Putin says annexation of occupied Ukraine lands is forever.

Headlines

• Liz Truss won't budge on her mini-budget.

• Putin says annexation of occupied Ukraine lands is forever.

• Ian slams South Carolina after devastating Florida.

• US markets falter on the Fed’s resolve to keep hiking interest rates.

• The US narrowly avoided a government shutdown, funding crucial agencies until Dec. 16.

• Parts of Florida may not have power for a month after Ian.

• China unleashed a slew of measures to prop up its property market.

• Top US green energy firms to visit UAE as Beijing  makes inroads.

• Apple’s tech supply chain shows difficulty of dumping China.

• Americans abroad are renouncing citizenship to escape this tax law.

• Iran targets journalists covering the country’s sprawling unrest.

• Singapore is slowly catching up with Hong Kong as Asia’s wealth hub.

• Economic and political turmoil roils UK

• The pound has reversed back to pre 'fiscal event' levels on news of a policy U-turn.

• OPEC+ considers production cut

• Another defeat for Putin 

Although many would like to see the USD weaker, until inflation drops, I doubt they will be happy! The Fed are on a mission and as PCE showed last week, inflation is sticky, which will keep the Fed on track to continue hiking rates…and more aggressively than most. Not only that, but they will also remain high well into 2023 or possibly 2024, depending on how long it takes them to drastically reduce demand and get inflation back to the desired 2%. Even this will not be enough, they will leave rates high for at least 3 to 6 months to ensure it does not jump again. (Remember, just my view).

Don’t forget OPEC+ meet this week on Wednesday. They may threaten more cuts to stoke prices, however, they cannot meet current quotas anyway, so it will not change the balance much. We have the war on one side and high risk of recession on the other, plus we should not ignore the weather😉

The UK has brought much of the pressure on Gilts and the pound on themselves. I can understand energy price caps and I think cutting tax rates for low to middle-income makes sense. What I do not understand is cutting the higher tax band and this will have serious consequences at the next general election, with Labour already enjoying a 30+ point advantage now. With pushing Boris out of the door and the reshaped Tory government, they are lucky an election is not around the corner as they could come in third! I have just been reading the UK government is abandoning the controversial move to abolish the top tax rate (not sure I have ever that right so quickly on UK politics haha).

Global News

Hurricane Ian pummeled South Carolina with violent wind and a deadly storm surge, heading up the East Coast after making its second US landfall in the wake of its destructive blow to Florida.

·  US stocks suffered their worst monthly rout since March 2020. The S&P 500 closed a volatile session lower. The index suffered its third straight quarter of losses for the first time since 2009.

·  Oil shed nearly 25% to post its first quarterly loss in more than two years but OPEC+ has signaled it could tighten supply. 

·  Fed Vice Chair Lael Brainard said interest rates need to remain high to get inflation under control, but acknowledged the need to monitor global financial stability risks. BB

The embattled UK leader sticks to her guns as inflation revs up in Europe. What a week.

·  Not for turning: Liz Truss's government signaled it's sticking with its plan for tax cuts after a meeting with the fiscal watchdog, defying some predictions that a policy pivot may be imminent. The pound fell, having risen earlier on investor expectations of a row-back in strategy.

·  Back of the class: The UK is the only G-7 economy that has yet to fully recover from the pandemic as revisions to the data leave GDP 0.2% below where it was at the end of 2019. Still, Britain did avert an immediate recession with a surprise expansion in the second quarter. Phew.BB

The euro area economic crisis intensified, delivering the first ever double-digit inflation reading and piling pressure on the ECB to keep raising rates aggressively. In France, though, inflation unexpectedly eased, revealing divergence among the region's top economies.

• ECB officials may have laid the groundwork for a significant rate hike next month, with several rallying around a second 75 basis-point step. But some policymakers are still wary about rushing to lift borrowing costs as the risk of a recession looms.BB

It was a return to the recent misery for the bulls on Thursday after hot economic data combined with a downgrade of Apple stock to negate most of Wednesday’s upside moves. The futures heading into the release of the economic data were already soft on the Apple downgrade. However, the lower-than-expected jobless claims numbers and hotter-than-expected price data added to the belief that the U.S. Fed will have no choice but to continue with their hawkish monetary stance. Thursday’s weakness continued into Friday morning until two rumors started making the rounds. First, Putin is apparently looking to come to the table with Ukraine for negotiations. The problem there is that his terms may be unacceptable to the Ukranians – who feel they are making nice headway in the fight (with the help of the West). The second rumor floating around has many members of the Federal Reserve being concerned enough about systemic risk being created by the fight against inflation that they would rather ease back off their uber-hawkish monetary policy for now. That was the big one that caused some shorts to run for cover.

• Halfway through Friday’s session, though, we are seeing some give back of the morning’s gains and some doubt being sowed into the bulls’ “Fed to the rescue” argument. Granted, stocks are oversold and conditions are ripe for a short-covering rally. Add some dovish-Fed rumors to that mix and a sharp countertrend move could certainly occur.

However, things are NOT looking good technically and the systemic risk is here with us right now – so any Fed hesitation may not be enough in magnitude or may not happen soon enough to prevent some very negative systemic risk events to occur. AMI

Vladimir Putin vowed his annexation of four occupied regions in Ukraine is irreversible. "They will become our citizens forever," he said at a Kremlin ceremony to formalize Europe's biggest land grab since World War II, accusing the West of trying to subjugate his country. Earlier today, a Russian missile strike killed at least 25 civilians near Zaporizhzhia, Ukrainian officials said.BB

A new operational defeat for Russia’s forces — this time in a strategic eastern Ukrainian town — casts further doubt on the “forever” annexation of four occupied regions by President Vladimir Putin. Several thousand Russian troops withdrew from Lyman in Donetsk province over the weekend. Controlling Ukraine’s Donbas region, made up of the Donetsk and Luhansk provinces, was a stated goal of Putin’s “special military operation” when Russian forces invaded in February. Since calling up 300,000 reservists to fight almost two weeks ago, hundreds of thousands of draft-age Russian men are believed to have fled the country.BB

We've written a lot about the downturn in the housing market posing major risks for US economic activity, but the August personal income and spending report suggests the weakness is already broadening. With inflation pressures remaining intense we see the Fed hiking another 75bp in November, implying more economic pain to come.

In terms of today's US data flow, the Federal Reserve's favoured measure of inflation has come in higher than expected, which will keep the hawkish comments coming from Fed officials and reinforce expectations of a fourth consecutive 75bp interest rate hike on November 2nd.

The August core personal consumer expenditure deflator rose 0.6%MoM/4.9%YoY (from an upwardly revised 4.7% year-on-year in July), above the consensus expectation of 0.5%/4.7%. This is a broader measure of inflation than the core CPI measure and we suspect it will stay close to these sorts of levels for another month or two. However, with inflation expectations numbers looking much softer and corporate pricing plans also heading lower (based on National Federation of Independent Business data in the chart below), we remain hopeful that a weakening growth environment will have the positive effect of taking some heat out of price inflation from early 2023. ING

Spiraling losses on Wall Street are now snowballing into forced asset liquidation, according to Bank of America strategists. The NYSE Composite Index, which includes US stocks, depositary receipts and real estate investment trusts, has broken multiple technical support levels including its 200-week moving average, the 14,000 mark. Now, accumulated losses could force funds to sell more assets to raise cash, accelerating the selloff. Similarly grim milestones keep piling up for Chinese stocks listed in Hong Kong. As September draws to an end, the Hang Seng China Enterprises Index has lost 14% to rank as the worst performer among major equity benchmarks globally in September. Hovering around the lowest since the global financial crisis, it is now trading at 0.6 times book value—the cheapest ever. BB

Florida faces years of rebuilding and an estimated $67 billion in damages from Hurricane Ian, one of the strongest storms ever to make landfall in the US. The climate-fueled storm killed several people, knocked out power to millions and likely ravaged Florida’s orange crop before moving on to South Carolina, where it made landfall Friday afternoon. Ian is the latest in a string of extreme and deadly weather events that scientists say are intensified by global warming.BB

Treasury 10-year yields are surging relentlessly higher in a way rarely seen. They just climbed for a ninth-straight week, the longest such streak since early 1994, jumping 1.18 percentage points in that time. That bond sell-off is only the most savage move since the April-May rout that sent yields up 1.4 points in a nine-week span, but its persistence is noticeable. 

The message is that the bond market has finally realized just how determined the Federal Reserve is about raising and raising and raising interest rates to contain and then cool inflation. Long streaks of weekly yield gains have tended to come around or just after the mid-point of tightening cycles, as well as at pivotal moments when the target rate is sitting at the bottom after rate cuts. That underscores the potential both that we get some sort of a rebound in bonds, and perhaps in other assets, though relief is likely to be short, and ultimately bittersweet.BB

Commodities

Oil surged to trade near $82 a barrel on indications the OPEC+ alliance is considering slashing production by more than 1 million barrels a day, in a bid to revive plunging prices. A reduction of that magnitude would be the biggest since the pandemic. A final decision on the size of the cuts won’t be made until ministers gather in Vienna on Wednesday. A large output cut may draw criticism from the US and other major consuming-nations, where energy-driven inflation has forced central banks to aggressively jack up interest rates. .BB

China sets oil products export quotas at about 15 mln T - China has set the size of its latest batch of oil products export quotas for 2022 at about 15 million tonnes, trade sources with knowledge of the matter said on Friday, a shift in fuel export policy as Beijing seeks ways to boost trade. The quotas, widely expected by the market for the last two weeks, include 13.25 million tonnes of refined products - normally gasoline, diesel and aviation fuel - and 1.75 million tonnes of low-sulphur marine fuel, two of the sources said.

Forecast of heavy rains in October raises concern about India's rice, wheat crops - India is likely to receive above-average rainfall in October, an official with the state-run weather office said on Friday, posing risks for summer-sown crops such as rice and the planting of wheat. Monthly rainfall is expected at 115% of the long-term average, Mrutyunjay Mohapatra, director general of the India Meteorological Department, told a virtual news conference.

Nestle to stop sourcing from Indonesian palm oil producer AAL - Food giant Nestle plans to stop sourcing from subsidiaries of Astra Agro Lestari (AAL), a major Indonesian palm oil producer accused by environmental groups of land and human rights abuses. The move comes as multinationals face increased reputational and legal pressure from consumers and governments to clean up their global supply chains in the fight against climate change.

China's spot copper premium to stay elevated as demand improves - The copper spot premium in top consumer China could stay elevated in the next few months, analysts and traders said on Friday, as demand for the metal has improved on the back of government stimulus. The spot premium for refined copper was at 605 yuan  a tonne on Thursday, up from 50 yuan a tonne at the end of last year. Earlier this month, it hit 825 yuan, the highest since November 2021.

Russia's Rusal denies it plans to deliver aluminium into LME warehouses - Russia's Rusal said on Friday that speculation the aluminium producer was planning to offload metal into London Metal Exchange (LME) registered warehouses was misleading. The LME, the world's oldest and largest market for trading industrial metals, said on Thursday it was considering a consultation on whether Russian aluminium, nickel and copper should continue to be traded and stored in its system.

Germany's RWE buys Con Edison clean energy in $6.8 bln U.S. shift - Germany's largest power producer RWE has agreed to buy Con Edison's Clean Energy Businesses for $6.8 billion, nearly doubling RWE's renewables portfolio in the United States, the world's second-biggest renewables market. The purchase will be partly funded by RWE issuing a $2.43 billion convertible bond to a Qatar Investment Authority unit, through which the QIA will become a 9.1% shareholder in RWE.

Yancoal Australia to prepay $1 billion debt as surging coal prices boost cashflows - Coal miner Yancoal Australia said on Friday it would prepay $1 billion in debt by October, as persistent strength in coal prices support strong cash inflows. Western sanctions on Russia, the world's third-largest exporter of coal, have sparked a scramble for alternate supplies, sending prices of the commodity to record highs.

Ukraine's Sept grain exports fall 23.6% y/y to 4.3 mln T -ministry - Ukraine's grain exports fell by 23.6% year on year in September to 4.278 million tonnes, but reached the highest level since the Russian invasion, agriculture ministry data showed. The country's grain exports have slumped since February as the invasion closed off Ukraine's Black Sea ports, driving up global food prices and prompting fears of shortages in Africa and the Middle East.

Algeria said to have bought about 300,000 T wheat, mainly Russian - Algeria’s state grains agency OAIC is believed to have bought about 300,000 tonnes of milling wheat in an international tender which closed on Thursday, European traders said on Friday. The purchase was expected to be largely sourced from Russia, although technically supplies are optional origin, they said.

The second round of Brazil's presidential campaign kicked off Monday after right-wing President Jair Bolsonaro outperformed polling and robbed leftist former President Luiz Inacio Lula da Silva of an outright victory in the first round of voting. The unexpectedly strong showing by Bolsonaro on Sunday dashed hopes for a quick resolution to the deeply polarized election in the world's fourth-largest democracy. With 99.9% of electronic votes counted, Lula had taken 48.4% of votes versus 43.2% for Bolsonaro. As neither got a majority of support, the race goes to a runoff vote on Oct. 30.

Crypto/Digital

The money flowing out of crypto-related funds in the third quarter has slowed down, a possible sign that many bears have already piled out of the risky asset class. Investors pulled out $17.6 million from crypto exchange-traded funds in the three months ending Sept. 30, according to data compiled by Bloomberg Intelligence. That figure, as of Friday morning, is far below the record $683.4 million withdrawn from such funds in the second quarter. BB

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