It may not be monster surf breaks in Hawaii or Uluwatu in Bali, but today is shaping up to be a stormy day for markets, with plenty of chances to get dumped and held under the waves for a while. We have already had two central banks in Asia raise policy rates this morning, with the Bank of Korea and Reserve Bank of New Zealand hiking by 0.50%, with a hawkish tone in their statements. Rather surprisingly, the Korean Won and New Zealand Dollar are both sharply unchanged, suggesting that the news was already priced in.
This evening, it will be the Bank of Canada’s turn, and markets have a chunky 0.75% rate hike pencilled in. Even the Bank of England was beating the rate hike inflation-fighting drums last night. India’s June YoY inflation stayed stubbornly above 7.0% overnight at 7.01%. That will keep the pressure on the Reserve Bank of India to keep tightening, and on the Indian Rupee. So, at a glance, the G-20 central banks are very much in inflation-fighting mode, unless you are China, Turkey and possibly Europe, who are in a world of stagflation pain now.
Just how much pain the Eurozone may be in inflation/stagflation-wise may be highlighted by German inflation this afternoon. June Inflation YoY is expected to remain very high at 7.60%, only modestly retreating from May’s 7.90%. French and Spanish Inflation YoY for June will be equally grim, expected to be 6.50% and 10.20% respectively. If the gas stays off through Nord Stream 1 after the maintenance period finishes on the 21st of July, those numbers are set to get worse, and not better. I suspect the outlook for the Euro will get worse as well, and we will be looking wistfully back at EUR/USD at 1.0000 and wishing we’d sold more. It will be interesting to see if the ECB decides to take the Asian route through the pandemic and wear the inflation pain to keep the economic lights on.
The United Kingdom (unless you’re Scottish), releases a chuck of tier-1 data this afternoon as well, including GDP, the Trade Balance, Manufacturing, and Industrial Production for May. All of it has downside risks and won’t have improved in May and in many ways, the BOE is facing the same quandary as the ECB. Combined with an extended leadership contest to select a new Prime Minister to replace Boris Trump, pressure is likely to remain on Sterling as well.
Before that, we get China’s balance of Trade shortly, expected to come in at $75.70 billion for June. Its market impact should be minimal though, as Mainland markets fret over new potential covid-zero lockdowns, and ahead of a slew of tier-1 data releases on Friday, including GDP, retail sales and industrial production.
All roads lead to the US Inflation data this evening, which comes after a surprisingly strong Non-Farm Payroll print last Friday. Overnight the US NFIB small business survey was quite weak, but it will be overruled by the inflation data, especially if headline inflation remains near 9.0% for June YoY, and the core remains near 6.0% YoY. That will lock and load 0.75% from the FOMC at the end of the month with potentially larger rate hikes to come, as well as shaking the confidence of the most ardent bottom-fisher in the US equity and bond market. Having said that, given the recent moves in the US Dollar and US equities, if the data comes in softer than forecast, we could see a decent correction lower by the greenback, relieving some of the Euro’s pain. Equities will probably rally as the FOMO gnomes pile in, and the US yield curve will move lower.
Glancing around other asset classes, the big mover overnight was oil, which plummeted after the US API Crude Inventories by 4.762 million barrels, the second week of huge increases. Notably, gasoline inventories rose by 2.927 million barrels, and distillates by 2.262 million barrels. Offsetting that was another big fall by stocks in the US SPR, which seems to be making up the feedstock difference now. With the street on recession watch, saw Brent and WTI fall by around 7.0%, with Brent crude closing under $100.00 a barrel. I remain sceptical that oil prices will move materially lower from here, however. The forward futures remain heavily in backwardation on both Brent and WTI, indicating real-world supplies remain tighter than Elon Musk’s wallet. OPEC also forecast a supply/demand deficit from its member to persist through 2023 overnight as well. The price action still appears to be a disconnect between the speculative world, and the real world, although I don’t discount more downside losses in the short term.
Over in Disneyland, I mean crypto-land, Bitcoin has slipped back below $20.000.00 of fiat currency US Dollars to $19,500.00 this morning. A soft US inflation print tonight should save Bitcoin’s bacon along with equities, temporarily at least. The line in the sand to flush our more margin stop-outs, 5-minute macros and some more HODL’ers is probably just below the June lows at around $18,500.00.
Also hanging out for a weak US inflation number tonight are gold bugs. Gold remains in Dire Straits, hovering near $1725.00 an ounce, strictly rhythm, it doesn’t want to cry or sing. (old people will get this) Another bout of US Dollar strength could well see $1675.00 fail, setting of another capitulation trade.
Asian heavyweight gain on lower oil prices
Asia’s northern heavyweights are higher despite a negative Wall Street session overnight, thanks to the slump in oil prices late in the New York session. Wall Street couldn’t hold onto early gains as pre-CPI nerves and recession fears sent US equities down once again. The S&P 500 fell by 0.92%, the Nasdaq by 0.85%, and the Dow Jones by 0.62%. US futures are showing resilience in Asia though, suggesting choppy trading ahead of the US inflation data tonight. S&P futures are 0.25% higher, Dow futures are 0.15% higher, while Nasdaq futures have jumped by 0.50%.
In Asia, the slump in oil prices overnight has lifted the northern Asia heavyweights, all of whom are voracious consumers of imported energy. Japan’s Nikkei 225 has gained 0.35%, with South Korea’s Kospi rising by 0.75%. In Mainland China, the Shanghai Composite is 0.35% higher, while the CSI 300 has gained 0.45%. Hong Kong has risen by 0.70%. Taipei has leapt 2.85% higher after the government activated its stock stabilisation fund today.
Elsewhere, growth-centric ASEAN has been unable to replicate those gains, following Wall Street’s overnight lead and heading south this morning. Singapore has fallen by 0.70%, with Jakarta losing 0.55%, and Kuala Lumpur falling by 0.65%. Manila continues to struggle as markets price in more aggressive tightening from the BSP and the trade balance deteriorates, retreating by 1.10% today. Bangkok has lost 0.75% today.
Australian markets are treading water after resource prices fell again overnight. The ASX 200 and All Ordinaries are ranging narrowly on each side of unchanged.
European markets conjured up a relied rally overnight, perhaps driven by Canada releasing a previously embargoed gas pipeline pump back to Russia, lifting hopes that Nord Stream 1 will start flowing again after maintenance finishes on the 21st of July. The momentum from that trade is going to wane quickly though, and Europe will be casting a nervous glance at US inflation data this evening, and inflation data from German, France, and Spain. I expect a cautious slightly negative, opening this afternoon.
US Dollar consolidates
After the impressive rally on Monday, the US Dollar settled into a pre-US-inflation waiting game overnight, which continues today in Asia as the greenback consolidates recent gains. ​ The dollar index closed almost unchanged at 108.15 overnight, where it remains in Asia. Resistance is at 108.45 and 110.00. Support is at the 1.0585 breakout point, and then 1.0500, followed by 1.0350 and 102.50. ​ The US inflation data will dictate whether the overbought relative strength index indicator (RSI) has signalled a short-term correction lower for the US Dollar.
EUR/USD traded at 1.0000 overnight, but held this level and rose back to finish the day unchanged at 1.0037, where it remains in Asia. A break of 1.0000 is likely to trigger a sharp move lower as stop-losses and algos kick in. Since breaking a multi-year support line at 1.0850 in April, Euro has looked consistently weak, the recovery rally failing ahead of 1.0850 in a technical analysis nirvana. An oversold RSI allows for short-term recovery, with resistance at 1.0200 and 1.0270. Support is at 1.0000, and failure targets the 0.9900/25 area.
GBP/USD fell to nearly 1.1800 overnight before rallying to an unchanged close at 1.1890 overnight. In Asia, it has crept slightly higher to 1.1910. Immediate support is at 1.1800, with 1.1400 as the medium-term target. Resistance is well defined at 1.2060 and 1.2200.
USD/JPY edged 0.40% lower to 136.90 overnight as US yields eased, rising to 137.05 in sedate Asian trading. USD/JPY has resistance at 138.00 and 140.00, with support at 136.00, 134.25 and 132.00. Only a sharp fall in US yields seems likely to turn USD/JPY lower, but a soft US CPI (relatively), this evening, could also do the job.
AUD/USD edged 0.35% higher overnight to 0.6755, rising slightly to 0.6770 in Asia as risk sentiment stabilises, at least for now. ​ In Asia, it has eased 0.17% lower to 0.6725. Risks remain skewed towards the downside and a test of 0.6600. It has resistance at 0.6780 and 0.6850. NZD/USD is unchanged at 0.6130 today, with the RBNZ’s 0.50% hike today clearly priced into the market.
Asian currencies ranged overnight, producing a mixed bag of modest gains and losses against the US Dollar. The Philippine Peso underperformed again, USD/PHP rising 0.65% to 56.34 as the trade balance deteriorates, inflation rises and harsher tightening by the BSP is priced in. Asian currencies have booked small gains today in an otherwise lacklustre session.
Overall, currency markets look content to wait on the sidelines for the US inflation data this evening. How the coins fall will dictate the US Dollar’s next directional move.
Oil slumps overnight
As mentioned above, a surprisingly high build in US API crude and refined product inventories spurred a late and aggressive slump in oil prices. Clearly, the speculative market is not prepared to wear any sort of losses from bottom fishing now, and we can expect to see more of these sorts of days going forward until the recession/inflation picture becomes clearer. That said, I believe that the disconnect between the real world, and the speculative world, is growing wider and although I don’t rule out more downside surprises, I believe the recent selloff could be getting a little overdone.
Brent crude plummeted by 6.75% lower to $99.10 overnight, while WTI collapsed by 7.60% to $95.60 a barrel. In Asia, both contracts probed the downside initially, but the lure of low prices was too irresistible for Asian buyers. Brent crude has risen 0.30% to $99.40, while WTI has recovered its losses to be unchanged at $95.60 a barrel.
The chart picture has turned negative again for both contracts, although I note that Brent crude has had these ranges up and down in three of the past six trading sessions, showing just how skittish the short-term trading market is. The RSIs on both contracts are still in neutral territory, implying that more downsides could occur, just as easily as a sharp rally could.
Brent crude has nearby resistance at $100.00, followed by a now distant $106.00 a barrel. It has nearby support at $98.40 followed by the much more import 200-day moving average (DMA) at $96.80 a barrel. Consecutive daily closes below the 200-DMA will force a reassessment by me, perhaps meaning that the backwardation important futures curves move lower with spot prices but remain in backwardation. A sort-off hawkish easing if you like. 2022 continues to surprise me.
WTI looks the more vulnerable after the API crude inventory data overnight, and tonight’s official US crude inventory data rises in importance. WTI tested its 200-DMA this morning at $94.00 a barrel but managed to rally from there. Consecutive daily closes under the 200-DMA would be an ominous development for prices, depending on your point of view. $93.00 is the next support level after the 200-DMA. Resistance is at $96.00 a barrel, followed by a now-distant $103.50 a barrel.
Gold needs a low US inflation print
Gold traded in quite a wide range between $1723.00 and $1745.00 an ounce overnight, but finished 0.45% lower at $1726.50 an ounce, another unimpressive close. In Asia, it has eased slightly to $1725.50 an ounce in a moribund session.
Gold desperately needs the US inflation data to come in lower than expectations tonight, which should trigger a pullback by the US Dollar, lifting gold prices. That said unless the US Dollar stages an extended and extensive pullback lower, gold’s technical picture remains grim. A high inflation number tonight from the US could well see $1675.00 finally tested. The only saving grace for gold right now is an oversold RSI, suggesting that a lower US Dollar could trigger a disproportionate upside correction by gold.
Gold has resistance at $1745.00, now a double top. That is followed by $1780.00, $1785.00, and $1802.00, its downward trendline. Support is at $1720.00, followed by $1675.00. Failure of longer-term support at $1675.00 sets in motion a much deeper correction, potentially reaching $1500.00 an ounce.
