Written Commentary
FINANCIAL FUTURES OVERNIGHT
Global commodity markets remain under pressure from surging oil prices, expectations of further escalation of the war, US rate hike fears and from fresh evidence of hot residual consumer price inflation from Europe. For example, German wholesale prices jumped by zero point in 9% and are up 6.8% on a year over year basis, French CPI came in at +0.7% while Spanish CPI also posted a gain of +0.7. The North American trading session today presents Canadian wholesale sales for July, a New York Empire State manufacturing index for September which is expected at 14.75 (versus 20.6), the Redbook index and a 20 year US treasury bond auction.
STOCK INDEX FUTURES
We continue to see the lack of aggressive downside action in US equities as a positive sign as the inflationary bogeyman continues to dominate the headlines and expectations for a US rate hike tomorrow are hovering at 92%. Unfortunately for the bull camp, internal equity market fundamentals being discounted in favor of macroeconomic fear that oil prices are likely to continue to spike as the war escalates and an alternative supply route to the Strait of Hormuz (the Saudi East-West pipeline) remain shuttered without estimates on when it may restart. However, there is a contingent in the market think there is a chance the Fed could pause which in turn would certainly spark a “relief rally” in stocks.
CURRENCIES
With geopolitical conditions favoring ongoing injection of war premium into the dollar, a 92% probability of a US rate hike tomorrow and nearby treasury note yields approaching 5%, the dollar bulls have plenty of ammunition. However, it is clear the dollar is hesitant to inject significant war premium as the intensification of fighting and the shutdown of a key Saudi oil pipeline should have sent the dollar sharply higher. Therefore, it is likely that hot European inflation over the past 24 hours have pushed up the odds of an ECB rate hike thereby reducing the dollars interest rate differential edge.
TREASURY FUTURES
With a new low for the move and a multiyear upside yield breakout, the downtrend in the treasury markets is extended and could accelerate given bearish internal and external developments. Externally, inflation pressures continue to dominate the headlines with European CPI readings uniformly holding at intolerable levels, oil prices in Europe approaching $108 per barrel, and rising international central bank rate hike expectations. Internally the treasury market is facing very high 92% expectations that the US Federal Reserve will hike interest rates tomorrow and there is also fear that accompanying dialogue from the Fed will add to the hawkish environment. With a 20 year treasury bond auction later today would be interesting to see if the upside breakout in treasury yields increase demand or cause buyers to hold out for even higher yields.
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