Market Summary Report Friday 8th December 2022

PPI disappoints with higher reading than expected; Putin threatens to cut oil production in response to price cap

1- Asia stocks were mostly up on hopes of Chinese re-opening and encouragement from the rise in Wall Street yesterday. Technology and real estate stocks led the rise. There was speculation that China is preparing for a meaningful relaxation of Covid fighting measures after Xi's return from a state visit to Saudi Arabia in which he signed contracts worth $30bln with the Saudis, and, more importantly, signed many MoU's in several areas. One in particular is calling for oil and gas sales to be settled in the Chinese Yuan! This, if implemented, could affect the dollar's status as the world's reserve currency. Staying in China, the first home made civilian aircraft, the C919, a single aisle aircraft, that will, supposedly, compete with Boeing and Airbus, at a list price of $99m per aircraft. That is 10% cheaper than some models of the Airbus A320 and 20% cheaper than some models of the Boeing's 737.

2- U.S. producer prices rose slightly more than expected in November at 0.3% MoM vs. 0.1%-0.2% expected with most of the increase coming from services. This took the YoY increase to 7.4% vs. 7.2% expected. Still, the trend is for lower PPI, with annual inflation at the factory gate posting its smallest increase in 1-1/2 years. Core PPI also increased at their slowest pace since April 2021 on a year-on-year basis. Consumers' one-year inflation expectations fell to a 15-month low in December, other data showed. Another economic release, the UoM survey, showed its measure of consumers' one-year inflation expectations fell to 4.6% this month, the lowest reading since September 2021, from 4.9% in November. The survey's five-year inflation outlook was unchanged at 3.0% in December. The main take here is that long-term inflation expectations are fairly well-behaved and are not showing any signs of becoming un-anchored.

3- The UK government introduced a set of measures to "safeguard" the competitiveness of the UK financial sector. The extensive reforms to financial regulation will overhaul EU laws that “choke off growth,” it said. The package of 30 measures includes a relaxation of the rule that requires banks to separate their retail operations from their investment arms, but this would not apply to retail banks. It will also review the Senior Managers Regime, introduced in 2016, which meant that individuals at regulated firms can face penalties for poor conduct, workplace culture or decision-making. They also include a review of rules on short-selling, how companies list on the stock exchange, insurers’ balance sheets and Real Estate Investment Trusts.

4- U.S. equity funds recorded withdrawals of $26.66 billion, the biggest weekly outflow since April 2021. Equity growth funds lost $9.91 bln while value funds lost $2.03bln Sector-wise: techs lost$1.27 bln, financials $761m and consumer discretionary $527m. However, U.S. bond funds received a net $992 million in inflows and high-yield bond funds took in $318 million, while government bond funds gained $1.06 billion.

5- TSMC the world's largest contracted chipmaker which upped its investment in Arizona from $16 bln to $40bln with the opening of a second chip plant, announced a 50% YoY rise in revenues to $7.27bln for the month of November. This came mainly on the back of high-end orders by Apple and Qualcom. TSMC share price was little changed at $81.

6- The Federal Trade Commission on Thursday sued to block Microsoft’s $69 billion acquisition of Activision Blizzard, challenging one of the largest tech acquisitions in history. Microsoft share price was little changed at $246.50

US Treasuries:

Treasuries reacted to the PPI differently, with the long end, particularly the 10-year and the 30-year bonds taking the brunt of the selling, pushing their yields up to 3.578% and 3.571% respectively. The rate-sensitive 2-year note yield rose marginally to 4.334%, making the curve flatter than yesterday, with the 2-10 year spread at minus 75.8bps, a considerable rise from yesterday's 83.9bps. PPI is a measure of wholesale prices and hence it takes time for the price pressures to take effect on the economy. This may explain why the long end yield rose more than the short end of the curve. The probability of a 50bps rate hike at next week's FOMC meeting has, if anything, increased from yesterday's 77% to 80%.

Foreign Exchange:

The US Dollar ended the day mixed against the major currencies, despite an initial rise straight after the PPI data. The UoM survey had the opposite, though smaller, effect on the dollar. It fell slightly. Still the net result was very little change from yesterday's levels. It finished the day at $1.0532 against the Euro, $1.2252 against Sterling, Y136.67 against the Yen and 6.956 against the Chinese offshore Yuan.

US equity markets:

The three major US stock indices ended the day, and week, lower after PPI data disappointed investors who were hoping for a soft figure that confirms the view that inflation has peaked and the Fed will soon be done with raising interest rates. The initial reaction of the US indices futures to the PPI was negative which made the cash equity markets open lower. Although stocks regained some of their losses, they gave up all these gains before the close and they all closed with more losses. The DJIA lost 305.02 points, or 0.9%, to close at 33,476.46, the S&P 500 fell 0.73% to end at 3,934.38, and the Nasdaq Composite fell 0.7% to finish at 11,004.62. For the week, the DJIA fell 2.77%, the S&P fell 3.37% and the Nasdaq fell almost 4%.

Oil:

Oil had a tumultuous week. It ended at its lowest for this year after OPEC+ kept its production level unchanged and the introduction of the Russian oil price cap of $60 did not cause, as was expected, a spike in oil prices. In fact, the opposite happened and the abundance of oil in the market caused the oil price to break several support levels this week on its way to the lows of the year. Unexpectedly, Turkey emerged as an unexpected supply bump as it started demanding a new proof of insurance measures for vessels carrying Russian oil traveling through the Bosporus Strait. It is estimated that more than 20m barrels of oil are stuck on the northern side of the Bosporus Straits. It is not clear yet whether Turkey will change its stance, and how the oil market will be affected by this development. U.S. Treasury Deputy Secretary Wally Adeyemo tried to resolve the issue by speaking to Turkish Deputy Foreign Minister Sedat, but no tangible results were seen after their conversation. On a different note, the Russian Energy Minister Nikolai Shulginov said that Russia had three possible options in response to the West's price cap on Russian oil but did not elaborate. WTI December futures ended Friday at about $71.50, having come close to $70 during the day, while Brent December futures ended the day at $76.55.

Gold:

Gold fell sharply immediately after the release of the PPI data, but then more than made up for its losses and broke through $1,800 but eased down later and closed at about $1,797. The yellow metal has changed its correlation with the US Treasuries yields, particularly the benchmark 10-year yield, which rose today after the PPI.

The technical picture is now looking quite positive for gold, and it should break the $1,800 convincingly next week. But if it fails, a sharp selloff might ensue.

Cryptocurrencies:

Cryptocurrencies fell today, in tandem with the stock market. Bitcoin fell $102 to $17,105, Ethereum fell $20 to $1,259, and Litecoin fell $0.93 to $76.29. Cryptocurrencies are still showing a negative correlation with gold that started a few weeks ago.

Bankman-Fried said he is ready to testify in the Congress, but he warned that he might remember all the things that happened as there are files that he no longer has access to. It remains to be seen how the fate of this man is going to be decided, and whether any government or regulatory agency will take any steps to accuse him of fraud. He currently lives in a $125m mansion in the Bahamas, where the crypto exchange that went bankrupt, FTX, was registered.

________________________________________________________________________________________________