Market Report:
Today bloomberg reported that Treasury futures leveraged positions have risen to an all-time high ahead of the Jackson Hole symposium where Powell will speak on monetary policy. Open interest in 10-year note futures peaked at almost 23 million contracts last week. That translates to a risk of almost $1.5 billion for every basis point change in the underlying cash notes. Some traders are using a well-liked hedge fund method whereby they borrow through repo markets and profit from the difference between cash Treasuries and futures. Traders may be compelled to liquidate their holdings in order to pay back their debts if lending circumstances worsen. The Treasury market may become volatile as a result of such a quick unwind.
Meanwhile, Bullish bets on aggressive rate cuts this year and in 2025 have increased positions. Asset managers extended their net long positioning by over 120,000 contracts in the latest week.
France’s caretaker government has set 2025 state spending at the same level as 2022’s budget at 492 billion euros, implying 10 billion in savings due to inflation. The goal is to maintain the public deficit reduction target to below 3% of GDP by 2027. Military spending will increase as one of the rare budgets to rise, while employment support spending will decrease as unemployment is relatively low. Macron will meet party leaders on Friday to name a new Prime Minister to form a coalition government and pass the budget before year-end.
The EU has slashed the proposed extra tariff on Tesla EVs imported from China from 20.8% to 9%, following Tesla’s request for recalculation. Chinese firms in joint ventures with EU automakers may also receive lower tariffs. Volkswagen’s SEAT unit expects a lower 21.3% tariff for its China-made Tavascan SUV. BMW’s China JV-made Mini EVs also qualify for the lower 21.3% duty. Final tariffs could be implemented in around 2 months unless a qualified majority of EU members vote against. China opposes the findings and tariffs, saying facts were determined unilaterally by the EU. It launched a WTO challenge.
Market View:
Yesterday seemed to be a pause session after an incredible rise in the markets over the past week. Asian sessions have closed with a timid increase. Nikkei 225 manages to close above 38,000 points. The Chinese stock market, on the other hand, has a mixed tone. On the one hand, the SSE tomorrow has managed to recover losses and remains below 3000 points, closing at 2850 points. The HSI, however, did somewhat better, and although it recovered 17,600 points, it has fallen back to 17380.
The US 2-year bond is slowly moving towards a 4% yield after falling to almost 3.6% at the beginning of August.
In today’s session, US futures such as the mini SP500 seem to be taking a break from yesterday’s close and is trading at 5620 points, just 80 points off its all-time highs. The Nasdaq 100 is doing the same, trading at 19740 points.
European markets, also taking a pause yesterday, are making modest gains today. The Dax40 stands at 18425 points.
Gold has set another all-time high, trading above $2550 an ounce. In previous reports we indicated that a possible price projection would take it to $ 2650. Crude oil remains low, with Brent at $77 and WTI at $73.
What if the fall of crude, which should give a bullish USDCAD, is marking juicy supports in the face of the punctual weakness of the dollar, and, if the DXY makes support, we are facing an imminent USDCAD rise? I have shared the graphs showing this possible scenario on our social networks.
Geopolitics:
Iran signalled that it will not rush the anticipated reprisal that had sparked worries of a regional conflict in the Middle East by stating that its response to the reported Israeli execution of a Hamas leader in Tehran could take a long time.
Ukraine claims to have taken control of 1,250 sqkm of Russia’s Kursk Oblast and the Sudzha gas metering station that supplies Europe. Sudzha is now under Ukrainian military administration and their forces are pushing deeper into Russia from there. Sudzha is the entry point for Russian gas into Ukraine and then onto European customers in countries like Slovakia, Hungary and Austria. Gas transit through Ukraine averaged 42-42.4 million cubic metres per day but fell to 37.25 million cubic metres after Sudzha was taken. Ukraine earns over $1 billion annually from Russian gas transit but the transit contract expires in late 2024.
