It says something about the level of confusion in the markets right now (American markets anyway), that having wrung their hands all last about inflation, 100 basis point rate hikes by the Fed, and an impending recession, that strong US Retail Sales and Michigan Consumer Sentiment on Friday saw Wall Street rally impressively. If that data had come out on Tuesday or Wednesday last week, we would probably have had a meltdown. And yet here we are, Wall Street’s S&P 500, Nasdaq and Dow Jones booking roughly 2.0% gains on Friday.
Last Fridays Wall Street price action was enough to spark risk sentiment rallies on forex markets, led by the usual suspects, the Euro, and the Australian Dollar, although not much love permeated into the Asian currency space. Oil held steady, but gold found no solace and remains near $1700.00. We also saw a modest rally in commodity prices. Bitcoin has wound its way back to $21,000.00 this morning in the crypto space, although it has been grinding higher all last week. Even US yields fell slightly on Friday after that US data; go figure?
My bear market rally theory postulated on Wednesday, got a beating on Thursday, and now looks quite clever again this morning after another day where Wall Street forgot to take their medication. I’ll stick my neck out again and say that with a relatively thin US data calendar this week, the FOMO gnomes of Wall Street may enjoy a week in the sun. This morning missive is heading into its last two full weeks of life before I head off to pastures new, and one thing I won’t miss, is trying to find something intelligent to explain Wall Street’s short-term price actions.
I suspect that Europe and its travails will be front and centre this week, with a smattering of China covid zero and property market nerves thrown in for good measure. The European Central Bank meets on Thursday to decide whether to hike its policy rates for the first time in 11 years, by a mighty 0.25%… That would take the Refinancing Rate to an inflation-fighting 0.25%, and the Deposit Rate to -0.25%, which I am sure will leave the Eurozone CPI quaking in its boots. We should also get some insight into its antifragmentation tool, intended to keep Eurozone sovereign spreads “on message,” but is really their there to support Italy’s debt, because they clearly can’t do it themselves if one glanced at the weekend news. Europe is a classic example of the perils of easy monetary policy and QE; it’s easy to take it out of the box, but as you get the financial system addicted to a zero per cent cost of capital, it’s hard to put it back. Europe isn’t alone here of course, and at least they can say “look at Japan.” High fives mes Ami’s.
The reason we can discount a 0.50% hike from the ECB when that is the minimum clearly needed, is something far more important for Europe. Thursday the 21st is gas-mageddon day for the Nord Stream 1 gas pipeline from Russia to Germany. Scheduled annual maintenance is due to finish that day, and the gas is supposed to start flowing again. I’ll give it another day because it’s Russia. But if flows don’t resume on Friday, that bear market rally by the Euro and European equities could well evaporate like the pipeline flows.
About energy, it is pleasing to see that sense is prevailing somewhere, and that Japan is restarting several mothballed nuclear power stations in preparation for the winter. Nations everywhere should be looking at this solution right now. Especially as North America looks as far away as ever from getting its act together on gas and oil, pipelines to move it, and refineries to make it into energy and fertiliser etc for the world. Japan’s moves are likely to bear more fruit than US President Biden’s visit to Saudi Arabia for a fist pump with MBS this weekend. Mr Biden emerged confident that Saudi Arabia and the UAE would pump more oil; Saudi Arabia emerged and said that’s up to OPEC+. Oil prices are sharply unchanged today in Asia, which tells you who the market believes.
China officials from the PBOC promised more support for the economy over the weekend. And it appears that behind the scenes, the wheels are turning to engineer a funding vehicle for beleaguered property developers to continue and complete the construction of residential projects. The alleged Chinese mortgage payment strike by homebuyers seems to have been the catalyst to spur faster action. Conversely, covid-19 cases appear to be creeping higher around the Mainland, with Macau’s full lockdown extended by four days. The threat of covid-zero Part Deux in Shanghai and other large urban centres will temper bullish spirits among China equity investors. Robust loan demand, and decent economic data last week, should mean that Wednesday’s one and five-year Loan Prime Rates remain unchanged.
Thursday also sees the Bank of Japan’s latest policy decision. With USD/JPY finding a cap ahead of 140.00 for now, some pressure will ease on the BOJ, which will also be watching the country’s supply/demand energy balance and the spiralling Covid-19 caseload with concern. With the FOMC meeting not until the end of the month as well, there is little incentive for the BOJ to spring a shock and markets to change any monetary settings.
The policy decision from Bank Indonesia, also on Thursday, is far more interesting. With Singapore and the Philippines announcing unscheduled rate hikes last week, and South Korea, Malaysia, and Taiwan hiking rates at recent meetings, it is going to get harder for BI to stand against the wind. With the FOMC expected to hike by at least 0.75% at the end of the month, and Asian currencies wilting under US Dollar strength, the uber-dove BI is likely to hike by at least 0.25%. BI is clearly capping USD/IDR at 15,000.00 now, and despite a surging current account surplus as palm oil exports resume, currency pressures are going to force BI’s hand. The question is, is 0.25% enough? I have my doubts.
Like North America and Europe, Asia’s data calendar is fairly thin once you strip out the discussion points above. With the FOMC in a pre-meeting news blackout, markets will be left to the tender mercies of headlines and geopolitical developments. One benefit is that, excluding any shocks and a lack of Fed speaker rate-hike bombs, and annoying data that has to be ignored when it doesn’t tell the story the FOMO gnomes want to hear, it could give the aforementioned bear market rally, room to breathe.
Asian equities track Wall Street higher
Wall Street staged an impressive rally after better than expected retail sales and consumer sentiment data from the US on Friday, as markets focused on a still-robust US consumer while ignoring its ominous warnings for the trajectory of Fed monetary policy. With a dearth of tier-1 data this week, and the FOMC in a pre-meeting media blackout, the equity rally could potentially extend throughout the week. Looking at the S&P 500 chart today, the technical picture certainly suggests that. The S&P 500 could rally back to 4,050.00, its March downtrend line, and still, be in a bear market. To start saying the worst was over for equity markets would require a sustained break of that level and preferably, the 100-day moving average (DMA) at 4,140.00.
Friday, saw the S&P 500 rally by 1.92%, the Nasdaq rally by 1.79%, with the Dow Jones the session’s outperformer, leaping higher by 2.15%. US futures are performing well in Asia today. S&P 500 futures are up 0.40%, while Nasdaq futures have jumped 0.95% higher, with Dow futures gaining 0.20%. Banking heavyweights, Bank of America and Goldman Sachs are releasing earnings today, although I believe it would take nightmare results and outlooks from both to give markets pause for thought.
Asian markets are content to track Wall Street this morning, helped along by hopes of more aggressive stimulus measures in China to resolve its property market wobbles. Japan’s Nikkei 225 is 0.55% higher, with South Korea’s tech-centric Kospi leaping 1.75% higher. In China, The Shanghai Composite has leapt 1.50% higher, with the CSI 300 rallying by 1.20%, and Hong Kong’s Hang Seng gaining an impressive 2.55%.
Across regional markets, better Singapore NODX data has lifted the Straits Times 0.65% higher, with Taipei adding 0.60%, while Kuala Lumpur is lagging at unchanged. Jakarta added 0.20%, Bangkok 0.25%, and Manila eased by 0.25% as the Peso remains under pressure. Australian markets are also higher after the Wall Street rally, the All Ordinaries rising by 0.90%, and the ASX 200 gaining 0.85%.
European markets also enjoyed a very positive session on Friday. But with the ECB looming on Thursday and the scheduled resumption of Russian gas deliveries, European equities may struggle to replicate Friday’s gains this week.
Wall Street rally pushes US Dollar lower
The US Dollar fell heavily on Friday, versus the developed market space, as Wall Street’s impressive rally spilt over into a broader sentiment rally in other asset classes. That saw the dollar index make a long-overdue correction lower. The dollar index fell 0.60% to 107.98 on Friday, easing another 0.17% lower to 107.80 in Asia as US Dollar weakness continued. Resistance is at 109,30, the overnight highs, and then 110.00. Support is at 107.50 and then the 1.0585 breakout point, followed by 1.0500. ​ The relative strength index indicator (RSI) has moved out of the overbought territory, but the technicals suggest the US Dollar correction could continue through the week.
EUR/USD rallied by 0.67% to 1.0088 on Friday, rising another 0.17% to 1.0115 in Asia. ​ The technical picture suggests a correction back towards 1.0200 is possible, but only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0000 and 0.9900/25. The single currency faces serious event risk in the latter half of the week, firstly from the ECB policy decision, and secondly, from Russian natural gas flows which are due to resume after pipeline maintenance.
GBP/USD followed the Euro overnight, finishing 0.37% higher at 1.1870, rising 0.23% to 1.1895 in Asia. It has support at 1.1800 and 1.1760, with resistance at 1.1965, followed by 1.2060 and 1.2200. A rise above 1.2060 suggests a larger rally to the 1.2400 regions, but it would take a sustained break of 1.2400 to call for a longer-term low by sterling.
USD/JPY fell on Friday by 0.38% at 138.50, easing another 0.15% to 138.30 in Asia. Thursday’s high around 139.40 is initial resistance, followed by 140.00. Support is at 137.40 and 136.00. Given the sentiment in the market this week, a fall in US yields this week could finally translate to a meaningful downside correction by USD/JPY, which is a crowded trade.
AUD/USD and NZD/USD rallied on Friday as investor sentiment ended the week on a high note. NZD/USD leapt higher on higher-than-expected inflation data today, but those early gains have since been eroded. AUD/USD and NZD/USD are both 0.25% higher at 0.6810 and 0.6175. Both currencies are showing falling wedge formations. A sustained break above 0.6850 or 0.6200 signals more gains ahead this week by the antipodeans.
Asian currencies had another noisy session on Friday, but as the dust settled, were mostly unchanged versus the US Dollar. The price action merely reversed their intraday losses from earlier in the session. The positive news headlines from China over the weekend on stimulus to support the property sector has allowed Asian currencies to book modest gains in Asia. However, despite a slew of recent policy tightenings in the region, fears of a widening interest rate differential with the US continue to cap gains by Asian currencies. That suggests markets will continue to call Asian central bank’s bluffs, the first being Indonesia on Thursday. Notably, the Philippine Peso and Indian Rupee continue to remain under pressure, USD/PHP rising 0.15% today to 29.913, with USD/INR rising 0.10% to 79.770. Across the rest of the region USD/Asia has fallen modestly by between 0.10% and 0.20%.
Oil prices edge higher
Both Brent crude and WTI rose modestly on Friday as they continued to unwind the mid-week slump. In Asia, hopes of more China stimulus, and a lack of concrete production promises from President Biden’s Middle East visit have seen Brent crude prices climb in Asian trading.
Brent crude finished Friday’s session 1.25% higher at $100.80, having tested $102.50 intraday. In Asia, it has added another 1.25% to 101.80 a barrel. WTI rose by 1.17% to $97.60 on Friday, edging 0.3% to $97.90 a barrel in Asia today.
Brent crude has resistance at $102.50, and then 104.00 a barrel, followed by a now distant $106.00 a barrel. It has support at $98.30 and then 97.00, the 200-DMA. WTI has support at $94.30, the 200 DMA, and then $90.60 a barrel. Resistance is at $99.00, followed by 101.00 a barrel.
Supply risks remain evident in international markets, and futures curves remain in backwardation. Despite the ructions in the speculative futures markets, the real-world dynamic remains as supportive of oil prices as ever. If Russian doesn’t switch gas exports back on to Europe at the end of the week, Brent crude could once again, find itself back near $110.00 a barrel.
Gold’s remains unimpressive
Gold was notable on Friday; it felt no positive spillover impact from the risk sentiment rally that swept other asset classes. Gold finished Friday’s session 0.15% lower at $1707.50 an ounce. In Asia, continued US Dollar weakness has allowed it to show some belated gains, rising 0.50% to $1715.70 an ounce in yet another quiet Asian session.
Overall, gold’s price action continues to be uninspiring with recoveries limited in scope, while the falls, when they do occur, are much larger and faster in scope. Gold’s fate this week rests on the hopes that the investor sentiment rally seen elsewhere, inspires more US Dollar weakness this week.
Gold has initial support at $1700.00, followed by the more important $1675.00 an ounce zone. A sustained failure of $1675.00 will signal a much deeper move, targeting the $1450.00 to $1500.00 an ounce regions in the weeks ahead. Gold has resistance nearby at $1720.00, then $1745.00, now a triple top. That is followed by $1780.00, $1800.00, its June downward trendline.
