The roller coaster activity on US stock markets continued overnight, with Wall Street deciding that inflation and recessions were an issue for two days in a row. A tiny rise in US Initial Jobless Claims probably tilted Wall Street over the edge, following the European Central Bank’s tilt to a hawkish bias at their policy meeting earlier in the day.
Thankfully, Friday is here on a number of levels, but most especially because we will see the release of US Inflation and Core Inflation data. Markets have been tying themselves up in knots over this all week, thanks to a thin data calendar. Like last Friday’s Non-Farm Payrolls, I am expecting a very binary outcome this evening with median forecasts for the headline at 8.30%, and core inflation at 5.90% YoY. A number at 8.40% or higher probably sparks a risk aversion sell-off across asset markets with the US Dollar winning. Conversely, a print at 8.20% or lower probably sees a buy everything, sell US Dollars rally, as Fed hiking expectations are pared ahead of next week’s FOMC.
China inflation this morning has passed without incident this morning. Inflation YoY for May was just under expectations at 2.10%. Inflation MoM fell to -0.20%, slightly higher than forecasts of -0.30%. The covid-led consumer and industrial led slowdown continues acting as a brake on inflation. Markets in China today have their eyes focused elsewhere. President Xi Jinping sent out mixed messages overnight, exhorting officials to maintain covid-zero, while also supporting economic growth. Good luck with that.
A potential on again, off again Ant Financial IPO is also doing the rounds. Bloomberg ran a story yesterday saying Chinese officials had indicated a willingness for it to go ahead. Alibaba ADRs rallied 7.0% in New York before reversing all those gains after Chinese officialdom denied the report. Today, Reuters is also running an exclusive the IPO had received a tentative blessing from officialdom as well. Hong Kong equity markets though are showing no signs of taking the bait this time. Where there’s smoke there’s fire I suppose, but with a valuation of around half of what it was around the abortive 2020 date, you’d probably ask why Alibaba and Ant would bother right now. Perhaps the main message would be that China was moving past “peak crackdown” as the economy slows.
Far more front and centre for Mainland China markets, and Asian ones and sentiment, in general, are developments from Shanghai. One district was locked down yesterday and today it was announced that mass testing would take place in seven of its 16 districts, so basically half the city. Markets have naively assumed that China was “one and done” with Beijing and Shanghai, ignoring the experience of Covid-zero nations elsewhere. That reality might finally be permeating the most ardent dip-buyers now, and the prospect of a wave of renewed covid lockdowns in Shanghai would have subdued Asian sentiment today, even without the bonfire on Wall Street last night.
The overnight ECB policy meeting outcome has already been analysis paralysis’ ed to death already. What stands out to me is the price action of EUR/USD, which after the hawkish pivot overnight, still closed 100 points lower at 1.0620. The devil is in the detail I suppose. ECB projections on growth and inflation suggest two years of stagflation ahead. A hike of 0.25% next month and one in September (they left the door open to a larger one), isn’t earth-shattering. It is telling that despite a pedestrian hiking schedule to errrr 0.0%, the Bund/BTP spread still blew out.
But I think the kicker is that the ECB will keep rolling over maturing bond purchases even if they stop adding more from July 1st. So effectively, their answer to stagflation is raising interest rates to 0.0%, while at the same time continuing quantitative easing under the surface. In their defence, the war in Ukraine has thrown a stagflation spanner in the works, but they would have arrived at this point to some degree anyway. Given the ECB’s response, I’d sell Euro and European equities as well.
Shanghai nerves weigh on Asian equities.
US markets couldn’t shake off the inflation/recession hoodoo last night after European markets endured a torrid session as the ECB swung to a hawkish stance. The S&P 500 slumped by 2.38%, the Nasdaq tumbled by 2.75%, and the Dow Jones lost 1.95%. In Asia, US futures have seen some modest short covering, lifting the S&P and Dow futures 0.20% higher, with Nasdaq futures gaining 0.35%.
In Asia, the overnight Wall Street performance was never going to give local markets a good start. But with US data and weekend risk ahead, as well as lockdown nerves around widening mass testing in Shanghai this weekend, regional markets are almost all in the red today. Japan’s Nikkei 225 has fallen by 1.35% today, with South Korea’s Kospi falling by 1.15%.
In Mainland China, equity markets have reversed earlier losses and are in modest positive territory. The Shanghai Composite is now 0.22% higher, while the CSI 300 is flat. I suspect that the authorities’ “national team” might be “smoothing” today. Hong Kong is performing better than expected, perhaps lifted by Ant Financial IPO hopes. Nevertheless, it remains 0.55% lower.
In regional markets, Singapore has fallen by 0.65%, with Taipei losing 0.85%. Kuala Lumpur has dropped by 1.0%, with Jakarta just 0.15% lower. Bangkok is 0.45% lower as it removes its last covid restrictions on inbound travellers, but Manila has slumped by 1.90%. Australian markets are tracking Wall Street and China nerves, the All Ordinaries falling 1.0%, with the ASX 200 losing 0.85%.
The tone in Asia, ahead of crucial US inflation data, means that European equities are poised to open lower once again this afternoon. If Bund/BTP spreads widen once again today, nerves will be further frayed. Only a lower US inflation number this evening is likely to bring any solace to European markets. US markets are a 100% binary outcome of the US inflation data.
US Dollar strengthens overnight.
Pre US inflation nerves triggered a wave of risk aversion in equity markets overnight, which translated into haven inflows to the US Dollar, which booked gains in the DM and EM space. The dollar index leapt 0.74% higher to 1.0330 overnight, although the rally’s scope was flattered by the Euro sell-off, the index’s largest component. How the Euro performs today will dictate whether we have seen a low put in place or not. Higher US inflation tonight should lift the US Dollar, with a lower print seeing renewed selling as Fed hiking expectations are pared. The index is almost unchanged in Asia, and has resistance at 104.00, with support at 1.0285.
EUR/USD slumped by 0.91% to 1.0620 post-ECB, adding a modest 0.13% to 1.0630 in Asia. EUR/USD may come under further pressure today if Eurozone sovereign spreads widen, or if US inflation prints above forecast. Support at 1.0650 overnight becomes nearby resistance, while the 1.0770 and 1.0830 zone remains as formidable as ever. Support is between 1.0610 and 1.0600, and failures signal a retest of 1.0500 early next week.
Sterling fell 0.32% to 1.2500 overnight, where it remains in Asia. Economic worries, leadership concerns, and the Northern Island protocol continue weighing on the Sterling. Resistance is at 1.2600 and 1.2670. Support is still at 1.2460 and 1.2400.
USD/JPY endured a torrid session overnight, selling off from 134.10 to near 133.20 at one stage, likely on EUR/YEN selling. Firm US bond yields saw it recover all those losses to finish almost unchanged at 134.35. Some long-covering today has seen it ease back to 134.15 in Asia. The Bank of Japan is unlikely to change policy next Friday post-FOMC, which will have hiked another 0.50%. The US/Japan rate differential should ensure that USD/JPY does not fall much further than 133.00 today, with its next target being 135.00. Soft US inflation though, could spur a US bond rally and see an abrupt fall by USD/JPY.
The price action on the Australian and New Zealand Dollars was ugly overnight. AUD/USD fell 1.30% to 0.7100, where it remains in Asia. NZD/USD fell by 1.0% to 0.6385, before edging up to 0.6400 in Asia. A combination of US inflation concerns and renewed mass testing in Shanghai seem to have created a toxic risk sentiment cocktail for the Australasians. Both remain acutely vulnerable to negative developments on both fronts. AUD/USD support resistance is at 0.7050 and 0.7200. NZD/USD support/resistance is at 0.6300 and 0.6450.
USD/Asia strengthened overnight with the KRW the worst performer, losing over 0.55% to 1263.80. Asian currencies are steady in Asia after the PBOC set a neutral USD/CNY fix at 6.6994, but several currencies are near their recent lows versus the US Dollar. USD/MYR is near 4.4000, USD/PHP is just below 53.00, USD/THB is 0.20% higher today at 34.640, and USD/INR is once again testing resistance at the 77.80 region. A high US inflation number today likely spurs another wave of Asian FX weakness to round out the week.
Oil eases in Asia on China fears.
Oil prices consolidated their recent gains overnight, with Brent crude edging 0.70% lower to $122.85, and WTI easing by 0.80% to $121.45 a barrel. Oil has continued retreating in Asia, driven by China slowdown fears after widened covid mass testing was announced for Shanghai this weekend. Brent crude is 0.53% lower at $122.20, and WTI is 0.60% lower at 120.70 a barrel.
Oil markets probably have more downside risk in the short-term, with another wave of China slowdown fears capping the upside. Somewhat counterintuitively, higher than forecast US inflation tonight may also spur more selling as markets price in a higher recession likelihood. Any losses are going to be limited though, as the physical tightness of both crude and refined products globally remain powerful supportive factors. Weekend event risk should also limit pullbacks.
Brent crude has traced out a series of highs at $124.25 marking initial resistance. After that, the road opens to $125.00 and $128.00 a barrel, bringing the Ukraine invasion highs back into sight. Support is at $120.50 and $118.50 a barrel. WTI has resistance at $123.15, the overnight high, and then $125.00 and $127.00 a barrel. Support is at $119.35 and $117.50 a barrel.
Gold remains in a coma.
Gold remains confined to a narrow $1840.00 to $1860.00 an ounce range, comfortably continuing to move in an inverted manner to US Dollar moves. Gold’s main hope for a directional breakout rests with US Inflation data moving the US Dollar materially one way or the other. In the meantime, bring a good book.
Gold has resistance at $1870.00, followed by the 100-DMA at $1890.00, and then $1900.00, where I expect there to be options-related sellers in the first instance. Support is at $1837, $1830.00, and then $1780.00 an ounce. I do not discount a disorderly retreat if the latter fails. The wider $1830.00 to $1870.00 range seems set to continue until the US data.
