Stocks in pre-Fed funk, oil cranks up

Pre-Fed Funk and Currency Jive

We seem to be in a bit of a pre-Fed funk with stocks doing little early Tuesday morning, having slipped yesterday ahead of the FOMC meeting kicking off later today. European indices were broadly flat the open, following a drab session in Asia and a flat session on Wall Street left the S&P 500 barely changed. Debt deals for embattled property developers Sunac and Country Garden lifted the mood a bit overnight but Asian shares were still broadly weaker. US futures are flat. The FTSE 100 managed to eke out some small gains thanks to miners and oil majors having retreated 0.8% on Monday and remains below the 7,700 as of send time. The DAX was flat at 15,725 after a decline of 1% yesterday. Gold is a bit firmer at $1,934 on its 50-day SMA and the dollar trades a little bit softer though sterling is lower at the 1.23 handle, its weakest since June, whilst the euro is up testing the 1.07 level again with some hawkish comments from the ECB’s Villeroy.

Oil's Roller Coaster Ride

Oil prices continued to march up with Brent topping $95 and WTI futures for October above $92. The Saudis say production cuts are not about artificially inflating prices but bringing stability...but the extreme backwardation points to a very tight physical market that could push near month contracts to $100 and beyond even if it cannot be sustained due to looser conditions expected next year. How tight can be seen by the backwardation in the curve with the Dec ‘23 and ‘24 contracts about $10 wide and the six-moth spread at $8. Front month trades about $1.20 higher than the Nov contract, which is about $1.60 higher than Dec. Meanwhile speculative long positioning has moved sharply upwards in the last couple of weeks, reflecting the bullish fundamentals.

Inflation Spotlight: EZ and Canada Take the Stage

Today markets can look to the EZ final inflation print at 10am and Canadian inflation data later in the session may also be of interest. Earlier meeting minutes from the last RBA meeting note “there was a risk the economy could slow more sharply than forecast…The recent flow of data was consistent with inflation returning to target within a reasonable timeframe”.

Corporate Chronicles: The Kingfisher and Ocado Saga

Kingfisher is still battling post-pandemic trends and higher inflation as consumers continue to prioritise spending on experiences over their homes and gardens. Europe was soft with the company noting consumer confidence in France particularly poor. UK growth is still positive, but pretty lacklustre at just +1.7% like-for-like vs –3.8% in France and –10.9% in Poland. As a result, profits slipped almost 29% in H1 and margins compressed further. The company cut its expected pre-tax profits for the full year to £590m, down from the prior guidance of £634m. Shares fell 6%.

Ocado rallied 3% with retail revenues up 7.2% in Q3 vs the 5% seen in H1 - still lagging inflation though and average selling prices at +8.4% - considerably lower than inflation – highlighting the investment in price required to generate a +1.5% increase in customers. Guidance confirmed for the year – shares up a bit and trade about +25% YTD.

Apple's New Star and Treasury Trembles

Apple – the iPhone 15 will go on sale on Friday, Wedbush Securities said in a note. iPhone 15 pre-orders as of late Sunday were tracking "much stronger than we and the Street expected and up roughly 10%-12% from iPhone 14." The mix is skewed heavily toward iPhone 15 Pro/Pro Max, and “this is a clear positive for Apple.”

On the ever-present topic of liquidity in the Treasury market, the Bank for International Settlements is out with a note warning about the build-up of leveraged positions.

“Speculative positions by leveraged investors in US Treasuries are back,” says BIS. “Over recent months, leveraged funds have built up net short positions in US Treasury futures of about $600 billion with more than 40% of the net "shorts" concentrated in two-year contracts. These funds had been at a comparable level of net shorts in the run-up to the repo market turmoil of September 2019 and the US Treasury market dislocations of March 2020.”

According to BIS, the current build-up of leveraged short positions in US Treasury futures is “a financial vulnerability worth monitoring because of the margin spirals it could potentially trigger” adding that “margin deleveraging, if disorderly, has the potential to dislocate core fixed income markets”. We’ve talked before about the problems facing the Treasury market from declining liquidity and this is a signal that there are problems bubbling away under the surface.