Morning Notes: Dollar dips to start the week

Broader risk sentiment tilting slightly positive.

This is the picture in Asia at 06:55BST

And Europe (excl. Italy) is broadly called higher at the open

 European Opening Calls:#FTSE 7033 +0.22%#DAX 15455 +0.55%#CAC 6390 +0.05%#AEX 707 +0.01%#MIB 24789 -0.75%#IBEX 9212 +0.08%#OMX 2245 +0.17%#STOXX 4026 +0.00%#IGOpeningCall— IGSquawk (@IGSquawk) May 24, 2021 

U.s. futures are slightly higher, while the dollar (DXY) falls through 90 to start the week...

Everyone's uncomfortable and there's nowhere to hide.

That's how the market looks to me right now.

Let me explain

Until recently, markets shifted between regimes where there was always something to buy with a relative degree of confidence.

Rotations and re-rotations between 'growth' and 'value'.

Crypto boom, commodity boom...

Now?

Crypto has taken some serious damage, regulators are closing in and it will take time for the market to find a strong footing again.  

Commodities are paring gains with authorities in China especially concerned about prices rising.

China NDRC: Vows zero tolerance of commodity futures violations; to severely punish commodities monopoly and price violations; to check abnormal transactions on commodities

“Internal guidance from our macro department is that the country won’t tighten credit too much -- they just won’t loosen further,” said Harry Jiang, head of trading and research at Yonggang Resouces, a commodity trader in Shanghai. “We don’t have many concerns over credit tightening.”

“Credit is a major driver for commodity prices, and we reckon prices peak when credit peaks,” said Alison Li, co-head of base metals research at Mysteel in Shanghai. “That refers to global credit, but Chinese credit accounts for a big part of it, especially when it comes to infrastructure and property investment.”

The rhetoric is working: Iron ore and steel products hit limit down in recent days.

The AUD refuses to drop...

There's also China's weakening credit impulse (touched on it here) 👇

And Bloomberg reports on a maturity wall in the next 12 months

A similar dynamic is also playing out in the offshore market, where maturities total $167 billion over the next 12 months.

Defaults are increasing and the already short average maturities are shortening further.

The upshot is that China’s domestic credit market faces a near constant cycle of refinancing and repayment risk, which threatens to exacerbate volatility as defaults rise.

So, long commodities isn't the obvious trade it once was.

And on the liquidity front, taper talk will continue to loom large...

Fed's Bostic actually had some sensible comments out over the weekend.

  • Many of the inflationary forces should resolve in months,

  • Fed should not fall too heavily on one possible outcome

  • Monitoring economy to assess transitory vs otherwise

  • Hard to decide US economy is beyond the pandemic, economy still has a ways to recover

  • Sept, Oct, Nov will be the time frame when signals clearer.

I completely agree with him on this last point, but the voices of 'something must be done' can easily drown out the calmer heads moving towards 'outcome-based' policy.

The more I think of it, the more Jackson Hole in August makes sense.

Announce the 'official' plan to taper QE in 2022 (conditional on positive data) through the end of the year.

Fed announcing tapering at the same time as China's fading credit impulse starts to impact actual credit conditions (lags between 6-10 months depending on how you measure it) will make for an especially interesting post-Summer period.

Looking ahead, a very light calendar today

đź—Ł Fed's Brainard, Mester, Bostic, George, BoE's Bailey, Saunders & Cunliffe

EUR/USD: 1.2145-60 (1BLN), 1.2200 (1.3BLN), 1.2260-70 (400M)

GBP/USD: 1.4150 (298M)

AUD/USD: 0.7710-20 (695M), 0.7725 (689M), 0.7750 (561M)

USD/CAD: 1.2100 (358M), 1.2150 (875M)

USD/JPY: 108.45-50 (443M), 108.80 (360M), 109.00 (285M)

109.15-25 (380M), 109.50 (521M)