Federal Reserve Chairman Jerome Powell’s semi-annual testimony on Capitol Hill was the centre of attention overnight. Mr Powell finally dispensed with soft landings, describing them as challenging, and instead said that a recession is “certainly a possibility.” That should have been enough to spark a somewhat counterintuitive risk sentiment rally as Fed hiking expectations were dialled back, but instead, we got a mixed response as Mr Powell asserted, quite forcefully, that soaring inflation had to be brought back to earth.
That left markets in somewhat of a no man’s land. US equities were clearly dying for any excuse to hit the buy button, such is their genetically pre-programmed disposition. But while Mr Powell was talking recession possibilities and being “nimble” from FOMC meeting to FOMC meeting, the reality that a recession probably isn’t great for stocks tempered animal spirits. US yields flopped overnight on the recession words, notably at the long end, which is a bit of a concern, given the market’s infatuation with inverse yield curves. The fall in yields was enough to stop the rot in equities, leaving them roughly unchanged, but the US Dollar fell slightly versus the Euro and Yen.
The Bank of Japan would have been breathing a sigh of relief as lower US yields took USD/JPY back below 136.00, but in the Asian EM space, regional currencies generally weakened. Notably the Korean Won, with a high beta to the health of the US economy, had a tough day at the office. Notably, the Australian and New Zealand Dollar, both global sentiment indicators like the Won, both finished the day lower as well.
Gold, of course, did nothing, while in the crypto space, Bitcoin had another almost unchanged day, hovering once again, just above $20,000.00. Depending on your point of view, Bitcoin is tracing out a major bottom in prices before the new dawn, or it is consolidating a dead cat bounce before heading lower. To help readers understand my point of view, here is a story from Thailand overnight. Basically a chap in Bangkok robbed a gold store to cover his crypto losses. I’m humming “Ironic” by Alanis Morissette.
We have another day of Powell testimony on the Hill this evening, so stand by for more intraday choppiness and analysis paralysis of his every word. In Asia, we have a busy day ahead. South Korean PPI YoY for May held steady at 9.70%, although the MoM number fell to 0.50%. Australian Manufacturing and Services Flash PMIs for June were steady at 55.8 and 52.6 respectively. Japan Jibun Bank June Flash Manufacturing PMI edged lower to 52.7, but the Services PMI rose from 52.6 to 54.2, quite the surprise. I am putting that down to a gradual reopening of borders and government stimulus.
Taiwan’s Industrial Production and Retail Sales come out late today, at 1600SGT, and will likely be lost in the noise of the S&P Manufacturing and Services PMI releases from France, Germany, and the Eurozone. Both numbers should hold steady, or increase slightly, from April, due to the knock-on effects of China’s covid-zero reopening. Singapore’s Core and headline Inflation for May are expected to increase slightly to 5.50% and 5.5% YoY respectively. That won’t be enough to tip the MAS’ hand for an out-of-sequence tightening announcement, especially with recession fears rising among key export markets.
Of most interest will be the monetary policy decisions out of the Philippines and Indonesia today. Both the Philippines Peso and Indonesian Rupiah have been under the cosh lately. The Bangko Sentral ng Pilipinas (BSP) has already indicated a 0.25% hike, with the incoming governor stating he isn’t a fan of large hikes. Bank Indonesia (BI) is murkier. Core inflation remains comfortably within the BI’s target range, but with USD/IDR approaching 15,000.00, BI may spring a surprise on markets and hike by 0.25%. Both central banks will likely be forced to hike at each policy meeting going forward now to offset currency pressures.
European and US S&P PMIs aside, the calendar is pretty light this evening. Powell’s testimony aside, Initial Jobless Claims could be interesting is the weekly number jumps sharply higher tonight. That will reinforce recession fears although frankly, I would need to see the monthly JOLTS number plummet from 11.50 jobs to confirm that. US API Crude Inventories leapt higher to 5.60 million barrels overnight, quite a surprise. More surprising is that oil didn’t move lower because of it, having plummeted in Asia. If tonight’s official US Crude Inventory data shows a huge increase as well, instead of the forecast modest drawdown, we could see some more short-term pressure on prices, especially WTI.
Asian equities are very mixed today
Wall Street had an inconclusive session overnight with the major indexes closing barely changed after being sandwiched by Powell’s recession comments on one side and falling US yields on the other. The S&P 500 eased 0.13% lower, the Nasdaq slipped just 0.15%, while the Dow Jones was down just 0.18%. With a slow news day post-Powell, US index futures have continued their modest pullback. S&P 500 futures are 0.25% lower, Nasdaq futures are unchanged, and Dow futures are 0.25% lower.
With little to pick from the bones of the overnight session, Asian markets have gone their own way today. Japan’s Nikkei 225 is unchanged, but both South Korea and Taipei are sharply lower again and seem to be becoming a proxy in Asia for the health of the US economy, having a high beta to that region. The Kospi is down by 0.55%, while Taipei is sharply lower by 1.10%.
In Mainland China, sentiment appears to have been boosted by hopes that Ant Financial will soon be given the regulatory all-clear, and President Xi reiterating his commitment to this year’s growth targets. That sees the Shanghai Composite and CSI 300 adding 0.55% today, while Hong Kong’s Hang Seng is 0.95% higher.
In regional markets, Singapore has gained 0.55%, while Kuala Lumpur is just 0.10% higher. Jakarta has retreated by 0.75% ahead of today’s BI policy meeting, with Manila losing 1.10% ahead of the BSP policy meeting. Bangkok is just 0.10% higher. Australian markets have booked modest gains after a steady Wall Street session. The All Ordinaries are 0.05% higher, while the ASX 200 has risen by 0.30%.
As expected, the music stopped for European equities overnight, which endured a torrid session. A lack of direction from the US and Asian markets is likely to spur a soft opening once again from Europe as its energy security, inflation and growth problems reassert themselves.
Currency markets continue their sideways trading
With the notable exception of the Japanese Yen once again, currency markets in the DM space continued to range trade. The overnight move lower by US yields after Powell’s recession remarks saw the US Dollar most falling versus the G-20 space, the notable exception being the Australasian sentiment currencies. The dollar index finished 0.23% lower at 104.18, edging lower to 104.14 in Asia. The dollar index has support at 1.0350 with resistance now distant at 1.0570.
EUR/USD rose just 0.32% to 1.0570 overnight, an intraday rally fading ahead of 1.0600 once again. It is unchanged in slow Asian trading. It has initial resistance at 1.0600, with challenging resistance at 1.0650. Support is at 1.0450 and 1.0400. Sterling is almost unchanged over the past 24 hours at 1.2250 in Asia. GBP/USD has initial resistance at 1.2360 and 1.2400, with support at 1.2200 and then 1.1950.
USD/JPY fell 0.32% to 136.22 overnight as US yields moved lower. In Asia, the selloff continues, USD/JPY falling another 0.53% to 135.50 today, helped along by a 0.91% yield at the just-announced 20-year JGB auction. I don’t rule out some nasty downside corrections, but they are likely to be short-lived in the current environment. Only a sharp fall in US yields is likely to stop the USD/JPY rally. Notably, a move by US 10 years back below 3.0%. USD/JPY has support at 135.00 and 134.50, with resistance at 136.65 and 138.00.
AUD/USD and NZD/USD both fell on US recession comments overnight, and both remain default ways to express sentiment by global currency traders. Overnight, AUD/USD fell 0.67% to 0.6925, losing another 0.57% to 0.6885 in Asia. NZD/USD slumped 0.72% to 0.6288 yesterday, losing another 0.50% to 0.6255 this morning. While supports at 0.6850 and 0.6200 hold respectively, further gains to 0.7150 and 0.6450 cannot be ruled out, but that prospect is looking increasingly remote as recession noise rises globally. The risks have skewed towards another sizeable move lower.
Asian currencies took no solace from US weakness in the G-20 space overnight, with their export-driven economies having a far greater correlation to slowdowns in major export markets. i.e., The US and Europe. The THB, SGD, IDR, PHP, and KRW were the worst performers, with USD/KRW notably, climbing over 1300.00 overnight, trading at 1301.70 this morning. That may raise the ire of the Bank of Korea and I expect to see them a likely a few other regional central banks selling a few US Dollars this week. In particular, the Won seems to be becoming a regional substitute, like the Aussie and Kiwi, for investors to express risk sentiment. With another round of Powell testimony tonight, any more retreats by US yields are going to be offset by recession comments by the big man, leaving Asian currencies under pressure. Hikes by BSP and BI, with hawkish outlooks, could relieve near-term pressures on the PHP and IDR.
Oil prices edge lower in Asia
Oil prices tumbled in Asia yesterday morning but managed to recover some of their losses throughout the rest of the day. Nevertheless, oil still recorded a substantial loss for the session. Brent crude finished 4.0% lower at $110.00 a barrel, while WTI finished 4.75% lower at 104.40 a barrel, with the Brent premium over WTI widening substantially. In Asia, oil prices have started moving lower once again, Brent crude and WTI losing 1.10% to $108.90 and $103.20 a barrel respectively.
Looking at the respective futures curves, both Brent and WTI are still heavily in backwardation, suggesting that prompt oil supplies remain as tight as ever, even as prices across the curves fall. Increasing recession fears appear to be prompting a culling of heavy speculative long positioning in both contracts, even as in the real world, energy tightness is as real as ever. WTI’s underperformance can be laid at Powell’s overnight comments, President Biden calling for a suspension of federal fuel taxes, and the surprise jump to 5.6 million barrels by the overnight US API Crude Inventories.
Still, even the US API number didn’t provoke a heavy negative response. Part of this could be that the US issue isn’t enough crude, it is enough crude refining capacity, which is running at an unsustainable 96.0% across the country already. If the official US Crude Inventory number jumps like the API one tonight, WTI may come under more sustained selling pressure than Brent crude, though.
The technical picture is interesting. Brent crude tested its 100-day moving average at $108.45, and the 2022 support line at $107.30 overnight but managed to bounce back to $110.00 a barrel. It may only be a reprieve though as oil prices start moving lower in Asia once again. A daily close under $107.30 implies a deeper move potentially reaching $100.00 initially.
WTI’s technical picture is much softer, having closed below its 2022 support line at $106.30, and its 100-DMA at $105.50 a barrel overnight. Failure of its overnight low at $101.50 could trigger a capitulation by speculative longs that moves WTI under $100.00 a barrel, although I suspect a lot of the damage has already been done.
How well oil performs tonight likely relies on how many times Jerome Powell says recession, and what the headline and gasoline stocks numbers are from the US Crude Inventories data set. I still can’t get past the heavy backwardation in both Brent and WTI futures contracts, which imply tight supplies in physical markets, something that makes complete sense when you look at its drivers around the world. Although I have never subscribed to the panic-mongering predictions of $150.00 and $200.00 a barrel of oil, I remain sceptical as to whether this is a structural turn in oil prices or just a culling of massive speculative positioning. As such, I believe for now, that oil will behave much like inflation, topping out as the year goes on, but not really falling by that much. A $100.00 to $120.00 a barrel medium-term range seems as sensible an outlook as ever.
Gold range continues
There isn’t much to say with gold, a slightly softer US Dollar saw gold edge higher by 0.26% to $1838.00, while Asia has seen it drift 0.26% lower to $1833.00 an ounce, leaving gold in its usual nil-all draw. Admittedly, gold did trade in a $22.00 range overnight, but it is telling that it failed ahead of $1850.00 and finished almost unchanged once again. Until we get a material directional move by the US Dollar, it seems unlikely that gold will sail out of the equatorial doldrums.
Gold has resistance at $1860.00 and $1880.00, the latter appearing an insurmountable obstacle for now. Support is at $1805.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, potentially reaching $1700.00 an ounce. On the topside, I would need to see a couple of daily closes above $1900.00 to get excited about a reinvigorated rally.
