Month: August 2022

Oil tumbled, completely reversing and then some Monday’s biggest rise in six weeks as traders still weighed potential supply disruptions, including the possibility of an OPEC+ output cut offset by hopes that the Iraq social unrest won’t translate into export cuts after Iraq’s state oil marketing company said exports would continue uninterrupted despite the recent violence. Striking a more bullish note, Goldman Sachs urged investors to “buy commodities now, worry about the recession later” but as always, the market knows to fade every single Goldman call and this one was no different.

Some more details: according to Alaa Al-Yassiri, director general of state-run oil marketing company SOMO, Iraq’s oil exports are continuing uninterrupted amid violence in the country. Iraq plans to export 3.35 million b/d of crude from the south and between 75,000-90,000 b/d from the north of the country this month, he said. The country has the capacity to boost oil exports to all destinations and it won’t refuse any request for more oil.

Elsewhere, OPEC crude production rose by 470,000 b/d to 28.43 million b/d in August, JBC Energy said in a note. Saudi Arabia’s output increased by 70,000 b/d to 10.55 million a day, Libya’s gained 290,000 b/d to 990,000 a day, while UAE pumped 3.19 million b/d, 70k a day more than in July.

As a bonus, here is a snippet from the latest US Oil and Gas reported by BofA’s Doug Leggate in which he published his “Discussion with BofA oil traders” and features Peter Doyle, Director of Oil Trading, BofA Securities. Here are the highlights from the discussion:

• Oil markets: Markets remain focused on short term demand as seasonal changes, bad economic data coming out of Asia, and refinery turnarounds weigh on prices. However, markets are still expecting to end the year strong as the SPR ends, taking ~1mnbpd of the market, and refineries run hard to try and build distillate stocks for winter in the EU. Gas to oil switching will be a large driver of crude demand too, expect products to lead oil.
• Oil trading: Oil markets remain in an irregular position due to a lack of liquidity. Saudi Arabia’s Energy Minister’s comments were valid since there is no position in the market. The Russia Ukraine conflict increased volatility where the commodity price could move $15 in a day increasing the cost to trade and driving positioning out of the market. Also, producers hedging less has removed sellers in the market.
• Gasoline demand: Data right after the July 4th weekend was ugly but it is normally noising during that time of year. We could still see gasoline cracks roll up in 2023 and 2024.

Finally, while oil prices are clearly on the defensive as of 10am ET, largely a function of the complete reversal of CTA buying seen on Monday in the extremely illiquid oil market, expect this to reverse again once the same CTAs and other fast money traders realize that the biggest headline of the morning…

• *TAIWAN’S MILITARY FIRED WARNING SHOTS AT CHINESE DRONE

… is anything but bearish for commodities.

By Michael Every of Rabobank

Markets saw choppy and mostly gloomy trade on Monday as they responded to the Jackson Hole message that rates are going to be higher for longer. Stocks were down, bond yields were up, and the US dollar was close to a new fresh high on the broad Bloomberg index: in particular, at time of writing USD/JPY was at 138.7 and USD/CNY is 6.91 – 7 here we come (again)! It goes without saying that EUR/USD was around parity, but fundamentals suggest it won’t stay there for long: it’s going well under. That is despite the fact that away from the financial media focus on Powell saying the same thing he has been saying for weeks (and equity markets have been steadily ignoring, “because markets”), one of the biggest sea-changes at J-Hole was in the stance from Europe.

In particular, we got a speech from the ECB’s Schnabel, ‘Monetary policy and the Great Volatility’, which did the unthinkable (for the Fed) – it mentioned the geopolitical backdrop as a key driver of inflation, not the abstract ‘”supply chains”, and noted that this was likely to be a structural feature not a temporary blip. Moreover, the world was drifting apart to boot. As she put it:

“The Great Moderation was a period of prosperity and broad macroeconomic stability. The volatility of both inflation and output declined, the length of economic expansions increased, and people in most economies experienced sustained improvements in their standards of living…. Yet, monetary policy was not the only factor behind [it]. Good luck, in the sense of a smaller variance of the shocks hitting the global economy, is widely believed to have played an important role as well…”

Except it wasn’t “luck”: you don’t need to embrace historical materialism and dialectics to see history is not about linear trends or steady states – or even steady nation-states.

Anyway, Schnabel continued:

“The question I would like to discuss… is whether the pandemic, and more recently Russia’s invasion of Ukraine, will herald a turning point for macroeconomic stability – that is, whether the Great Moderation will give way to a period of “Great Volatility” – or whether these shocks, albeit significant, will ultimately prove temporary, as was the case for the global financial crisis.”

Her conclusion is the same as mine: these shocks are *not* temporary, and while “Globalisation acted as a gigantic shock absorber… The pandemic and the war are likely to add to instability in the years to come.” Moreover, as predicted here continuously since 2015’s ‘FX Wars’ and 2016’s ‘Thin Ice’, “Today, the world economy is at risk of fracturing into competing security and trade blocs. The international network that connects our economies is fragile. We are witnessing new and alarming forms of protectionism.”

Of course, Schnabel was of the view that a determined commitment to Volckeresque high rates for as long as needed could break the back of this inflation. Thus, partly, the market sell-off. However, she overlooks that what did the inflation trick for Volcker was neoliberal supply-side reforms and globalization, which destroyed the power of labor vs. capital. That’s a trick that can only be played once and arguably needs to be reversed to bring inflation down this time (i.e., nationalization, onshoring, forcing private capital to invest productively, not speculate, and redistribution to prop up final demand to support local production) alongside higher rates. Schnabel of course didn’t go there. But somebody who can read history will.

The sense of intellectual retreat to match the market’s was also evident in yesterday’s Bloomberg op-ed, ‘The West Needs Friendshoring, Not Reshoring’. This put China in the same geopolitical basket as Russia, which presumed UK PM Truss is also about to do too, yet begs that rather than reshore, the West should friendshore to retain as much of the neoliberal architecture as possible – just with people who are more liberal: “In the short term, the current revolution in the world’s supply chains will inevitably bring much pain, from sudden surges in the price of energy of the sort now tormenting Europe to a more general inflationary pressure. In the longer term, however, if we can handle the revolution properly, showing a mixture of restraint and foresight, firmness and dissimilitude, we can produce a healthier global economy – one that preserves the advantages of world-stretching supply chains while gradually freeing us from dependence on the whims of the autocrats in Moscow and Beijing.” Which still involves splitting the world in two.

Fusing all the above arguments, yesterday was also notable for the EU making a grand declaration on resolving its current energy crisis. Steps will be taken to de-link the price of electricity, now over EUR1,000 per MWh(!), from the price of gas, which while still at insane highs, tumbled yesterday in thin trading. Furthermore, measures will be taken to ensure renewable energies are generated at lower costs, and consumers directly benefit, price caps, windfall profits taxes, and, potentially, rationing. Talk about a retreat from neoliberalism!

On one hand, this is no surprise. Polanyi argued markets are ultimately always subservient to society, and right now society does not want to freeze or go hungry. However, understand this is not just  a ‘technical decoupling of marginal trading linkages’ – it is dismantling market pricing, and the moral (and financial) argument for having the private sector involved in energy at all, except where their capital is directed by government, for a socially-acceptable rate of return. And after energy, where next, given our long list of supply short-falls and Achilles’ Heels?

Welcome to industrial policy. Welcome to corporatism (one definition of which is fascism). Welcome to Common Prosperity. Welcome also to the mixed-economy model European nation-states used to build their power systems until the 1980s and neoliberalism.

Of course, the real problem is that Europe doesn’t have any energy supplies to force state or private capital into – or at least not ones it is prepared to tap: indeed, Germany’s economy minister says the “bitter reality” is that Russia will not resume gas supply. Enjoy those stocks you have built up at huge expense, because there will be far less flow ahead.

As such, what power source will the EU link electricity prices to? Solar panels, in winter when northern Europe’s energy requirements are at their highest? Burning the M&Ms that unicorns excrete?

Underlining the point, Brent oil prices rose 4% to over $105 yesterday before retreating slightly (and wheat and corn went up 3-4% too, showing that central banks are still behind the curve on that front); Iraq slipped into chaos, with the US airlifting its personnel out of another Greater Middle East embassy(!); it was rumored OPEC+ may announce a production cut ahead; that the US might have to dip into its Strategic Petroleum Reserve even more – as if there can’t be a real crisis that demands its use ahead; and US Department of Defence spokesman Kirby warned he was concerned about the possibility of energy shortages ahead.

The brutal lesson is that neoliberalism is like a chocolate teapot – it looks amazingly sweet until things get ‘hot’, and then it serves no purpose at all. Yet industrial policy/corporatism/fascism/Common Prosperity also needs to be based on the real, and realpolitik, not the ideal. If the EU throws de facto MMT/printed money at energy subsidies within a neoliberal framework with no concrete, achievable plan for more energy supply (of what? From whom?) then it is simply going to drive global energy prices higher, many EM into the ground – some of whom are located close to Europe, EUR well through the parity floor, and inflation still into the sky. So let’s hope there is joined-up thinking behind their latest proposals.

Relatedly, the title of today’s Daily, ‘The Power of the Powerless’ (which I have used before) addresses the energy situation in Europe, but was also the title of a political pamphlet by dissident Vaclav Havel against communist Czechoslovakia. He argued the first step to bringing down the regime was for a powerless greengrocer not to place the state-backed sign saying, ‘Workers of the World, Unite!’ in his window. If Europe (and others) had done the same with certain neoliberal-approved signs they arguably would not be in the critical mess they are in now.

Finally, and also linked to the Daily title –as even the ECB agrees with me!– military reports are that a Ukrainian Kherson counter-offensive has begun. Market participants who have read any history will know that watching the success or failure on that key front will likely also be key to the global geopolitical and inflation outlook longer term. Far more so than most central bank warble, regardless of how much power they like to think they have.

“It is not at the level we would like to go into combat,” a US defense official told The Wall Street Journal of the Pentagon’s fast depleting stockpiles due to unprecedented defense aid to Ukraine, and stressed in particular that artillery ammunition is now “uncomfortably low”.

What’s more is that the shortfall will likely last into the future, given the norm is for new purchases and then manufacturers supplying the weapons to take a process of years.

“The U.S. has during the past six months supplied Ukraine with 16 U.S. rocket launchers, known as Himars, thousands of guns, drones, missiles and other equipment. Much of that, including ammunition, has come directly from U.S. inventory, depleting stockpiles intended for unexpected threats, defense officials say,” the report spells out.

In total so far, the US has pledged to send about $13 billion in arms to Ukraine after only six months of conflict. Given the alarm over Washington’s own dwindling stockpiles, the DoD is now opting to send 105mm rounds to Ukraine instead of the 155mm guided ‘smart’ artillery shells.

In early July, a senior US defense official told reporters in a briefing that the Ukrainian army was at that point firing about 3,000 155mm shells per day:

The revelation came amid questioning on the latest tranche of weapons and ammunition being sent to Ukraine, including, for the first time 1,000 guided 155mm ‘smart’ shells.

The official said despite the high usage rate, Ukrainian forces still have “substantial stores” of 155mm rounds and are far from running out with more rounds on the way. The U.S. and NATO allies have donated hundreds of thousands of 155mm rounds to Ukraine.

But already at this point it seems the Pentagon is becoming increasingly uncomfortable with the rate of these ‘donations’.

The Wall Street Journal report indicated further that the US Army has requested of Congress another $500 million per year to enhance its own ammo factories. It remains that the biggest winner in all of this is the big defense contractors and manufacturers. 

THE EXCALIBUR: This artillery shell gives Ukraine’s 155mm artillery shells precision strike capability. pic.twitter.com/LukyTBWDar

— Chuck Pfarrer (@ChuckPfarrer) August 21, 2022

Meanwhile, other NATO allies are facing this same problem and worry, especially ‘neutral’ Germany which has dramatically shifted its historic stance on not sending weapons into foreign conflict zones. A number of German politicians have warned that Berlin should not be sharing weapons from its own arsenal, given that “Unfortunately, the situation here is such that we have an absolute deficit in our own stocks,” according to the recent words of Foreign Minister Annalena Baerbock.

Speaking to German media agency ZDF, she said: “However, Germany must also think in the medium term. Due to the German arms problem, the armaments industry had to dedicatedly produce material for the Ukraine.”

Authored by Bill Blain via MorningPorridge.com,

“The church bell chimed ’til it rang twenty-nine times, for each man on the Edmund Fitzgerald”

Warning – Readers of a sensitive nature may wish to take a chill pill before reading this morning’s Porridge comment. Remember, the sun will come up tomorrow. The market might not.

Red Sky in the Morning – Sailor take warning. I woke to a vivid red sky this morning – by the time I rushed upstairs to snap a photograph it was already fading. In sailor lore Red Skies presage storms – it’s the rising sun reflecting off high levels of water vapour carried by approaching weather fronts that causes the bright red effect. Curiously, it’s been the quietest Caribbean Hurricane Season in decades, yet I suspect there is an almighty storm already upon global markets – we are so caught up in it we don’t realise its knocking on the windows – and about to knock them out!

The worst part of any storm is not the Eye (which is calm), or even the winds and storm surges as the gale approaches. The strongest winds are just outside the “eye-wall”, following the path of destruction. The really sustained high-winds and storm waves are in the following quarters. When it’s an Atlantic storm barrelling into Europe from across the Atlantic, is the bottom left-hand of the rotating storm where the winds are strongest and most destructive.

Which is all a long-winded way of saying.. this might get worse.. Much worse.

Despite many storm warnings – this market is ill prepared for the kind of instability about to hit, as recession, stagflation, geo-politics, domestic politics, energy, food, inflation and the rest combine in that most misused of metaphors; a Perfect Storm. There is no such thing – every storm is different – and it’s not the things you see coming that maims you, it’s the things you don’t!

Following Jackson Hole last week – where the Fed and other Central Banks confirmed the battle versus inflation means higher rates for longer – the market has staged a predictable sell-back. The numbers look bad – but hardly terminal. It still looks kind of normal for a typical September market reverse, a correction. The gains from the summer rally will probably be wiped out, but market participants will be expecting the next play to begin. In the next few days we will be back to talk of recovery.

Nothing much to panic about when the US 2 year bonds nearly hit 3.5%. Stocks in reverse. The VIX fear indicator of stock volatility is up to 27. None of these are chaotic – yet. Arrr…. The calm will not last…

The wind in the wires made a tattle-tale sound
And a wave broke over the railing
And every man knew, as the captain did too
T’was the witch of September come stealin’

The big issue is how prepared for a market blow are we? Anyone with a career record under 15-years has never experienced a real market gale – the last one being the Global Financial Crisis of 2008. I reckon that’s well over 50% of the financial workforce. Their careers have been forged in markets artificially supported by quantitative easing and Zero Interest rates. Now we are stepping into aggressive rate hikes and quantitative tightening – with the Fed confirming a steep pace of hikes to tame inflation, even if it causes a slowdown. And the financial conditions barometer is tumbling as consumers and business face impossible budget calls.

This is a new game.

Lots of young fund managers will be looking at their books and wondering how they are going to reverse the 10-15% losses they’ve sustained this year. The compliance and risk management mitigation mindset that dominates institutional investor groupthink will largely ensure they don’t bet the farm on big risky bets, but for most funds – which means the money folk are saving for retirement – it’s going to a very bad year.

Risk and groupthink mean there are going to be fewer folk out there looking for risky opportunities – potentially meaning the crisis last longer. Losses on losses, at a time when consumer discretionary spending and pension saving will have been hammered by inflation, will have profound consequences on the future market.  Forget the walls of money that’s fuelled funds, and speculative market rallies – we’re looking at significantly less money coming into markets.

Bankers will be smiling. They are focused on how the transfer of wealth from the poor to the rich was accelerated by QE and now means the top 1% of the global population own over 58% of societies wealth and assets. No wonder investment banks are hiring aggressively into private banking and wealth management services! Family offices don’t mind being smoozed.

Meanwhile… The Fed and the US economy can afford some economic misery. The US is largely detached from the global energy price shock, and will survive global recession in its largely self-contained domestic bubble. A recession will hurt – but won’t kill the economy.

This gathering storm is going to hit Europe hardest. Energy insecurity and the Ukraine war is responsible, but a large number of ECB board members are publicly calling for an unparalleled 75 bp hike to tame the inflation beast, and to reverse the sinking Euro (down 15% this year, and headed lower). Higher rates and a deepening economic crisis as Europe heads into recession and rising unemployment is scary, and doubly so as soaring energy costs look likely to trigger rising social tensions. As I’ve said before, when the going gets tough, the French will be revolting.

The dawn came late and the breakfast had to wait
When the gales of September came slashin’
When afternoon came it was freezin’ rain
In the face of a hurricane west wind

As for the UK. La-la land. New prime minister next week, promising tax cuts for the rich and regressive tax allowances to fight soaring energy bill – when the bottom 40% of the UK don’t pay tax. It won’t help the national mood to know our new Aircraft Carrier, the Prince of Wales, broke down a few miles from port yesterday on its way to a major deployment. Oops.. Sums up busted Britain.

What comes next isn’t pretty.

Since 1985 I’ve experienced a number of market crashes. They have been shocking, sharp and surprising. In every case they were caused by a blindingly obvious financial market imbalance – like consumer lending risks, over-exuberance, unsustainable expectations, etc. The coming crisis is very different – it’s been a series of exogenous shocks; Covid, and now Energy and Ukraine. It feels more fundamental that the simple market mispricings that triggered some form of market crash every 6-7 years. These were short, and we quickly recovered.

What is coming is something worse. This may be a once in a century storm…

When suppertime came, the old cook came on deck sayin’
“Fellas, it’s too rough to feed ya”
At seven PM, a main hatchway caved in, he said
“Fellas, it’s been good to know ya”

This is developing into something with a smattering of 1929 – unravelling massive financial mispricings – together with the exogenous effects of the wartime shocks in 1914 and from 1939. Forget inflation and growth, but consider issues like expertise, experience, groupthink, panic and fear, and the crushing of small investors trying to figure out where this might go next..

The captain wired in he had water comin’ in
And the good ship and crew was in peril
And later that night when his lights went outta sight
Came the wreck of the Global Economy

The one positive thing I can add.. following any storm.. the seas calm, the sun comes up, and we go out and do it all again..

Footnote – On August 11, 1979, 303 small yachts set out on the Fastnet Race from the Isle of Wight to the famous lighthouse off the South-Western tip of Ireland and back to Plymouth. There were strong winds forecast, but nothing unmanagable. It turned out much worse. The fleet was hit by a weather bomb as fronts combined to create a Force 11 Hurricane. 15 sailors died. Lessons have been learnt – mainly that: “there is nothing always about a storm at sea except its danger.”

Same thing in markets….

US home price growth slowed in June (the latest data released from S&P Core Logic Case-Shiller). The headline national average saw home prices rise 17.96% YoY (well below the +19.90% YoY seen in May) and the 20-City Composite home price index rose 18.65% YoY, well below the 19.20% YoY expected and May’s +20.51% surge…

Source: Bloomberg

This is the weakest annual price growth since May 2021.

“It’s important to bear in mind that deceleration and decline are two entirely different things, and that prices are still rising at a robust clip,” Craig J. Lazzara, managing director at S&P Dow Jones Indices, said in statement.

“June’s growth rates for all three composites are at or above the 95th percentile of historical experience.”

Tampa, Miami, Dallas reported highest year-over-year gains among 20 cities surveyed but all major cities have seen price growth peak (with West Coast prices fading fastest)…

Notably US home affordability just reached new record lows (below the trough in July 2006) but as the chart below shows, the average home price in the US is now 65% higher than at that previous trough of affordability…

Source: Bloomberg

And with rates higher and sentiment lower since this ancient June data, this could well be the epicenter of Powell’s “pain”…

On Tuesday, Europe faced a worsening supply crunch after Russian energy giant Gazprom PSJC informed French utility Engie SA that natural gas supplies would immediately be reduced because of contract disagreements, reported Financial Times.

Engie said Gazprom notified it of “a reduction in gas deliveries, starting today, due to a disagreement between the parties on the application of some contracts.”

Gazprom’s reductions in NatGas over retaliation for sanctions related to its invasion of Ukraine have primarily targeted Germany and eastern Europe but now appear to extend to France. The continent is facing the worst energy crisis in half a century, sending prices of NatGas to record highs on supply shortage concerns ahead of the winter season. 

French Energy Transition Minister Agnes Pannier-Runacher spoke with France Inter radio about the NatGas curbs to Engie, who warned: “We’re getting ready for the worst-case scenario, which is a complete cut-off.” She said Moscow is using NatGas as a weapon of war.

Engie’s deliveries of Russian NatGas averaged in the 17% range but have since slumped to only 4% in recent months. 

The good news is the utility announced it “had already secured the volumes necessary to meet its commitments towards its customers and its own requirements, and put in place several measures to significantly reduce any direct financial and physical impacts that could result from an interruption to gas supplies by Gazprom.”

The announcement follows the EU’s announcement on Monday to prepare emergency measures to reduce the price of electricity by separating it from soaring NatGas prices. 

MAP OF THE DAY: Wholesale day-ahead electricity prices breaching the €700 per MWh barrier in multiple European countries today. Two years ago, the typical price was leas than €50 per MWh. These are prices paid for **today’s electricity** #EnergyCrisis #energytwitter pic.twitter.com/i6EHnwdBvO

— Javier Blas (@JavierBlas) August 29, 2022

European Commission president Ursula von der Leyen said Brussels was developing an “emergency intervention” and structural reforms to address elevated electricity prices. 

“Currently, gas dominates the price of the electricity market . . . with these exorbitant prices, we’ll have to decouple.

“We’ll have to ensure renewable energies are generated at lower costs, that those costs are transferred to consumers and windfall profits used to help vulnerable households. We need an emergency instrument which would be triggered very quickly, in weeks perhaps,” von der Leyen said.

Europe’s energy crisis deteriorated in August as the price of NatGas soared, rising more than $500 a barrel of oil equivalent last week. EU NatGas prices Tuesday morning are around 257 euros per megawatt-hour. 

France’s power situation has become direr due to the shutdowns of nuclear power plants. The country generates around 70% of its electricity needs from a fleet of 56 reactors, though 32 are offline for routine maintenance or corrosion risks. Less nuclear power has led the country to increase electricity imports from neighboring countries or become even more reliant on other power generation sources. 

Engie Executive Vice President Claire Waysand outlined France does have a buffer with NatGas storage facilities around 90% filled. Across the EU, the figure is about 79.4% as of Aug. 27, compared with the target of 80% by the start of November. 

Waysand also said the utility is holding discussions with Algeria’s Sonatrach as a move away from Russian supplies. Any new contract with the North African nation wouldn’t be finalized until after this winter. 

Europe is betting Norway could be their saving grace as the Scandinavian country surpasses Russia as the top supplier of NatGas to the energy-stricken continent. EU’s move to diversify NatGas supplies away from Gazprom isn’t an overnight process and could result in several dark and cold winters. 

Authored by Katabella Roberts via The Epoch Times,

Tesla CEO Elon Musk has revealed plans for the wide release of self-driving electric vehicles by the end of the year, pending regulator approval.

Musk made the comments at an energy conference in Norway on Monday, where he noted that he is currently focusing his attention more on his SpaceX Starship spacecraft and self-driving Tesla electric cars.

“The two technologies I am focused on, trying to ideally get done before the end of the year, are getting our Starship into orbit … and then having Tesla cars to be able to do self-driving,” Musk said.

He added that he hopes the electric auto maker’s self-driving technology would be released in the United States and possibly in Europe.

“Have self-driving in wide release at least in the U.S. and … potentially in Europe, depending on regulatory approval,” Musk told the audience.

The billionaire businessman’s comments come after he announced on Aug. 21 that the price of Tesla’s Full Self-Driving system (FSD) will increase by $3,000 next month to $15,000. The latest increase marks the second time it has risen in price this year.

The FSD package comes with additional features that are not included in standard Tesla vehicles, such as “Traffic and Stop Sign Control,” “Navigate on Autopilot,” as well as “Autopark” among others.

It also offers a feature called “Smart Summon” which allows drivers to use Tesla’s mobile app to summon their vehicle to come find them. The vehicle will be able to navigate through “more complex environments and parking spaces” with the feature, according to Tesla.

Human Drivers ‘Often Distracted’

FSD still requires the driver’s active supervision and does not make the vehicle fully autonomous. However, the updated version will allow vehicles to drive on their own without the need for human supervision.

Musk has previously suggested that autonomous vehicles may be safer than cars driven by humans because drivers are easily distracted.

During Tesla’s 2021 fourth-quarter earnings call in January 2021, the businessman said: “Being safer than a human is a low standard, not a high standard. People are often distracted, tired, texting. … It’s remarkable that we don’t have more accidents.”

However, a report by the National Highway Traffic Safety Administration in June found that out of 392 crashes in the last year involving cars equipped with advanced driver assistance systems, 273 involved Teslas.

Elsewhere on Monday, Musk stated that oil and gas should continue to be extracted to ensure sustained civilization while the world continues to develop sustainable sources of energy.

“Realistically I think we need to use oil and gas in the short term, because otherwise, civilization will crumble,” Musk told reporters at the conference.

“One of the biggest challenges the world has ever faced is the transition to sustainable energy and to a sustainable economy,” he said. “That will take some decades to complete.”

Musk also noted that offshore wind power generation in the North Sea, combined with stationary battery packs, could “provide a strong, sustainable energy source in winter.”

After revealing that he was so “happy” he danced a jig when stocks tumbled after Powell’s J-Hole speech sparked a market rout on Friday, we can only imagine that Neel Kashkari’s face looked like this when he saw the market update this morning…

When he turned on his bbg this morning pic.twitter.com/h6QqIcfgSV

— zerohedge (@zerohedge) August 30, 2022

… because after two days of selling, risk assets are sharply higher this morning, with S&P futures rising 0.8% and Nasdaq 100 futs rising 1.1%, as investor sentiment stabilized, while 10Y Treasury yields slid 5bps, the BBG dollar index lost 0.3%, and oil tumbled, 4% reversing most of Monday’s gains.

In premarket trading, cryptocurrency-tied stocks climbed as Bitcoin rose: Marathon Digital and Coinbase lead cryptocurrency-exposed stocks higher in premarket trading as Bitcoin trades in a narrow band around $20,000 for the fifth consecutive session: Marathon Digital +5.7%, Coinbase +3.7%, Riot Blockchain +4.9%; Twitter slipped after Elon Musk cited recent accusations from a whistle-blower as a new reason to terminate the $44 billion takeover. Here are some other notable premarket movers:

• Bed Bath & Beyond (BBBY US) shares jump as much as 16% in premarket trading, putting the home products retailer on track for a third session of straight gains after Monday’s 25% surge.
• Baidu (BIDU US) shares rise as much as 4.5% in premarket trading, leading China stocks higher, after the internet search company’s profit beat analyst estimates.
• Gran TierraEnergy (GTE US) shares jump as much as 8.7% in premarket trading, after the oil & gas company said it would buy back as many as 36m shares.
• Nikola stocks slumped after filing for At-the-Market stock offering

With markets once again very volatile, Credit Suisse recommended investors go underweight global equities (or at least short Credit Suisse bank itself) following the Jackson Hole symposium, while JPMorgan Chase strategists say that a reading on the US labor market that spells bad news for the economy is actually a bullish signal for stocks.

“The markets are spooked because they are afraid that the Fed could create a hard landing — that they’ll raise rates into a recession and that will be really painful for the economy and for corporate profits,” Terri Spath, chief investment officer at Zuma Wealth LLC, said on Bloomberg Television

Minneapolis Fed President Neel Kashkari said sharp stock-market losses show investors have got the message that the US central bank is determined to contain inflation. “People now understand the seriousness of our commitment to getting inflation back down to 2%,” he said; it wasn’t clear what he said this morning when he saw futures sharply higher.

In Europe, the Stoxx 50 rallied 1.3%. DAX outperforms, adding 1.5%, FTSE 100 lags, adding 0.4%. Retailers, banks and tech are the strongest-performing sectors while energy companies underperformed as prices plunged on signs that the region is stepping up efforts to curb a crisis. Here are some of the biggest European movers today:

• Banks and lenders lead a broader rebound in European stocks as yields rise in the UK, with banks in the country resuming trade following Monday’s holiday.
• Adevinta shares rise as much as 16%, with analysts noting a beat on earnings from the classified advertising firm, along with a strong performance in its Mobile arm and reassuring guidance.
• Aker Solutions shares rise as much as 17% after the Norwegian offshore firm said it would form a joint venture with Schlumberger and Subsea 7. Pareto notes “significant” cost synergies.
• Bango shares jump as much as 15% after Liberum increased their price target to a Street high. The broker said the acquisition of NTT DOCOMO’s payments business helps accelerate Bango’s growth strategy.
• Munters shares rise as much as 8.7% after the Swedish industrial cooling and climate solutions manufacturer said it had received its “largest order ever” for a data center in the US.
• Technoprobe shares gain as much as 2.5% in Milan as Mediobanca increased its PT on the stock to EU9.10 from EU8.6 ahead of what the broker expects to be “another robust release” on Sep. 27.
• Diurnal Group shares soar as much as 136%, the most since January 2019, after Neurocrine Biosciences agreed to buy the specialty pharmaceutical company for 27.5p in cash per share.
• Carrefour shares fall as much as 2.7%, after JPMorgan cut its recommendation on the French grocer to neutral, noting “lackluster” operating momentum and a “lack of short-term catalysts.”
• Bunzl shares fall as much as 8.1%, the most intraday since March 2020, after the supplies distributor reported 1H results that disappointed, according to Interactive Investor.
• European mining stocks underperforms all other European industry groups as the regional equity benchmark advances, after iron ore and base metals fell amid concerns over demand in China.
• Warsaw stocks are worst performers globally so far in August, down 8.2%, on the way to largest monthly drop since April as a domino effect from Europe’s gas crisis hits Polish companies.

Asian equities rebounded from a post-Jackson Hole slide, with investors focusing on earnings on the region’s busiest day this season. The MSCI Asia Pacific Index added as much as 1% following Monday’s 2.2% slump, lifted by technology and financial shares. Indian and Japanese shares were among the region’s best performers, while benchmarks in China and Hong Kong declined. Chinese search-engine operator Baidu Inc. and Industrial and Commercial Bank of China Ltd., the world’s biggest bank by assets, were among the 110 MSCI Asia Pacific Index members to report results Tuesday. Investors had been bracing for a poor earnings season in a quarter marred by China’s lockdowns, but an analysis by Bloomberg Intelligence shows the results have surprised to the upside so far. While Asian stocks are set for a 1.1% monthly slump in the wake of Federal Reserve Chair Jerome Powell’s hawkish comments last week, there’s a possibility that the region’s valuations could attract investors, said Christina Woon, an Asian equities investment director at Abrdn in Singapore. Asia has “more of a relative buffer in valuations” given investors are already quite cautious toward the region, Woon said in a Bloomberg TV interview. Many of Asia’s quality companies are “producing earnings that are holding up well,” which may support stock performances, she added. China tech stocks in Hong Kong slid amid lingering uncertainties over discussions to avoid the delisting of companies from New York stock exchanges. Asian emerging market ex-China equities saw a small net outflow last week after five weeks of inflows.  

Japanese equities also rebounded after heavy selling on Monday, as investors digested the Federal Reserve’s continued stance to keep up its hawkish monetary policies and the yen stayed near 140 per dollar.  The Topix rose 1.2% to 1,968.38 as of the market close in Tokyo, while the Nikkei 225 advanced 1.1% to 28,195.58. Keyence Corp. contributed the most to the Topix’s gain, increasing 2.1%. Out of 2,169 stocks in the index, 1,839 rose and 257 fell, while 73 were unchanged. “There may be a slight effect from the weak yen,” said Mamoru Shimode, chief strategist at Resona Asset Management.

The S&P/ASX 200 index rose 0.5% to close at 6,998.30, boosted by gains in banks and energy shares. All but one of the 11 sector gauge rallied, while mining shares edged lower as iron ore fell below $100 a ton for the first time in five weeks on signs a crisis in China’s steel industry is worsening.  Uranium shares including Paladin surged after Tesla Chief Executive Elon Musk said countries shouldn’t shut down existing nuclear power plants as Europe grapples with an energy crisis. 

In FX, the Bloomberg dollar spot index falls 0.3%, its first drop in three days as the greenback weakened against all of its Group-of-10 peers apart from the Swiss franc. The euro rose above parity against the dollar. European bonds advanced as month-on-month numbers for German state CPIs showed signs of slowing. A euro-area economic confidence gauge fell to 97.6 in August, its lowest level in 1 1/2 years, and down from 99 the previous month. Analysts surveyed by Bloomberg had expected a decline to 98. The pound traded near a 2 1/2-year low versus the US dollar amid speculation the UK is headed for recession with further interest-rate hikes potentially deepening an economic downturn. Aussie eased after a sharp drop in building approvals, only to rebound in European trading.

Meanwhile, China’s central bank set a stronger-than-expected yuan fixing for a fifth day, a sign it doesn’t want an excessively weak currency. The move highlights how greenback strength is a challenge for Asia as the region’s currencies slip.

In rates, treasuries are near session highs as US trading gets under way Tuesday, holding most of gains that were paced by euro-zone bonds during European morning after release of German regional CPIs, with national gauge due out at 8am New York time.  US yields are lower by 2bp-5bp, 10-year TSY sliding by 5.8bp at 3.05%. Gilts curve bear-flattened with 2-year yield 12bps higher as money markets raise BOE tightening bets. Gilts slumped after yesterday’s English holiday as money markets cranked up BOE tightening bets. The UK 2-year yield briefly rose above 3% for the first time since October 2008. Peripheral spreads are mixed to Germany; Italy and Portugal widen, Spain tightens. Australian sovereign bonds extend an opening gain as iron ore slumped back under $100 for the first time this month. IG credit issuance lull expected to last through US Labor Day holiday Sept. 6.

In commodities, WTI drifts 2.8% lower to trade near $94.32. Most base metals are in the red; LME copper falls 2.9%, underperforming peers. LME lead outperforms, adding 0.7%. Spot gold falls roughly $2 to trade near $1,735/oz. China was reported to provide Europe with an energy lifeline through the resale of surplus LNG, according to FT. UK PM candidate Truss is set to approve a series of oil and gas drilling licences in the North Sea in one of her first acts as PM, should she be elected, according to The Times. Canada said it is invoking the 1977 pipeline treaty with the US for the second time over Enbridge’s (ENB) Line 5 (540k BPD) dispute.

On the US calendar today, we get the August Conference Board consumer confidence, July JOLTS job openings, June FHFA house price index, Q2 house price purchase index; Bank of Montreal and Best Buy are among the companies expected to report results today.

Market Snapshot

• S&P 500 futures up 0.9% to 4,066.25
• STOXX Europe 600 up 0.8% to 426.16
• MXAP up 0.9% to 158.61
• MXAPJ up 0.6% to 518.99
• Nikkei up 1.1% to 28,195.58
• Topix up 1.2% to 1,968.38
• Hang Seng Index down 0.4% to 19,949.03
• Shanghai Composite down 0.4% to 3,227.22
• Sensex up 2.1% to 59,168.51
• Australia S&P/ASX 200 up 0.5% to 6,998.33
• Kospi up 1.0% to 2,450.93
• Gold spot down 0.0% to $1,736.80
• U.S. Dollar Index down 0.36% to 108.45
• German 10Y yield little changed at 1.46%
• Euro up 0.3% to $1.0029

Top Overnight News from Bloomberg

• Bonds are sliding toward the first bear market in a generation, burning investors who erred in bets that central banks would pivot away from rapid interest-rate hikes. The Bloomberg Global Aggregate Index, which tracks total returns from investment- grade government and corporate bonds, is within a percentage point of falling 20% from its peak after another bout of selling following the Federal Reserve’s Jackson Hole symposium
• The number of container ships headed for the California ports of Los Angeles and Long Beach — a traffic jam that once symbolized American consumer vigor during the pandemic — declined to the lowest level since the bottleneck started to build two years ago
• European energy prices plunged on signs that the region is stepping up efforts to curb a crisis that threatens to tip the region into recession with winter approaching
• The European Union is set to meet its gas storage filling goal two months ahead of target as the bloc braces for a tough winter with Russia limiting supplies and energy contracts trading at elevated levels throughout the continent
• China has rolled out “more forceful” economic policies this year than it did in 2020, Premier Li Keqiang said, as he warned the country faces an arduous task in ensuring its recovery
• China took the most aggressive step in its latest battle to bolster the yuan, setting its reference rate for the currency with the second strongest bias on record. The People’s Bank of China fixed the yuan at 6.8802 per dollar on Tuesday, 249 pips stronger than the average estimate in a Bloomberg survey. The bias was the second largest on the strong side since the survey of analysts and traders began in 2018
• The slide in the yen back toward the key psychological 140 per-dollar level is reigniting chatter on the likelihood officials will intervene to support the Japanese currency

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were somewhat mixed as most of the regional bourses recouped some of the prior day’s losses but with gains capped amid a slew of earnings releases and as participants look towards month-end, as well as the upcoming risk events. ASX 200 was led higher by the energy sector after recent gains in oil prices which printed a fresh monthly high and with strong earnings from Woodside Energy. Nikkei 225 outperformed and reclaimed the psychologically key 28k level. Hang Seng and Shanghai Comp were negative with participants digesting earnings releases and amid further COVID-related disruptions as China’s Dalian region limited movements for five days and Shenzhen ordered to close the Huaqiangbei subdistrict which is a global electronics sourcing centre. ICBC (1398 HK) – H2 2022 (CNY): net profit 171.51bln vs. Exp. 186.4bln, NII 351.4bln vs. Exp. 360.5bln. Baidu Inc (BIDU) Q2 2022 (CNY): EPS 15.79 (exp. 10.46), Revenue 29.6bln (exp. 29.31bln). Global funds invested into Evergrande’s (3333 HK) bonds have determined their own debt restructuring plan, via FT sources; demands the chair repay liabilities with own funds.

Top Asian News

• Chinese Finance Ministry said it will make good use of local government special bonds and strictly curb new local government hidden debt in H2, while it will strive to stabilise employment and prices.
• US President Biden’s administration plans to ask Congress to approve an estimated USD 1.1bln arms sale to Taiwan, according to Politico.
• PBoC has issued draft rules to regulate related transactions of financial holding firms.
• All industrial and business power usage has resumed in Sichuan as of August 30th, according to CCTV.
• Pakistan to Import Onions, Tomatoes To Meet Shortage After Flood
• Asia Push for Winter LNG Sends Price to New Five-Month High

European bourses are supported in tandem with pressure in European gas prices, Euro Stoxx 50 +1.7%, while the FTSE 100 lags somewhat after its Bank Holiday. Stateside, futures are firmer across the board, ES +0.9%, with the NQ +1.2% outperforming modestly as yields ease. Tesla (TSLA) CEO Musk has filed an SEC filing on Twitter (TWTR); on Aug 29th, sent a letter to Twitter notifying he is terminating merger agreement for additional bases separate from bases set forth in July 8th, according to a letter.

Top European News

• Spain is to propose the EU mimics its gas price system, via El Pais.
• Germany said to be open to discussing an EU gas price cap at the September 9th summit, via Reuters citing an official.
• Britons Ditch Staycations for Cheaper All-Inclusive Trips Abroad
• Spanish Inflation Slows But Any Retreat Is Likely to be Gradual
• UK July Mortgage Approvals Rise to 63.8k vs. Est. 62k
• Austria Is Probing Trades Behind Wien Energie Margin Call
• Revolution Beauty Shares to Be Suspended One Year After Listing

FX

• DXY dips under 108.50 after seeing a mild bid overnight to a high of 108.90.
• Antipodeans lead the gains whilst EUR feels a boost from receding European gas prices.
• Haven FX are mixed vs the USD with JPY firmer and the CHF in the red.

Fixed Income

• EGBs are bid as the benchmarks recoup from yesterday’s pressure, fresh fundamentals limited though European gas pricing easing has likely assisted.
• Gilts remain subdued by over a full point, though off worst, as it catches up to the weekend’s hawkish rhetoric.
• USTs are in-fitting with EZ peers and awaiting commentary from Fed’s Williams; yields slightly flatter.

Commodities

• WTI and Brent futures have pared back around half of the prior day’s gains; relatively pronounced pressure once more in European gas benchmarks.
• Spot gold is modestly softer intraday and remains under its 21, 50, and 10 DMAs.
• LME copper has fallen back under USD 8,000/t as the exchange plays catch-up following the UK bank holiday.
• China was reported to provide Europe with an energy lifeline through the resale of surplus LNG, according to FT.
• UK PM candidate Truss is set to approve a series of oil and gas drilling licences in the North Sea in one of her first acts as PM, should she be elected, according to The Times
• Canada said it is invoking the 1977 pipeline treaty with the US for the second time over Enbridge’s (ENB) Line 5 (540k BPD) dispute.
• Sadrist protesters in Iraq reportedly closed the oil production distribution company in Basra and there were explosions in Baghdad’s Green Zone from mortars targeting the former PM’s residential area, according to Iraqi Day.

US Event Calendar

• 09:00: June S&P Case Shiller Composite-20 YoY, est. 19.20%, prior 20.50%
• 09:00: June S&P/Case-Shiller US HPI YoY, prior 19.75%
• 09:00: 2Q House Price Purchase Index QoQ, prior 4.6%
• 09:00: June S&P/CS 20 City MoM SA, est. 0.90%, prior 1.32%
• 09:00: June FHFA House Price Index MoM, est. 0.8%, prior 1.4%
• 10:00: Aug. Conf. Board Consumer Confidence, est. 98.0, prior 95.7
  • Present Situation, prior 141.3
  • Expectations, prior 65.3
• 10:00: July JOLTs Job Openings, est. 10.4m, prior 10.7m

DB’s Henry Allen concludes the overnight wrap

For those also arriving back after the holiday weekend, markets have been playing a familiar tune for 2022, with risk assets losing ground as central banks underlined their determination to keep bearing down on inflation. Fed Chair Powell kicked off the latest selloff in his speech at Jackson Hole on Friday, where he said that getting back to price stability would “likely require maintaining a restrictive policy stance for some time.” He also went on to reiterate that hawkish message at multiple points, saying that “the employment costs of bringing down inflation are likely to increase with delay”, which favoured “acting with resolve now” to avoid a more costly outcome later.

With Powell explicitly warning against repeating the mistakes of the 1970s, investors moved to price in a more hawkish response from the Fed over the next year. In fact over Friday and yesterday, the rate that Fed funds futures are pricing in for the December 2022 meeting went up a further +7.1bps to 3.70%. And with a more hawkish Fed being priced in, that’s having an impact on Treasury yields, with the 2yr yield reaching its highest intraday level since 2007 in trading yesterday, at 3.48%, although it’s since fallen back to 3.41% this morning. US equities have also taken a significant hit, with the S&P 500 seeing its worst daily performance in over two months on Friday, with a -3.37% decline, followed by a more modest -0.67% fall yesterday. Strikingly, Minneapolis Fed President Kashkari said that he was “happy to see how Chair Powell’s Jackson Hole speech was received” in markets, saying it reflected an understanding of their commitment to return inflation to 2%.

That theme of investors adapting to more hawkish central banks has been seen on this side of the Atlantic as well, since a number of individuals at the ECB are now openly floating the idea of hiking by 75bps at a single meeting like the Fed. On Friday, Austria’s Holzmann said that a 75bps move “should be part of the debate”, and that a 50bps move was “the minimum for me”. Then in an interview on Sunday, Latvia’s Kazaks said that “at least 50 basis points would be appropriate” in September and said “at the current moment, I would say 50 or 75 basis points”. Those may be two of the most hawkish officials on the Governing Council, but the fact that a 75bps move is being openly discussed ahead of next week’s decision just shows how the direction of travel has shifted, and overnight index swaps are now pricing in a 75bps move as more likely than a 50bps one. Nevertheless, there was some pushback yesterday from Chief Economist Lane, who said that a “steady pace” was important when reaching the terminal rate.

In light of these developments, our European economists have updated their ECB call (link here), where they bring forward their timing for the terminal rate to mid-2023 from mid-2024, and now see the terminal deposit rate reaching 2.5% (up from 2% previously). In terms of the specific moves to get there, they now expect 50bp hikes at the remaining 3 meetings this year, bringing the deposit rate up to 1.5% in December, before the ECB slows to a 25bp pace at the 4 meetings in H1 2023 that takes the deposit rate up to 2.5%. They are maintaining their call for a 50bp hike at the September meeting for now, but note there are still some key data and risks around energy that could change the September profile.

With markets waking up to the prospect of more aggressive ECB hikes, sovereign bonds sold off significantly yesterday. Yields on 10yr bunds (+11.4bps), OATs (+10.6bps) and BTPs (+10.3bps) all moved sharply higher thanks to rises in real yields, whilst gilts were closed given the public holiday. European equities similarly lost ground as they caught up with the late US selloff from Friday, and the STOXX 600 (-0.81%) posted a decent decline, even as nearly a quarter of the index’s weighting didn’t trade given the London holiday. In the US, tech stocks bore the brunt of the decline given the higher yields, and the FANG+ index followed up its -4.26% loss on Friday with another -1.03% move lower yesterday.

Overnight in Asia, equity markets have put in a mixed performance, with the Nikkei (+1.02%) and the Kospi (+0.54%) clawing back some of their heavy losses yesterday, whereas the Hang Seng (-1.32%), the Shanghai Composite (-0.68%) and the CSI 300 (-0.61%) are all trading in negative territory. That underperformance in Chinese equities follows the moves from the People’s Bank of China to push back against yuan weakness, with a fix at 6.8802 per US Dollar this morning, which is noticeably stronger than Bloomberg’s survey estimate of 6.9051. Indeed, it was the strongest fix relative to estimates since August 2019. Elsewhere overnight, there are also signs that the recent market selloff could take a breather today, with futures contracts on the S&P 500 (+0.27%) and NASDAQ 100 (+0.3%) both pointing higher.

Looking forward now, this week should illuminate plenty on the near-term policy trajectory as a number of important data releases come out. For the Euro Area, the main one will be tomorrow’s flash CPI reading for August, where our economists see year-on-year CPI ticking down from the record +8.9% in July to +8.8% in August. However, we haven’t reached the peak yet in their opinion, as they see CPI rebounding again in September up to +9.3%, so the ECB would still have a long way to go to get back to their target. On the question of core inflation, they see that moving up to +4.3% in August year-on-year, which would be the highest since the formation of the single currency. So an important release for the ECB just over a week before their decision.

The other big release this week will be the US jobs report for August on Friday, which could go a long way to determining whether the Fed move by 50bps or 75bps. Our US economists expect that there’ll be another +300k increase in nonfarm payrolls, which would leave the unemployment rate unchanged at 3.5%. Markets are pricing in +69.1bps worth of hikes for September right now, so much closer to 75 than 50 still. But last month we saw how a strong jobs report jolted market expectations towards 75bps, so a surprise in either direction could well see that shift once again. In the meantime, keep an eye out for the July JOLTS data later today as well, which includes measures on job openings and hires. That’ll offer some further signals on whether labour demand is moving back in line with supply.

Otherwise this week, a major theme will be the ongoing turmoil in European energy markets, where yesterday saw prices come down from their record highs of last Friday. For instance, natural gas futures were down -19.63% to €273 per megawatt-hour, whist German power prices for next year fell -22.84% to €760 per megawatt-hour, having traded above €1000 for the first time earlier in the day. European Commission President Von der Leyen said yesterday that the EU was “working on an emergency intervention and a structural reform of the electricity market.” Let’s see what happens there, but one piece of better news from Germany came over the weekend after Economy Minister Habeck said in a Sunday statement that the target to see gas storage 85% full by October should be reached by early September. In the meantime oil prices have got the week off to a strong start, with Brent crude advancing +4.06% yesterday to their highest finish so far this month at $105.09/bbl. They’ve maintained the bulk of those gains overnight too, with Brent crude only down -0.69% at $104.36/bbl.