the impact of the energy crisis. Chancellor Olaf Scholz’s coalition has put together three packages of measures to help households and businesses struggling with soaring energy costs. The initiatives are worth almost €100 billion in total.BB

Minimum Tax | Ireland’s Finance Minister Paschal Donohoe said the EU should take time to get unanimous backing for the global minimum corporate tax. His stance pushes back against large European countries including Germany and France that are looking at new ways to quickly bring the minimum levy into force as Hungary continues to block an EU directive.BB

WhatsApp Fines | Credit Suisse, Deutsche Bank and UBS aren’t expecting a hit to third-quarter earnings after agreeing to pay fines in the U.S. related to a probe into unauthorized messaging apps. Deutsche Bank confirmed yesterday that it won’t see any impact on results due next month. The two Swiss banks have also largely set aside enough cash to cover the fine, we’re told.BB

Draft Exodus | At least 200,000 Russians have left the country after President Vladimir Putin’s mobilization order, an exodus that’s causing turmoil at the borders and stirring fears in neighboring states about potential instability. While Russia hasn’t released official data, statistics from Georgia, Kazakhstan and the EU showed the scale of the departures.BB

Three decades after the presumed cause of Alzheimer’s disease was identified, a Japanese company little known outside of the pharmaceutical industry has become the first drugmaker to prove the debilitating condition can be slowed. Eisai and partner Biogen said their experimental drug lecanemab blunted progression of the disease in a large definitive study. The results bolster the so-called amyloid hypothesis: a controversial theory that the build up of amyloid, a toxic protein that clutters the brain, is one of the main causes of the disease.BB

EDF is exploring keeping two of its UK nuclear power stations open for longer than planned amid growing concern over energy shortages. The French state-owned company said it will review its current plans to close Hartlepool and Heysham 1 in March 2024 "with an ambition to generate longer if possible". - Telegraph

Commodities

The EU  is considering adding shipping restrictions to its oil sanctions as the bloc continues to discuss the introduction of a price cap on Russian oil, according to people familiar with the matter. BB

Slovakia may cut electricity exports to Germany and other EU states unless the bloc’s governments meet its demand to modify an emergency energy proposal, Prime Minister Eduard Heger told us. A package of intervention measures includes a cap on lower-cost power producers’ revenue from electricity, which Slovakia argues isn’t fit for its national power industry.BB

China may extend refined fuel export quota into next year - China may tweak a proposed sharp increase in refined fuel export quotas for this year by extending the plan into next year, as it weighs the benefits to the economy of higher exports against low domestic stocks and operational challenges, four sources told Reuters. However, the four sources with direct knowledge of the matter - and three others - said the government was still reviewing the matter. 

U.S. crude, fuel stocks fall in most recent week - EIA - U.S. crude and fuels stocks posted surprising declines in the most recent week as fuel demand rose and refiners cut runs, the Energy Information Administration said on Wednesday. Crude inventories fell by 215,000 barrels in the week to Sept. 23 to 430.6 million barrels, compared with analysts' expectations in a Reuters poll for a 443,000-barrel rise.

Argentina soy harvest set to climb next season; wheat, corn to retreat - Soybean production in Argentina is expected to rise to 48 million tonnes in 2022/23, the Buenos Aires grains exchange said on Wednesday, as it provided its first estimates for the new season in one of the world's largest grain suppliers. The 15.5% increase over the 2021/22 crop, currently seen at 43.3 million tonnes, would come on the back of a larger planted area and at the expense of other crops, such as corn, the exchange said.

Brazil soy crushers halt production as margins turn negative - Brazilian soybean processors have temporarily halted units as crushing margins turned negative, reflecting weak domestic demand for biodiesel and high vegetable oil inventories, analysts said on Wednesday. Abiove, a trade group representing global oilseed crushers in Brazil, confirmed the move, noting some members advanced scheduled maintenance stoppages as soy oil prices dropped even as soybean prices remained high, hurting margins.

Peru targets local lithium battery production, official says - Peru wants to produce lithium batteries domestically, a government official said on Wednesday, joining other Latin American nations with lofty ambitions to industrialize their resources of the ultralight metal needed to power electric vehicles. "We are already starting to act to see if we can develop a battery industry," said Jaime Chavez, Peru's vice minister of mines, at the Perumin mining industry conference. 

S.Korea's SK On inks deal with Global Lithium Resources for lithium supply - South Korean battery maker SK On said on Thursday it signed a memorandum of understanding with Australia's Global Lithium Resources Ltd for stable supply of lithium.  SK On will receive long-term supply of lithium ore called spodumene, and have an opportunity to secure a stake in a project pursued by Global Lithium Resources, the battery maker said without elaborating. 

EU vows to protect energy network after 'sabotage' of Russian gas pipeline - The European Union on Wednesday promised a "robust" response to any intentional disruption of its energy infrastructure after saying it suspected sabotage was behind gas leaks discovered this week on subsea Russian pipelines to Europe. As gas spewed out under the Baltic Sea for a third day after first being detected, it remained far from clear who might be responsible for any sabotage of the Nord Stream pipelines that Russia and European partners spent billions of dollars building.

Australia's AGL fast-tracks coal power closure after investor pressure - Australia's AGL Energy Ltd on Thursday unveiled plans to spend up to A$20 billion on renewable energy by 2036 and bring forward its exit from coal-fired generation by a decade, caving in to pressure from investors and lenders. The U-turn by the country's top power producer and worst polluter came after a loud campaign by top shareholder and billionaire climate activist Mike Cannon-Brookes that forced AGL to ditch plans to split off coal generation and led its chairman and chief executive to quit.

Ukrainian grains still using Danube as gateway to Romanian Black Sea port  - Ukraine continues to ship grain across the Danube to the Romanian Black Sea port of Constanta even after some of its own ports reopened, and the new routes are likely to remain, the deputy chief of freight logistics group TTS said on Wednesday. Ukraine's grain exports slumped after Russia invaded the country on Feb. 24 and blockaded its Black Sea ports, driving up global food prices and prompting fears of shortages in Africa and the Middle East.

Ukraine grain exports down 41.5% so far this season, ministry says - Ukraine's grain exports are down 41.5% year on year in the 2022/23 season so far at almost 8 million tonnes, but the pace of shipments is increasing gradually, agriculture ministry data showed on Wednesday. The country's grain exports have slumped since Russia invaded in February because its Black Sea ports were closed off, driving up global food prices and prompting fears of shortages in Africa and the Middle East.

Sweden's coast guard discovered a fourth gas leak on the damaged Nord Stream pipelines earlier this week, a spokesperson told the Svenska Dagbladet newspaper. The European Union suspects sabotage was behind the gas leaks on the subsea Russian pipelines to Europe and has promised a "robust" response to any intentional disruption of its energy infrastructure. While neither pipeline was in use at the time of the suspected blasts, they were filled with gas that has been spewing out in the Baltic Sea since Monday's ruptures.

A weakened but still formidable Hurricane Ian chugged across Florida toward the Atlantic seaboard on Thursday after thrashing the state's Gulf Coast with fierce winds, torrential downpours and raging surf that flooded oceanside communities. Ian blasted ashore with catastrophic force on Wednesday afternoon as a Category 4 hurricane, packing maximum sustained winds of 150 miles per hour (241 kph), and quickly plunged the region's flat, low-lying landscape into a scene of devastation. Ian's winds, making it one of the most intense storms to strike the U.S. mainland in recent years, diminished significantly after nightfall. Within eight hours of its arrival, Ian was downgraded to Category 1 on the five-step Saffir-Simpson scale, with top sustained winds of 90 mph (150 kmh), the National Hurricane Center (NHC) reported.

Porsche AG made its debut on the stock market on Thursday, with a price tag of about 75 billion euros ($72.45 billion) after Volkswagen (VOWG_p.DE) priced shares at the top end of the range, braving turbulent market conditions. The bumper flotation, expected to generate around 19.5 billion euros ($19.0 billion), comes as instability in European markets has deterred other share sales by carmakers, including in luxury brands.  The sale values Porsche AG close to the market capitalisation of its parent Volkswagen, which is worth around 84 billion euros, and puts it ahead of rivals like Ferrari. Books closed on Wednesday on what is one of Europe's biggest IPOs and the second largest in Germany since Deutsche Telekom (DTEGn.DE) made its debut in 1996, at the top end of the 76.50-82.50 euro range it announced earlier this month.

Crypto/Digital

Regulation is the U.S will soon impact stablecoins.

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