Markets continue to price that the worst is over for US bond markets and that the end of Fed rate hikes will occur sooner as the economy in the US, and elsewhere, slow sharply in H2 2022. US stock markets had a banner week based on that theory, which continued Friday with Wall Street posting another day of sharp gains.
It is not just US yields that have retreated sharply over the last week, oil retreated, and this month, industrial metals have taken a beating as well. I’ll not argue with the slow-down predictions although they’re not alone. China has already had one, Europe and the UK are going through one, New Zealand is going to have one, and from Ecuador to Peru, Sri Lanka, and plenty of points in between, emerging markets are feeling some serious pain from inflation and the stagflation shock and disruption to staple supplies like food and energy.
The backwardation in oil futures markets has widened, not lessened, suggesting that despite least weeks’ price falls, energy supplies are as tight as ever. Europe is suffering from reduced Russian natural gas flows; Ecuadorean oil production is expected to go completely offline this week due to cost-of-living protests, and I’m guessing in the US, Honda Civics (a hybrid of course) are this season’s new automotive black as American’s face the reality of owning and running a 10-litre pickup truck. And don’t get me started on the downstream impacts of high natural gas and oil prices on the manufacturing of fertilisers, exacerbated by Russian and Belarus sanctions.
We are already seeing winters of discontent sweeping the UK and Europe and places elsewhere as workers strike over pay increases. None of this adds up to a reason to be piling into equity markets in my mind, because even if bond yields from early hikers start topping out with the US, the real world where companies sell their products isn’t looking too special for H2.
Still, one of the wisest sayings an investor can ever listen to is from John Maynard Keynes. He said that “the market can stay irrational longer than you can stay solvent.” Nary a truer word has been said and as such one should always respect the short-term momentum is that’s the space you play in, and it seems that many do in this gamified investment day and age. The stock market rally could run for another couple of weeks, US yields and the Dollar could continue falling, and even USD/JPY might make it back to 130.00 if US 10-years fall back below 3.0%.
Helping the bounce in sentiment on Friday were US New Homes surprising to the upside, rising by 11% in April. The consensus seems to be that this is an outlier in a downward trend though. On the negative side, Michigan Consumer Sentiment for June fell to a record low of 50.0, with the only tenuous positive being that Inflation Expectations held steady at 5.30% and didn’t move higher.
This week, we have the Fed’s Powell, ECB’s Lagarde, and BOE’s Bailey, all speaking on Wednesday at an economic policy panel discussion at the ECB junket, I mean forum in Portugal. We may well get some tasty snippets to generate short-term vol. Otherwise, data is heavily skewed towards the end of the week. The highlights will be China and US PMI readings released over Thursday and Friday, German Retail Sales on Thursday, and US Personal Income and Expenditure, also on Thursday.
Barring a chock fall in US Personal Income and Expenditure, I can’t see any of that moving the dial on the global risk sentiment rebound. It is clear the market wants to buy the dip, and it’s best to let them get it out of their system. Next week’s JOLTs Job-Opening data and the US Non-Farm Payrolls will provide a sterner test. Tonight’s US Durable Goods may also give the FOMO gnomes an early stress test.
In Asia this week, the ongoing G-7 meeting could be the most relevant one in a decade with Ukraine and Russia at the centre of the agenda. China has already released Industrial Profits this morning, which fell by 6.50% YoY in May, a slight improvement over April. The official and Caixin PMIs at the end of the week are what matter though. Australian Retail Sales on Wednesday are always good for some intra-day AUD vol, but both AUD and NZD are slaves to global sentiment perception, and Australian stock markets are just cost-tailing Wall Street right now. Friday also sees a slew of Manufacturing PMIs released from across Asia, which are usually a decent short-term directional play for local equity markets.
South Korea releases Industrial Production, Manufacturing Production and Retail Sales on Thursday. Retail Sales will remain under pressure as the cost of living increases bite. Industrial Production and Manufacturing should hold steady, but weaker data may see renewed pressure on the Won and other Asian currencies on slowdown fears.
Japan has a packed calendar. Retail Sales and Consumer Confidence should continue to improve as the reopening momentum domestically continues. A weaker yen should help Thursday’s Industrial Production data, but Friday’s Tankan Large Manufacturing Index has downside risks. Arguably the most closely watched item will be Friday’s Tokyo CPI data where June Inflation YoY could breach above 2.0%. It’s a strange old world when markets get excited about 2.0% inflation anywhere but especially in Japan. Although I believe after over two decades, the Bank of Japan has no intention of altering monetary policy, a CPI reading above 2.0% could see temporary pressure on 10-year JGBs and the USD/JPY. That’s all it’s likely to be, temporary.
Finally, it’s Monday so I suppose I have to talk about cryptos for a little bit in their role as a “tradeable asset,” instead of an “investable asset.” Thanks to the rebound in US stock markets and the fall in US yields, Bitcoin looks to have traced out a low of around $18,000.00 for now. From a technical perspective, a rise above $22,000.00 looks possible, extending onwards to $24,000.00. However, in the medium-term, Bitcoin remains in the danger zone, and only a rise above $28,000.00 negates.
Asian equities rally with Wall Street
Wall Street had an impressive session on Friday, rallying powerfully once again as markets priced in a US recession meaning US interest rate hikes would end sooner than expected. That perverse logic saw the S&P 500 jump 3.07%, the Nasdaq rally 3.34% higher, while the Dow Jones gained 2.70%. Much the same pattern is playing out in US futures in Asia. S&P 500 have added 0.35%, Nasdaq futures have jumped by 0.85%, while Dow futures have gained 0.10% as the FOMO gnomes of Wall Street go hard on growth over value.
That sees Asian stock markets coat-tailing New York higher today. The Nikkei 225 has risen by 1.20%, with South Korea’s Kospi rallying by 1.80%. Mainland China’s Shanghai Composite is 0.90% higher, and the CSI 300 has risen by 1.25%. China stocks benefiting additionally from a large CNY 90 billion liquidity injection ahead of the quarter-end vis the 7-day reverse repo. The ever-effervescent Hong Kong market has seen the Hang Seng making an outsized 3.30% gain today.
Regionally, Singapore is up by 0.70%, the tech-centric Taipei by 1.90%, Kuala Lumpur by 0.25%, and Jakarta has fallen by 0.75%. Bangkok has added 0.75%, and Manila is down slightly by 0.15%. Australian markets are slavishly following the S&P 500 and Nasdaq as well, very much their want of late. The All Ordinaries have rallied by 1.90%, with the ASX 200 rallying by 1.95%.
The G-7 meeting probably has potentially a much greater bearing on Europe right now, than other areas, thanks to the Ukraine/Russia war. European markets piled into the buy-side with the US on Friday after a very mixed week, and with the G-7 springing no surprises thus far, we can expect a positive opening from European markets this afternoon.
US Dollar edges lower with US yields
The US Dollar moved slightly lower on Friday as investor confidence ended the week on a high as the street priced in an earlier end to interest rate hikes, and US yields held steady. The dollar index continued grinding lower, falling 0.27% to 104.12, where it remains in another dead Asian session. The dollar index has support at 1.0350 and 102.50, with resistance now distant at 1.0570.
EUR/USD rose by 0.33% to 1.055 on Friday, where it remains in Asia, as investor sentiment continued rebounding. It continues showing resilience as the Russian natural gas exports to Europe situation deteriorates, but initial resistance at 1.0600 and 1.0650 remains challenging. Support is at 1.0450 and 1.0400. Sterling was unchanged at 1.2275 on Friday, not moving in Asia. GBP/USD has initial resistance at 1.2360 and 1.2400, with support at 1.2200, 1.2160, and then 1.1950.
USD/JPY finished sideways at 135.25 on Friday as US bond yields remained steady. It has fallen 0.40% to 134.80 in Asia and it rising investor sentiment pushes US 10-year yields back below 3.0%, a sharp move lower to 132.00 cannot be ruled out. ​ USD/JPY has support at 134.25 and 132.00, with resistance at 136.65 and 138.00.
AUD/USD and NZD/USD booked decent gains on Friday as the stock market rally spilt over into the Australasians. However, today, both have moved sharply lower slightly to 0.6920 and 0.6305, and it looks like some decent-sized AUD/JPY and NZD/JPY selling has gone through the market. The outlook remains negative for AUD/USD while it holds under 0.7000. Support is at 0.6850.
Asian currencies traded sideways on Friday, booking some small gains, but overall, remaining near recent lows versus the US Dollar. That suggests that the rise in investor sentiment in equity markets is yet to spill out into the broader EM complex. The weakest of the pack has been the Philippine Peso with USD/PHP rising above 55.00 this morning to 55.12. The inauguration of the new Marcos President this week, and a dovish rate hike last week are likely the contributing factors. The Chinese Yuan has had zero reaction to the liquidity injection via the reverse repo this morning, or weekend news that a Yuan liquidity pool has been created at the BIS.
Oil prices bounce
Oil prices rose on Friday and Brent crude and WTI has unwound most of early last week’s losses. The futures curves remain in very firm backwardation and in the real world, supplies are as tight as ever with increasing risks around Russia and European natural gas exports. As I said last week, we are unlikely to see Brent crude below $100.00 in this environment, whatever noise we are hearing from other asset classes. OPEC should be a non-event this week, having increased production slightly last month. A potential full loss of Ecuadorian production is having no impact on markets today.
Brent crude rose by 2.55% to $112.40 on Friday, gaining 0.75% to $113.30 a barrel in Asia. WTI rose by 3.45% to $107.50 on Friday, edging 0.15% higher to $107.70 a barrel in Asia.
Notably, Brent crude tested and held its rising longer-term support line, today at $107.70, in the early part of last week. It did not reach the 100-day moving average DMA either. That is a technical development that should be respected and talk emerging from the G-& about a cap on Russian oil prices, is likely to be more supportive of Brent crude over WTI.
WTI’s technical picture continues to look the more vulnerable. Having closed below its rising 2022 support line and its 100-DMA last week, the rally on Friday has only lifted it back to this region today. The support line is at $107.10, with the 100-DMA at 105.85 a barrel. Although the worst may be over for the WTI sell-off as well, we can’t rule out more corrections lower this week. It has resistance at $110.00 a barrel.
Gold rises on Russian gold ban
Gold rose with general investor sentiment on Friday, as the US Dollar eased. It ground out a modest 0.25% gain to $1827.50 an ounce, adding another 0.45% to $1835.50 an ounce in Asia today. The gains today have been driven by a G-& announcement of a formal ban on Russian gold imports. In reality, this is a mere rubber-stamping exercise of unofficial policies already in place and is unlikely to meaningfully change the outlook for gold. ​ It remains adrift in month-long $1800.00 to $1880.00 range.
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.
