Russia Has Pulled Out of the Black Sea Grain Deal. Here's Why It Must Be Restored

Nasdaq futures are down this morning, by about 0.50% at the time of writing, after the afterhours trading session was shaken by results from two U.S. tech giants: Tesla and Netflix. For both there was good and less good news.

Tesla's price cuts that boosted sales and got the company to sell almost half a million cars less quarter, also squeezed its profit margins for the 3rd straight quarter to 9.6%. This number was almost 15% earlier this year. But Elon Musk said he believes this is the right choice still, and it certainly is. Tesla's earnings jumped 20% and total revenue rose 47% – both better than expected. But the stock price fell more than 4% in the afterhours trading. Netflix on the other hand added 5.9 mio subscribers last quarter – more than double what was estimated by analysts – as banning password sharing encouraged people to … subscribe! Note that Netflix had its 2nd best quarter since the heart of the pandemic, yet, its sales and revenue fell short of expectations due to price cuts in some markets and the unfavourable exchange rate, while Q3 forecast disappointed, and the stock fell more than 8% in the afterhours trading. Netflix rally could pause after a 175% rally since last May but Hollywood strike and the deteriorating macro conditions are not all negative for Netflix. First, Netflix gets a big chunk of its content from outside the U.S. and should help the streaming giant diversify risks from Hollywood, and second, as the living crisis in some parts of the world gets worse, people could be tempted to stay home and watch Netflix. Plus, it is said that with competition tightening its purse's strings, Netflix could find itself with less competition too. Pricewise, it could be time for a downside correction in Netflix which actually trades in overbought market conditions, but price pullbacks could also serve as interesting entry opportunities for further gains. Though, we all know that this quarter's jump in subscriptions was probably a one-off jump, making it hard to predict how the numbers be impacted in the next few quarters.

Apple also made headlines yesterday, as news that it's quietly working on generative AI called 'Ajax' but that employees call Apple GPT, pleased investors sent Apple just a few points below the $200 mark yesterday. Microsoft and Google fell more than 1% on the news. But Apple doesn't have a clear strategy for releasing the technology to customers, and no matter what they say, ChatGPT's arrival was like a bomb, and it will be hard to dethrone Microsoft with a bigger bang soon.

On the banks front, well Goldman Sachs was right warning investors that it was going to have a BAD quarter, because it really had a BAD one. I mean its earnings slumped 58% last quarter on investment banking – the worst among the big U.S. banks and the return on equity – the key measure of profitability – fell 4%. That was also the worst among the big U.S. banks. But happily, investors were prepared for the bad news and barely reacted. The bank shares will likely come under pressure in the coming weeks in expectation of tighter capital rules.

Overall, the S&P500 and Nasdaq both extended gains yesterday but we could see some consolidation and downside correction today. The U.S. 2-year yield remains steady around 4.70/4.80% range, as Federal Reserve (Fed) officials are in their quiet period before the next policy meeting and can't insist that there will be more rate hikes on horizon! The U.S. dollar index consolidates and slightly corrects near the overbought territory. The dollar-yen tested the 140 resistance, again, on the back of softening Bank of Japan (BoJ) expectations with no more than a fifth of forecasters predicting that the BoJ will adjust its YCC policy this July. The new governor Ueda is sticking to easy policy and the improved functioning of the bond market doesn't call for urgent action. October is now the month that investors expect a change to happen.

Cable tipped a toe below the 1.29 mark yesterday after the latest inflation figures came in softer than expected yesterday morning and helped traders trim a 50bp hike expectation for the next meeting. While the euro took the opposite direction, after the core CPI came in higher than expected, at 5.5% in June. The latter somehow pushed back the European Central Bank (ECB) doves that were boosted earlier this week by comments from ECB's Knot that a rate hike beyond the next policy meeting is all but guaranteed.

In commodities, wheat futures were up 8.5% yesterday as Russia fuels tensions in the Black Sea. Russian Defense ministry said that all vessels in the Back Sea heading to Ukrainian ports will be considered potential carriers of military cargo starting from today.

Whisper it, but for all the warnings of a Turkish financial market meltdown if Tayyip Erdogan won May's Presidential vote, some parts of it have done rather well, although the lira's drop has been as punishing as predicted, if not worse.

From a stock market rally to one of the worst performing currencies in the world, the charts below show how extreme the moves have been and what investors are watching out for next.

The lira has slumped 25% since Erdogan secured his victory and installed new Finance Minister Mehmet Şimşek and central bank chief Hafize Gaye Erkan who seem to have given the currency much more room to do its own thing.

It is down over 30% for 2023 as a whole, pipped only by Nigeria which slashed at the naira with a super-sized devaluation last month and perennial pariah Argentina

The pace of the lira's fall has been accelerating though, meaning it could soon overtake those two unless the tide turns. Many investors think that will only happen if interest rates go to levels just too high for investors to pass up.

The central bank will announce its second post-election rate decision at 1100 GMT. Last month it raised rates sharply to 15%. Now economists expect it will go to 20%.

"You wonder whether they have left it too late" said Mikhail Volodchenko at one of Europe's largest fund managers AXA IM. "You need a lot of things to go right," he added, to avoid some kind of drama.

The lira may have buckled but Turkey's stock market has soared and not just because of locals piling in to protect their money from a renewed rise in inflation.

Foreign investors scooped up $231 million worth of Turkish shares in the week to July 7, according to central bank data, in what was a fifth straight week of buying.

Even more impressive has been the post-election burst of outperformance by MSCI's Turkey index, which is dollar-denominated and therefore accounts for the lira's woes.

"Implementing policies to stabilize the exchange rate, easing inflation concerns and improving economic conditions may positively affect investor confidence and lead to the continuation of optimism," said Enver Erkan, chief economist at Dinamik Yatirim.

The switch back towards more orthodox-looking policies has cut the premium, or 'spread' in banker speak, investors demand to buy Turkey's dollar-denominated government bonds rather than the U.S. Treasuries to the lowest since COVID broke out.

That move has meant the bonds have now done better this year than the worldwide benchmark for emerging market debt, the JPMorgan EMBI Global Diversified index.

There have been other helps too. Erdogan last week unexpectedly gave the green light to Sweden's NATO bid after months of delays.

Just a day later the EU's powerful lending arm, the European Investment bank, which has long had a ban on lending in Turkey, approved a 400 million euros ($448 million) package to help the post-February earthquake rebuild effort.

And on Wednesday Erdogan landed $50 billion worth of deals from the United Arab Emirates on one of his first stops on a tour to wealthy Gulf Arab nations.

"No one is really overweight Turkey," said Simon Lue-Fong, a fixed income head at Swiss-based fund manager Vontobel, referring to investor positioning. "But if it looks like things are changing then it can do well."

In contrast to the dollar bonds, Turkey's 'local' lira-denominated bonds have had a shocker.

The mix of higher interest rates and the lira's collapse means they have lost a whopping 38% in dollar terms versus an 11% gain on the world's main local currency debt index, the JPMorgan GBI EM.

Even if the lira is taken out of the equation the bonds are still down around 13% since Erdogan's election win.

"It is the only local market in world where both the bonds and the currency are weaker this year," said Aegon Asset Management's head of emerging market debt Jeff Grills.

One of the big grumbles investors have is that Turkey is in a cycle where high inflation hits the currency which then raises the price of importing everything from food to fuel.

Analysts forecast headline inflation will now stay above 40% for another year and Michael Metcalfe at State Street Global Markets says prices scraped off the internet in real time already show it is going up again.

"This likely reflects a direct response to the collapse in the Lira in the past two-months," Metcalfe said, adding the data pointed to a sharp reacceleration of the monthly inflation rate to back above 4%.

($1 = 0.8920 euros)

Markets have pared back their near-term rate hike expectations over the past few days. The final element, which had a significant impact on sterling rates, was the UK CPI print yesterday morning, which also saw services inflation fall below what the Bank of England itself was projecting. At 7.2%, it is still elevated but could make the difference between another 50bp move or a smaller 25bp hike at the upcoming central bank meeting in August. It certainly made a difference for the terminal rate markets are anticipating, which further declined to just over 5.8% coming from a peak of pricing of 6.5% earlier this month.

The UK data print helped feed the general narrative that inflation dynamics are starting to look more encouraging. Even the European Central Bank could point to its very own 'supercore' inflation measure, which posted a third monthly decline in a row yesterday (albeit still painfully high at 5.7% year-on-year). The data was released along with the final eurozone inflation data for June, which saw the official YoY core reading being revised up by a tenth to 5.5%.

EUR rates also reacted to the UK data initially, but their bigger move had already occurred the day before on the back of the unusually dovish comments by one of the ECB's hawks Klaas Knot. A July hike is a "necessity", he remarked, while anything beyond July "would at most be a possibility but by no means a certainty." Bundesbank President Joachim Nagel had also sounded less determined with regards to September earlier this week, stressing that the decision would emerge from a data-dependent approach.

Market pricing for the September ECB meeting now sees a rate cut hanging in the balance, although markets are still more inclined to see the ECB hiking once more after July before the year is over, putting the probability of the ECB reaching a 4% depo at 80%. It will indeed be more questionable whether we will get as firm a commitment for the next meeting in the upcoming press conference as we did in June for July. At the same time, the ECB is also unlikely to signal the end of its tightening cycle.

Over the summer, the ECB will this time have two CPI releases (for July and August) to contemplate and will also have new forecasts available in September. Other ECB officials such as Governing Council member Gediminas Simkus also reminded us yesterday that there are still scenarios where the central bank might do more, including a revisit of quantitative tightening discussions next year. The ECB has set the bar it has to clear with regards to inflation relatively high, not wanting "to be surprised again by sudden and significant changes in the wrong direction".

Against that backdrop, it might not surprise that the EUR front end was reluctant to further trim the chances of a September hike to below 50%.

It's unusual to see eurozone rates and U.S. rates moving in opposite directions, but that is exactly what we saw yesterday. The U.S. market saw the higher-than-expected inflation print as an issue for the eurozone to price in, and by implication without consequence for the US. At the same time, the U.S. has already re-priced to reflect the relative robustness of its economy. The Fed funds strip continues to account for this, with the liquid portion of the strip out to early 2025 not dipping below 3.75%. Further out it gets down to 3.6%, but there are no volumes to speak of out there. Either way, adding a 30bp term premium to this suggests that the U.S. 10yr yield could easily be closer to 4% here.

It's far from a perfect model, but it does help to explain why the 10yr yield has not collapsed lower, and in fact, we rationalise this as a factor that can force U.S. yields higher as a tactical view. It goes against the consensus out there that the inflation story is behind us, but is rationalised by the reality that macro robustness can always reignite the inflation bubble in the months and quarters ahead. For this reason, we maintain a moderate bearish stance on the directional view, expecting market rates to remain under moderate rising pressure. The fact that risk assets remain in risk-on mode pushes in the same direction.

As we approach summer, many investors are taking chips off the table and trading is becoming more choppy surrounding the competing narratives of easing inflation and economic resilience. At the moment, the market seems to take the middle ground, attaching a growing possibility to the most benign outcome of a 'soft landing'.

As for today, the main focus is on U.S. data, with the release of the initial jobless claims as the highlight. The consensus is for very little change, which would support the notion of a resilient jobs market, but surprises here have seen some volatility in the past. Other releases are the Philadelphia Fed business outlook and existing home sales. The Conference Board's Leading index is seen extending its fall, and it has been pointing to weaker economic activity ahead already for more than a year.

European supply will come from France and Spain. The French nominal bond auctions are targeting shorter maturity bonds out to 6 years, but France will also launch a new 11-year linker. Spain will active out to the 27-year maturity. The U.S. Treasury launches a new 10Y TIPs inflation linked bond.

The oil market had a fairly choppy day of trading yesterday. ICE Brent managed to break above US$80/bbl and reach an intraday high of US$80.93/bbl. However, some renewed USD strength eventually weighed on the market, which saw the prompt price settle back below US$80/bbl.

The EIA's weekly inventory report was also not the most constructive, with crude and gasoline draws coming in lower than expected. U.S. commercial crude oil inventories fell by 708Mbbls over the last week, compared to expectations for a roughly 2.5MMbbls draw. Gasoline stocks dropped by 1.07Mbbls, slightly less than the 1.5MMbbls decline expected. In terms of inventory data, the most constructive data point was the 2.89MMbbls fall in crude inventories at the WTI delivery hub, Cushing. This was the largest weekly decline since October 2021, although the prompt WTI timespread did not react to this draw, in fact, the spread weakened over the course of the day.

Refinery margins continue to edge higher, supported by strength in most refined product cracks – gasoline, middle distillates and fuel oil. Middle distillates continue to be supported by falling inventories in the ARA region, whilst Singapore middle distillate stocks are broadly in line with the low levels seen last year. As for fuel oil, high sulphur fuel oil (HSFO) cracks have continued to strengthen, largely driven by tightness in the sour crude market, as well as stronger summer fuel oil demand for power generation needs in the Middle East. The tightness in sour crude has been driven by OPEC+ supply cuts and is evident with Brent's unusual discount to Dubai. The strength in the HSFO market has weighed heavily on the Hi-5 spread (very low sulphur fuel oil – high sulphur fuel oil), which is trading at a little over US$60/t in NW Europe – its lowest levels since November 2020. The one weak spot for products remains naphtha, where cracks remain deep in negative territory (more than -$14/bbl). Given the weakness in propane prices and ethylene margins, it is difficult to see much upside in naphtha cracks in the near term.

Finally, the latest sales data from the European Automobile Manufacturers' Association (ACEA) shows that, for the first time, the share of new battery electric vehicle sales exceeded diesel vehicle sales in the EU over the month of June. Electric vehicles made up 15.1% of total sales in June, compared to diesel holding a share of 13.4%. However, petrol sales still dominate, making up 36.3% of total sales in the month.

LME copper prices fell for a fourth straight session on the back of growing exchange inventories and expectations of rising supplies. LME copper inventories have been edging higher since the end of last week, whilst SHFE rose 11% for a third straight week as of last Friday. In addition, a dispute over royalties at the Tenke Fubngurume mine in the Democratic Republic of Congo appears to have been resolved, which will allow for the export of copper stocks accumulated at the mine since the dispute began in July last year.

Chile's Antofagasta reported copper production rose 2.5% quarter-on-quarter to 149.6kt in the second quarter of this year, while cumulative production increased by 10% year-on-year to 295.5kt in the first half of the year following a surge in throughput rates at its Los Pelambres operation. However, the mine has lowered its 2023 annual production guidance for copper due to a delay in the completion of its desalination plant and concentrator expansion, along with the water shortages faced in the first half of the year. The miner now expects its copper output to range between 640kt-670kt for the year, down from its previous estimates of 670kt-710kt.

In zinc, LME data shows that total on-warrant stocks for the metal continued to report large inflows, rising by 11,500 tonnes yesterday to 82,400 tonnes – the highest since the start of April 2022. Most of the inflows were once again reported from warehouses in Singapore. Total readily available stocks for zinc have jumped over 40% in the last two days alone, which brings net inflows for the month to 14,075 tonnes as of yesterday, compared to net outflows of 9,100 tonnes over the same period last month. Meanwhile, cancelled warrants for zinc declined by 1,050 tonnes to 8,425 tonnes yesterday. Total exchange inventories rose by 10,450 tonnes to 90,825 tonnes yesterday, the highest since May 2022.

CBOT wheat futures extended the upward rally for a third straight session this morning after surging as much as 9% yesterday amid growing tension between Russia and Ukraine. Russia's Ministry of Defense warned all vessels sailing to Ukrainian's Black Sea ports will be considered as potential military targets starting today, which has heightened worries over the safe transit of grains from the Black Sea region. Earlier this week, Russia attacked Ukraine's grain export ports in Odesa, resulting in the destruction of agricultural infrastructure and 60kt of grain. Russia has been adamant that it will only return to the grain deal if its conditions are met. Recent reports of dry weather in parts of the U.S. and Canada have offered additional support to grain prices.

Recent numbers from Ukraine's Agriculture Ministry show that grain exports for the season stood at 1.43mt as of 19 July, up 32% YoY. This includes 451kt of wheat and 818kt of corn.

The second disinflation surprise in a week, this time in the UK, initially seemed to have the potential for some global spillover yesterday – i.e. curve re-steepening and a risk-on narrative. As discussed in our daily notes over the past few days, the dollar's drop was starting to look overstretched, and as markets actually downscaled the UK CPI's global implications during yesterday's session, they also saw an opportunity to rotate back to the dollar.

Beyond technical short-term valuation considerations, the reasoning behind this dollar rebound appears quite straightforward in our eyes. Last week's (post-US CPI) narrative revolved around the Federal Reserve standing out as a dovish outlier compared to expectations and its own projections, but this week has offered evidence this may well be a more widespread dynamic among G3 central banks. If undershooting UK inflation now opens the door for a smaller 25bp Bank of England hike in August, the Bank of Japan's latest comments leaned on the dovish side (CPI figures are released overnight in Japan) and there have also been reports of European Central Bank members potentially refraining from committing to a September hike when they announce policy next week.

We must note the inflation and central bank picture is not homogeneous. In the commodity space, Canada saw larger than expected headline inflation, but sticky core price pressures suggest it's too early to rule out further tightening by the Bank of Canada. In New Zealand, headline inflation beat consensus and the RBNZ-issued core measure was unchanged at 5.8% from the first to second quarter. In a day of dollar strength yesterday, CAD stayed bid (helped by its close correlation with USD) and NZD lost less than its closest peers like AUD.

In Australia, the release of June's employment figures overnight sent AUD rallying. Employment rose 32.6k versus 15k consensus, with 39.3k attributable to full-time hiring, and the unemployment rate moved from 3.6% to 3.5%. Jobs data remain secondary in importance for the Reserve Bank of Australia, which has proved to put greater weight on monthly CPI readings. We currently expect one last hike in September on the back of an inflation uptick.

Moving back to the US, the Philadelphia Fed index and existing home sales data will be watched along with jobless claims today. We are inclined to think the dollar can consolidate or even tick higher again today as markets start to eye next week's FOMC as a potential hawkish risk. DXY may test 101.00 by the end of the week.

EUR/USD has slipped back to the 1.1200 level, but remains around 2.5% overvalued according to our short-term financial fair value model. A key input to the model, the two-year EUR-USD swap rate gap, has rewidened (in favour of the dollar) to pre-US CPI levels, now hovering around -115/-120bp. On Friday, it had shrunk to -100bp, the tightest since late May.

Today, the eurozone calendar includes consumer confidence figures for July, with consensus expecting a virtually unchanged read from last month. Yesterday, the eurozone final core inflation printed 5.5% versus the preliminary 5.4%. Still, media reports that Governing Council members are planning to soften their tone on forward guidance as they hike by 25bp next week suggests – as also hinted in recent remarks – that concerns on inflation may have eased slightly.

We think EUR/USD is more likely to ease back from these levels than jump back higher. A test of 1.1100 in the coming days would be in line with a re-connection with its short-term fair value.

In a matter of 10 days, markets moved from pricing in a peak rate close to 6.5% to only 5.75% in the UK. Some pre-CPI positioning on Tuesday had seen the pound soften and the Sonia curve shift lower. The FX impact yesterday was large but ultimately not extreme despite the big moves in rates.

The question of whether the Bank of England will hike by 25bp or 50bp remains open. We are in the 25bp camp, as discussed by our economics team here, while markets are pricing in 35bp, close to a 50/50 split. GBP/USD is (like EUR/USD) still overvalued by around 2.5% in the near term according to our calculations. This tells us that the positive risk-premium that had been built into Cable was only partially scaled back yesterday, and the move was actually very much in line with the drop in GBP short-term rates.

Volatility in the pound should remain elevated. We continue to favour a weaker GBP/USD into the 1.2800/1.2850 area in the coming days but are less convinced of EUR/GBP upside potential into the FOMC and ECB risk events next week.

Several data will be released today in Poland, including industrial production, producer prices and wage growth. We forecast that industrial production remained in the red in June at -2.2% year-on-year, falling for the fifth consecutive month in annual terms. Rapid disinflation in producer prices likely continued in June as well and annual growth is trending towards negative figures. Nominal wage growth stabilised at low double-digit levels at 12.1% YoY. We project wage pressure to continue over the medium term despite some deterioration in economic activity.

Later today, we will get the Central Bank of Turkey decision. The bank has acknowledged that inflation has been well above its target, which calls for more effective use of monetary policy. The June decision was considered to be "the first step of the monetary tightening process". Given this backdrop and rising pricing pressures amid i) FX pass-through from recent lira weakness, ii) strong mid-year wage adjustments and iii) inflationary effects from government measures to raise revenue, we expect a policy rate hike of 5 percentage points to 20%. However, risks point to a smaller move given the bank's signals of gradualism.

We saw some weakness across the board in the FX market in the region for the first time in a while. Similar to two weeks ago, we see the main reasons on the global story side, which stopped supplying impulses for stronger EM FX. The Dollar Index showed some gains for the first time in ten days, European equity markets are flat and gas prices have stabilised around 26 EUR/MWh. Rather than reasons to weaken, we see yesterday's move as profit-taking after a multi-day rally, which is especially the case for the Hungarian forint. The Czech koruna continues to adjust to the Czech National Bank comments, which we believe got lost in translation and misinterpreted. However, the main message here is that we see no reason to turn negative on CEE FX for now and continue to expect new gains despite yesterday's weakness.

The Pound to Dollar exchange rate (GBPUSD) experienced a decline, slipping below the 1.30 level, following the release of inflation data that fell short of expectations. This lower-than-forecast inflation figure has reduced the likelihood of a 50 basis point interest rate hike by the Bank of England in August.

The diminished expectations for a rate hike were reflected in a drop in UK two-year bonds, affecting lending rates and potentially alleviating financial pressure on households and businesses. This adjustment in interest rate expectations has improved the overall economic outlook for the UK.

The Pound is currently closely tracking developments in UK bond markets, which explains its decline following the inflation news. While the Pound to Dollar exchange rate recently reached a 14-month high at 1.31, it was considered overbought, leading to a correction.

The undershoot in inflation data has triggered this corrective move lower for Pound Sterling. This development is disappointing for those advocating for another 50-basis point hike by the Bank of England in August, which had contributed to GBP/USD climbing to 16-month highs earlier in the month.

The UK's inflation data for June showed a year-on-year reading of 7.9%, down from the previous figure of 8.7%. The core Consumer Price Index (CPI) reading, which is crucial for assessing underlying inflationary pressures, also decreased from 7.1% to 6.9%.

Both CPI and core inflation were expected to rise, with forecasts of 8.2% year-on-year for CPI and 7.1% for core inflation. However, CPI inflation only increased by 0.1% month-on-month in June, falling short of the market's expectation of 0.4% and significantly lower than the 0.7% increase observed in May. Core inflation rose by 0.2% month-on-month, which was only half of the anticipated 0.4%, and a substantial decline compared to the 0.8% reported the previous month.

The lower-than-expected inflation figures led to a downward revision of expectations for future interest rate hikes by the Bank of England. As a result, UK bond yields and the Pound both experienced downward pressure. The probability of a 50 basis point rate hike on August 3rd decreased to 41%, down from 58% at the close of trading on the previous day.

The fundamentals in the UK are now showing disinflationary trends. Tightening monetary policy, falling consumer inflation expectations, normalizing producer prices, rising unemployment, and declining job vacancies all contribute to this disinflationary environment. If these trends continue, it is expected that inflation will fall rapidly towards a rate of 4-5% by the end of the year and within the 2-3% range by the middle of next year.

The impact on the Pound is uncertain. On one hand, the fall in UK bond yields in response to the data is clearly weighing on the currency. However, economists note that the UK's previous inflationary problem posed the risk of an economic downturn, which would have also affected the Pound's prospects. Thus, while the near-term outlook may show further weakness, the longer-term outlook has improved.

For GBPUSD, the outlook also depends on developments in the US, where inflation has also slowed down, potentially signaling a pause in the Federal Reserve's rate hiking cycle. If the Fed halts rate hikes and global growth strengthens, the Dollar could weaken over the coming months, providing a more sustainable opportunity for GBPUSD to comfortably surpass the 1.30 level.

Given the expected extended weakness in the US dollar during the second half of the year, it is not implausible to see fresh highs for GBPUSD in the coming months.