US Atlantic Coast Now a Breeding Ground for Supercharged Hurricanes

Asia stocks nudged higher on Tuesday as the dramatic U-turn in British fiscal policy brightened investor sentiment, while the U.S. dollar took a breather at its lowest levels in more than a week as a revival in risk-taking lowered its appeal.

Britain's new finance minister Jeremy Hunt abandoned most of Prime Minister Liz Truss' economic plan that had led to a political maelstrom fuelled by market turmoil, with the pound hitting record lows in recent weeks and the Bank of England being forced to intervene.

Morgan Stanley analysts said the fiscal U-turn was likely to have significant implications for the BoE as its economists now revise their call for the November meeting to a 75-basis-point rate hike, from 100 basis points.

Hunt's move led to Britain's government bonds, currency and shares soaring, also lifting Wall Street.

Given such a wholesale scrapping of PM Truss' Tory leadership promises, it remains an open question how long Truss will remain in power, said Tapas Strickland, head of market economics at National Australia Bank.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.43%, while Japan's Nikkei was up 0.6%. S&P 500 futures and Nasdaq futures were both up 0.8%.

China's stock market opened nearly flat and edged up 0.12% to 3,088.54 as the Chinese ruling Communist Party's twice-a-decade congress remains in session this week.

Chinese state banks are stepping up intervention to defend the weakening yuan, banking sources told Reuters on Monday, while many companies have announced share buyback programmes.

In currency markets, the U.S. dollar retreated against most currencies overnight, with sterling subdued early on Tuesday after gaining 1.6% in the previous session.

The Australian dollar rose on Tuesday after the Reserve Bank of Australia said it expects to raise interest rates further over the coming months.

The yen touched a fresh 32-year low of 149.10 per dollar on Monday, not far off the psychological metric of 150. Investors have been watching out for any signs of further intervention by the Bank of Japan, with authorities repeatedly warning of a firm response to overly rapid yen declines.

NAB's Strickland said many are noting 150 as a key threshold that the government will be keen to avoid a sustained break of, for political reasons.

Meanwhile, China has delayed the release of economic indicators, including the country's third-quarter gross domestic product due on Tuesday and trade data that had been scheduled last Friday.

Brent was up 0.08% to $91.69 a barrel, while U.S. crude rose 0.04% to $85.49 per barrel.

Although oil prices traded in a fairly large range yesterday, ICE Brent managed to settle little changed from Friday's close. The strength in equities and the weakness in the dollar failed to push oil prices higher. Instead, the market still seems wary of the demand outlook for the market. President Xi has made it clear that China will continue to follow a zero-Covid policy, which raises uncertainty over Chinese oil demand through 2023. Recession concerns elsewhere only add to the market's uncertainty.

The EIA yesterday released its latest drilling productivity report, in which US shale oil production is forecast to average 9.105MMbbls/d in November, up from an estimated 9.001MMbbls/d in October. Unsurprisingly, the Permian region is expected to drive the bulk of this growth with output expected to increase by 50Mbbls/d, whilst Bakken and Eagle Ford are forecast to see output increase by 22Mbbls/d and 18Mbbls/d respectively. The report also showed that drilled but uncompleted wells (DUCs) continue to decline. DUC inventory fell by 10 to total just 4,333 at the end of September. This is the lowest number since at least 2014. US producers have been relying on DUCs to sustain production growth at a time when we are not seeing significant growth in drilling activity. However, as the number of DUCs continues to decline so does the rate at which they decline. In 2021 the average monthly decline in DUCs was 219 vs. 76 so far this year.

European natural gas prices came under further pressure yesterday. The Nov-22 TTF contract fell close to 10%, leaving the market at just under EUR128/MWh, which is the lowest level since June. There is now a fairly strong contango in the front end of the curve, as the market seems less concerned about supply in the near term, but is much more concerned about 2023 supply and the region's ability to build adequate storage ahead of the 2023/24 winter in the absence of Russian supply. For now, though, EU storage continues to increase with the latest numbers from Gas Infrastructure Europe showing storage is more than 92% full. Although, with the 2022/23 heating season still ahead of us, it is important that the market doesn't get too complacent about the supply/demand picture in the near term.

The European Commission also continues to work on proposals for the EU energy markets, which according to reports, could include a proposal for a temporary dynamic price limit on TTF. In addition, there are suggestions that the voluntary gas demand cut of 15% could become a mandatory cut. Proposed measures will be discussed by EU leaders when they meet on 20-21 October.

LME aluminium prices fell by more than 3% after large inflows into exchange warehouses. The latest LME data showed arrivals of 65.8kt, the biggest daily addition since February, taking total stocks to 433kt, the highest since 8 June. The majority of the inflows were reported in Gwangyang in South Korea and Port Klang in Malaysia, raising speculation that large volumes of unwanted Russian metal could be starting to arrive at the exchange's warehouses.

Union members at Antofagasta's Los Pelambres copper mine in Chile have reached an agreement with the management, avoiding a strike, according to media reports. The union members failed to reach an agreement during a formal discussion two weeks ago. The mine produced around 336kt of copper last year.

According to the latest forecast from the Ministry of Economy, Trade and Industry (METI), crude steel production in Japan is expected to drop by 6.8% YoY (fourth consecutive quarter decline) to 22.5mt in 4Q22. The group expects Japan's total crude steel output to decline by 5.6% YoY to 90.99mt during the 2022 calendar year.

The Indian Sugar Mills Association (ISMA) projects that India's sugar production will increase by 2% YoY to 36.5mt in the 2022/23 marketing year that started this month. Sugar output without the diversion of cane juice and B-heavy molasses is expected to be around 41mt in 2022/23, compared to 39.2mt a year ago. On the consumption side, the group expects Indian sugar demand to total around 27.5mt in 2022/23, while opening stocks were 5.5mt as of 1 October. This leaves a large exportable surplus from India. However, mills are still waiting for an announcement with regard to the export policy for sugar. The Food Secretary in India has said that the government is set to announce the sugar export quota for the season (that began in October) within a week.

Data from the National Oilseed Processors Association (NOPA) showed that soybean crushing in the US dropped to the lowest level in a year and also came in below market estimates of 161mn bushels. Soybean crushing fell 4.5% MoM to 158mn bushels in September, as the crushing pace slowed due to seasonal maintenance and repair downtime ahead of the fall harvest. However, it was still up 2.8% YoY. Meanwhile, soy oil supplies among NOPA members dropped to 1.5 billion lbs (lowest since September 2020) as of 30 September, down from 1.6b lbs a month earlier and lower than the 1.7b lbs seen at the same stage last year.

Investors are speculating about whether Monday's big stock surge is the start of a recovery or another pause in the market's decline, and the answer may depend in part on upcoming quarterly results from heavyweights including Tesla Inc, Johnson & Johnson and Netflix Inc.

The world's most widely tracked stock benchmark jumped 2.65% on Monday, lifted in part by strong quarterly results from Bank of America, even as investors worry that the U.S. Federal Reserve's war against inflation may hobble the economy.

Expectations are low for the September-quarter earnings season that's now underway, suggesting potential upside for shares of companies that do come in ahead of analysts' estimates, while raising risks for companies that fail to meet even modest expectations.

"This week and next week are just crucial and full of earnings," said Peter Tuz, President of Chase Investment Counsel in Charlottesville, Virginia.

Monday's major rally on Wall Street was just the latest in an unusually volatile year. The S&P 500 has recorded daily gains or losses of more than 2% 39 times so far in 2022, compared to seven times last year and 44 times in all of 2020.

Shares of Tesla jumped 7%, with the electric vehicle maker's report late on Wednesday set to be one of this week's main attractions.

Wall Street's most heavily traded stock, Tesla has tumbled over 17% since Oct. 2, when it disclosed third-quarter vehicle deliveries that missed estimates as logistical challenges overshadowed its record deliveries. However, analysts still expect Chief Executive Elon Musk to deliver a 60% jump in quarterly revenue and a 48% surge in "adjusted" earnings before interest, taxes, depreciation and amortization.

Analysts worried about a deteriorating global economy have slashed their quarterly earnings outlooks. They now on average expect S&P 500 September quarter earnings per share to have increased 3.0% year/year, down from a consensus estimate of over 11% in July, according to I/B/E/S data from Refinitiv.

With the S&P 500 down 23% so far in 2022, the index's forward earnings valuation has dropped to 17, marginally below its 10-year average, according to Refinitiv data.

Netflix reports on Tuesday, with analysts expecting revenue to grow just 5% year/year, its lowest quarterly increase ever, according to Refinitiv. Netflix's stock on Monday jumped over 6%, leaving it with a loss of about 59% in 2022.

Other major companies reporting their results this week include Lockheed Martin on Tuesday, Procter & Gamble on Wednesday and AT&T on Thursday.

Many investors warn that expectations the Fed will continue its aggressive interest rate hikes will limit the amount of optimism generated by a potentially strong quarterly earnings season.

"Right now, the Fed owns the market," said Emily Roland, Co-Chief Investment Strategist at John Hancock Investment Management in Boston. "Sentiment is extremely bearish. You want to be careful here."

U.S. stocks erased their losses from Friday's session, opening higher and then trading quite flat until the close. The S&P500 rose 2.65% and the NASDAQ was up 3.43%.

Falling bond yields may have helped restore some confidence, and this may have been helped by tailwinds from the UK Gilts market, where new Chancellor, Jeremy Hunt, took an axe to the previous mini-budget and put the UK's finances on a sounder footing.

30Y UK Gilt yields fell 40.2bp, the 10Y dropped 35.7bp and 2Y Gilt yields declined by 33.3bp. 10Y European government bond yields declined by about 8bp on average, while the 10Y U.S. Treasury yield was down just 0.8bp.

Equity futures suggest that the positive tone will persist into today's trading, and this could help lift the EUR further. EUR/USD rose to 0.9843 yesterday from about 0.972 and could be buoyed further if risk sentiment holds up. The AUD is trading just below 63 cents, after touching 0.6189 briefly yesterday.

Cable has recovered all the way to 1.1356, though it looked as if it might hit 1.145 at one point yesterday. But the JPY seems to be looking at further weakness, missing out on the G-10 rallies, and edging ever closer to 150. The BoJ will be getting anxious after their recent jawboning seems to have fallen on deaf ears.

Asian FX has lagged behind the G-10 rally, and will likely pick up the slack today. Yesterday, the VND was the weakest of the Asia pack, dropping as the central bank widened the trading band to 5% (from 3%) on either side of the fixing rate.

It is very quiet on the G-7 calendar today. Germany's ZEW business survey is probably the main pick of the day.

The expectations component of the survey is not far above the Global Financial Crisis low of -63.9, and could well push below that today. The consensus expects it to fall to -66.5.

There are some delays to the economic data scheduled for release during the Party Congress. These include the customs export and import numbers, which were scheduled for release yesterday, as well as GDP, retail sales, industrial production, and fixed asset investment, which were previously scheduled for release today. We aren't concerned that the release in the data is because it is particularly weak.

Although we don't expect it to paint a particularly positive picture of the Chinese economy when it is eventually released. Rather, the delay suggests that the government believes that the 20th Party Congress is the most important thing happening in China right now and would like to avoid other information flows that could create mixed messages.

US stocks rebounded strongly amid a tech-fuelled rally after a drop last Friday. There is a combination of reasons why stock markets continued the rebounding momentum since hotter-than-expected US CPI data was released last week. Firstly, rates eased surging after the UK's new finance minister Jeremy Hunt made a U-turn of the previously proposed tax-cutting plan. The UK 10-year gilt yield fell to 3.96% from 4.32% a day ago, boosting the British Pound to jump 1% against the US dollar. Secondly, a bunch of US big banks' earnings came in stronger than expected, leading earnings optimism into the second half of October. Netflix and Tesla's shares jumped 6.6% and 7%, respectively, ahead of their third-quarter earnings reports on Wednesday and Thursday. Third, major US indices are at key technical support levels, algorithmic trading may have caused short covering in positions.

S&P 200 rebounds at the 200 weekly moving average, with the pivotal support around 3,500. All 11 sectors in the S&P 500 finished higher, with consumer discretionary leading gains, up 4.23%. The other two growth sectors, including technology and communication services, were also up more than 3%. And Real Estate jumped 3.9% amid banks' earnings optimism.

Goldman Sachs is reportedly planning to merge trading and investment banking, making its four main divisions into three, one day ahead of the third quarter earnings reports, which is the third reorganization since 2018. The bank will also split the money-losing consumer banking between two new divisions. Apparently, the bank is under pressure due to a downgrade in valuation by analysts.

Credit Suisse considers selling its US asset management business, CSAM, amid its billions of dollars in losses. The unit may draw interest from private equity firms, while the bank is also in process of selling its securitized products, according to Bloomberg.

USD/JPY tops 149, the highest since September 1990 after the BOJ confirmed to keep its ultra-loss monetary policy last week, while the US dollar index fell due to a slide in global bond yields, with most major currencies jumping about 1% against the greenback.

Asian markets are set to open higher following a strong close on Wall Street. ASX futures were up 0.92%. Nikkei 225 futures jumped 1.42% and Hang Seng Index futures rose 1.81%.

Crude oil was flat on mixed signals that the Chinese Party Congress offered over the weekend. President Xi's speech shows that the country's zero Covid policy will remain while continue supporting property and technology with stimulus measures. A softened US dollar also helped ease falls in the prices on Monday.

Gold futures finished higher after paring early gains. The precious metal may continue to be under pressure of rising rates and a strong dollar, with a key resistance level around the 20-day MA at 1,677.

So far this year, global merchandise trade has held up extremely well given the volatile and uncertain environment, with world goods trade standing at 4.7% year-to-date (January to July) according to CPB world trade data. Despite households worrying about the rising cost of living and the end of lockdowns, which resulted in a shift back to services and travelling, consumers' appetite to spend on physical things was still running high in the first half of the year compared to the previous year.

Looking at the details, the eurozone and the US registered YTD growth of around 6%, while the UK figure was in double digits, thanks to an extremely low comparative base of 2021. Emerging economies registered a solid growth rate of 4.1%. Only Eastern Europe/CIS and China's YTD growth figures were in negative territory with the former being especially hampered by the war in Ukraine and the latter suffering from Covid lockdowns. Although we expect the rest of the year to result in subdued goods trade, global trade will still likely see a growth rate of 3.8% this year, far better than we had expected back in April and much closer to our initial call of 4.1% in January.

Slowing consumer demand is bringing relief to global supply chains. After an unprecedented wave of incoming containers, leading to record throughput and peaking congestion in dominant US container gateway LA-Longbeach in early 2022, volumes trended down. With operations fully resumed after Covid, the impressive backlog of waiting vessels was quickly reduced and almost cleared in September. To avoid new supply chain disruptions and build resilience, shippers in the US increased their inventories to relatively high levels in the first quarter of 2022, according to the logistics managers index. They also started ordering early for the holiday season, which flattened the traditional peak season (the third quarter). At the same time, consumers shifted back to services and started to cut spending on goods. This created a 'Bullwhip effect' of self-reinforcing inventory moderation across the supply chain which drove volumes down. Consequently, the 12-month rolling TEU-throughput has slipped into negative territory. And this could continue for a while. The slack in spending on goods (or normalisation) is also reflected in the parcel delivering figures of FedEx and other delivery companies. Moreover, global air cargo volume – known as an early indicator for consumer products demand – has also slumped since early 2022, showing a 5% decline YTD after an initial strong recovery in 2020 and 2021.

Although major ports, including US-bottleneck LA-Long Beach and Shanghai, have managed to get through unprecedented backlogs, there is still a long way to go before global congestion eases. In the US, more ships are directed to the East Coast and elsewhere, diverted to smaller ports which still see more delays. This is also the reason why transatlantic container rates are at more elevated levels. Ocean timelines of cargo ex-works until the port of destination have improved since their peak at the start of 2022, but they still hover around double the pre-pandemic lead times of around 80-90 days. This also means that arrival performance has a long way to go to return to normal levels. Since May, global schedule reliability, tracked by Sea Intelligence, has embarked on a cautious recovery path, standing at 46.2% in August. However, this is still a far cry from the 2018-19 average of 74%. Some 7% of the fleet is stuck queuing up in ports around the world, with 11% of goods still being blocked on waiting container ships.

Softening demand has sent spot rates on the major trade lanes down, ending an extraordinary two-year period in container shipping. Spot rates have been coming down for longer on the main trades from Asia, but higher contract rates and an initiated shift to longer-term contracts by container liners pushed average transport costs for larger shippers up in the first half of 2022. Mid-year, Maersk had 71% of shipments fixed in long contracts. Nevertheless renegotiated contracts have likely reached a turning point as well. And with falling average global earnings for vessels, the mixed bucket of tariffs for shippers is now beyond its peak, and with the economic headwinds, the balance could quickly shift. Smaller shippers now benefit the most from lower tariffs as they are usually dependent on the spot market. Dry bulk rates have also weakened, although they still hover above pre-pandemic levels. Yet, contrary to the container market, tanker rates have rallied after a difficult pandemic phase with lower oil demand – with the Ukraine war having severe implications for the oil and tanker market.

Overall, global supply chain pressures have come down from the peak registered in December 2021, but are still some way off their average level, meaning that supply chain uncertainty is still an everyday reality for the rest of 2022. Shippers have anticipated that.

The current market moderation is expected to spill over into 2023. With recessionary scenarios running high, we don't expect world trade to exceed 2% next year and are pencilling in a subdued growth rate of 1.2% for global goods trade. This falls behind expected GDP growth. With 1) consumer demand faltering, 2) the energy and subsequent inflation crisis persisting, and 3) ongoing labour and material shortages, there are simply not enough silver linings to keep global goods trade robustly flowing. Energy prices are very likely to remain high, burdening companies' cost competitiveness and households' purchasing power, despite government compensation packages.

Although governments around the world are trying to support the demand-side with large fiscal stimulus packages, the uncertainty around the final energy bill in Europe, tightening credit conditions in the US, and a subdued growth environment in China do not speak in favour of robust demand. Consumers face economic uncertainty and the strong dollar has led to more expensive cross-border shopping in China. The European picture shows similarities, as European consumer confidence has tested new lows amid the energy crisis. While consumer spending in the US held up relatively well in 2022, we expect it to fall in 2023 due to rising interest rates resulting in ever-tighter credit conditions and rising unemployment, further weighing on demand.

Consequently, trade in consumer products is expected to stick below growth averages next year. On the industrial side, sliding new export orders (PMI) also indicate a slowdown, with Europe in the eye of the energy storm. Order books, while still reasonably filled, are declining. Meanwhile, trade in Asia might fare better than elsewhere next year with the region better able to weather disruptions. Intra-Asian trade has proved robust with many companies reorienting and diversifying their business activities towards Asia excluding China. Once again, we expect intra-Asian trade to show higher growth rates than overall trade.

The winter season of 2023/24 could prove more challenging for gas supplies with minimal Russian gas flows. Therefore, building inventories will become more challenging next year, leading to gas prices rising to 200€/MWh. The EU ban on Russian oil comes into force on 5 December, followed by a refined products ban on 5 February, which might lead to a decline in the Russian oil supply. If insurance and shipping firms are stopped from providing transportation of Russian energy products above the agreed-upon cap by the G7, the international energy supply will automatically be curtailed and global trade patterns will shift. Although other large tanker 'flag states' like Liberia and Panama could step in by taking the leading role in transporting Russian oil around the world from Greece, Cyprus, and Malta, this shift won't come without obstacles. In addition, China and India are wary of the risk of secondary sanctions, which might limit their appetite for Russian commodity products next year.

There is a significant risk of strikes and labour negotiations in the transportation sector due to spiking inflation and eroding purchasing power. Strikes in all parts of the world this year, such as in the US, UK, Germany, South Africa and South Korea have made the transport sector hold its breath. And the war in Ukraine remains a downside risk. As we've written previously, 10.5% of all seafarers come from Russia and 4% from Ukraine, according to the International Chamber of Shipping. With Russia possibly announcing a full mobilisation, already persisting shortages of sailors could, in theory, intensify. Then, new Covid-19 lockdowns in China might return in 2023. Although restrictions have tended to become shorter and more focused, activity will be impacted nonetheless. As a result of the persistent zero-Covid policy, congestion in Chinese ports increased significantly this year, with container dwell times on the import-side soaring due to difficulties with inland connections and closed factories in the region. This creates production backlogs, leading to a wave of export traffic through the port later and affecting global ports and sailing schemes as well.

More than 80% of world trade is seaborne. The breakdown in typical flows shows a mixed picture but is expected to sum up to just above 2% year-on-year in 2023 in terms of tonnage. This exceeds our forecast for world goods trade (in value), which can be explained by the fact that the energy crisis leads to more seaborne transport of energy carriers (like liquefied natural gas [LNG]). Next to that, airfreight carries mainly consumer goods, which has a more moderate outlook.

Demand for oil and oil products is continuing to catch up after the pandemic setback and this is expected to continue in 2023, although the economic slowdown will weigh on demand. The European urgency to replace piped natural gas is also leading to a rush for seaborne LNG flows, but in terms of trade this is mainly a replacement of piped gas.

On the container side, the inflationary environment with eroded purchasing power continues to temper demand for consumer goods in 2023, with growth sticking under 2% which is well below its long-term average. For dry bulk flows, 2023 is set to be a better year as industrial demand from China (particularly important for iron ore) is expected to catch up. On the other side, demand for coal from Europe continues to be strong and hampered grain trade due to the Black Sea blockage in 2022 is assumed to be less disturbed.

Next year we won't see another shortage in container shipping, as subsiding backlogs will boost productivity and a flood of new vessels will come online from 2023 amid a weakened market. Twenty-eight percent of the current installed fleet capacity is on order and just under half of that is expected to be delivered over the course of next year. This obviously threatens to accelerate the downward trend in spot prices. But container rates will not go down the drain, for these three reasons (in addition to the strong dollar):

During the pandemic, container liners and alliances learned how to better manage capacity cancelling and cooperate in alliances, by cancelling scheduled sailings (blank sailings), (super) slow steaming, and scrapping less efficient older-generation vessels. During the previous two periods, scrapping numbers were extremely low and new IMO energy efficiency and intensity standards from 2023 (also turning into a vessel rating) will have an influence on this perspective.

Second, costs are higher in general due to increases in compliant fuel, port and infrastructure fees (for example, the Suez Canal rate hike of 15%) and wages. Next, ordered dual fuel and new-generation vessels require larger capital investments. And alternative fuels like LNG, biofuels and methanol are more costly. Lastly, more regulation is coming: in Europe, shipping is proposed to be included in the emissions trading scheme (ETS) as part of the new climate strategy, and the FuelEU Maritime proposal prescribes an annual reduction of the carbon-intensity of existing ships by 2% in 2025 which leads to the increased use of more expensive low carbon fuels. On a global scale, collectives including the getting to zero coalition and cargo owners for zero-emission vessels are also pushing for low-carbon solutions from 2030. The bottom line is, the cost base will be higher.

Third, the war in Ukraine has disrupted the market, leading to trade inefficiencies such as longer routes. The workforce is also still stretched and spiking inflation could lead to more strikes and interruptions at ports. Lockdowns are still a local disruptive threat in China, while extreme weather events are a bigger operational risk in shipping. This means costly frictions remain a threat.

For the second time in only four years, low water levels in Germany's main rivers have seriously threatened economic activity, with most of the goods transported being intermediate goods and raw materials that are required for further processing in other industries and are preferably transported by ship, including bulk goods such as coal and steel, dangerous goods and heavy goods. In the US, falling water levels in the Mississippi River are currently log-jamming more than 100 vessels. In China, heatwaves and little rainfall have caused drought in the southwestern Chinese province of Sichuan, a hydroelectric power producer. Some factories in western China have been affected by limited-to-no-power supply, shopping malls have little air-con and lighting, and some apartments have been left without a working lift. Extreme weather events are becoming an ever-larger threat to the transportation sector, seriously affecting supply chains and hampering world trade. With extreme weather events on the rise, weather forecasts represent a disruptive threat urging resilience in global supply chains.