North American News
Dollar and bonds go for a wild ride
Markets:
- Gold flat at $1806
- US 10-year yields down 8.5 bps to 2.89%
- WTI crude oil up $2.51 to $108.29
- S&P 500 up 1.1%
- JPY leads, AUD lags
There were some massive moves in FX and bonds. The dollar and yen soared in Asia and Europe with the euro, pound and Australian dollar crumbling. The latter ran stops after busing the May low and fell to 0.6765, which is the lowest since June 2020.
In the bond market, 5-year yields were down 22 bps at the lows to 2.88%, a far cry from 3.62% on June 14. It’s a similar story across the curve as it bull flattens. The Fed funds market has taken down the terminal top to 3.34% in Feb and falling 50 bps over the remainder of the year from there.
The moves in the dollar and bonds both unwound to some extent. 5-year yields halved the decline while the dollar did the same.
Atlanta Fed GDPNow Q2 tracker falls deeper into negative territory
- Down to 2.1% from 1.0% yesterday
We started the week at +0.2% in the Atlanta Fed’s GDP tracker. After a series of economic data point disappointments, it’s now at -2.1%. That’s down from yesterday’s reading of -1.0% and comes after today’s data on manufacturing and construction spending.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -2.1 percent on July 1, down from -1.0 percent on June 30. After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7 percent and -13.2 percent, respectively, to 0.8 percent and -15.2 percent, respectively.
Yikes. That line has gone straight south.
US May construction spending -0.1% vs +0.4% expected
- US May construction spending
- Prior was +0.2% (revised to +0.8%)
Commodities
Gold Price Forecast: XAU/USD rebounds above $1800 from a five-month low as US yields tumble
- Gold prices trim daily losses as the dollar soars on risk aversion.
- US yields collapse amid fears of a recession.
- Silver also rebounds, down “just” 2.60%.
Metals rebounded during the American session, amid a collapse in US yields. The rally in Treasuries boosted gold that dragged silver to the upside. XAU/USD is hovering around $1,800/oz, far from the daily low.
Yields tumble helping gold that helps silver
US yields spiked to the downside. The US 10-year dropped to as low as 2.79%, the lowest since late May (earlier on Friday, it traded above 3.00%), while the 30-year tumbled to 3.02%.
Recession fears are softening Fed’s tightening expectations. The bond market on Friday is showing more concerns than the equity market. In Wall Street, the Dow Jones is falling by 0.56% and the Nasdaq by 0.49%.
The sharp slide in yields pushed gold back above $1,800, alleviating the bearish pressure. XAU/USD bottomed at $1,784, the lowest since late January. It is still down for the day and about to post the lowest weekly close in months. The area around the 2022 low at $1,780 is a critical support.
Silver also trimmed losses dragged to the upside by gold. XAG/USD bottomed at $19.38, level not seen since July 2020 and it is trading at $19.75, down 2.60%. Price is under the 200-week Simple Moving average for the first time since May 2020.
OPEC badly missed production quotas in June
- Another survey shows they fell short
OPEC production fell 120,000 barrels per day in June to 28.6 million barrels per day, according to a Bloomberg survey. Earlier, Reuters’ survey estimated at 100,000 bpd decline.
OPEC was supposed to increase production in the month but instead it declined. Saudis missed their quota by 213k bpd.
There’s a good chance that by announcing further production hikes, OPEC simply embarrasses itself.
Here are the numbers:
EU News
European equity close: Middling start to the new quarter
- Closing changes for the main European bourses
Last quarter was rough for European stocks and there wasn’t exactly a rush to buy into the new quarter:
- UK FTSE 100 -0.2%
- Stoxx 600 -0.1%
- German DAX +0.1%
- French CAC +0.1%
- Italy MIB +0.3%
- Spain IBEX +0.8%
On the week:
- UK FTSE 100 -0.7%
- Stoxx 600 -1.45%
- German DAX -2.3%
- French CAC -2.3%
- Italy MIB -3.5%
- Spain IBEX -1.0%
Other News
GM warns that supply chain issues affected Q2 but re-affirms 2022 guidance
- Comments from the automaker
General Motors shares were halted ahead of news but there’s no big surprise in the release. It says that the company had about 95,000 vehicles in inventory that were manufactured without certain components due to supply chain issues, including semi-conductors. The company said it expects all the vehicles to be sold before year end and reaffirmed its guidance.
I wonder how closely automotive manufacturers and dealers are watching the broader retail space and the bullwhip effect there where they’re now stuck with excess inventory. Given that it’s largely a vertically-integrated industry with long lead times, they should be able to manage it well but sales are also declining rapidly so by this time next year we could be in a situation where companies are slowing production and cutting prices. That’s another reason to worry that the Fed is overdoing it.
The company said sales were down 15% y/y with 582,401 sold in the US. The second quarter SAAR was an estimated 13.4 million light vehicles compared to 17 million a year ago. Slowing sales at the moment in autos is well-known, so that’s not a big surprise but shares are down 2% pre-market after resuming trading.
Cryptocurrency News
BlockFi sells itself to FTX in Earn-out-laden deal
- High end of the deal is $240 million
Update: BlockFi CEO Zac Prince now offers details.
Yesterday we signed definitive agreements, subject to shareholder approval, with FTX US for:
1. A $400M revolving credit facility which is subordinate to all client funds, and
2. An option to acquire BlockFi at a variable price of up to $240M based on performance triggers.
This, together with other potential consideration, represents a total value of up to $680M.
We have not drawn on this credit facility to date and have continued to operate all our products and services normally. In fact, we raised interest rates, effective today.
So, what events led up to this deal with FTX US?
Crypto market volatility, particularly market events related to Celsius and 3AC, had a negative impact on BlockFi. The Celsius news on June 12th started an uptick in client withdrawals from BlockFi’s platform despite us having no exposure to them.
In the same week, 3AC news spread further fear in the market. While we were one of the first to fully accelerate our overcollateralized loan to 3AC, as well as liquidate and hedge all collateral, we did experience ~$80M in losses, which is a fraction of losses reported by others.
This represents the full extent of the impact to BlockFi from 3AC. We have no further exposure and the limited losses we did experience will be absorbed by BlockFi with no impact to client funds.
Our 3AC losses will be part of 3AC’s ongoing bankruptcy case(s) so more info will surely come out as those cases proceed.
It’s always ‘ volatility ‘ and never ‘terrible risk management’. How does an $80m loss on a company that’s raised $1 billion lead to a fire-sale? This is certainly not the whole truth.