Volatility was the winner overnight, with a multitude of data points and events leaving market price action messier than a teenager’s bedroom. The European Central Bank surprised markets by lifting policy rates by 0.50%, ending over a decade of negative interest rates. The Euro has already been rallying, but its gains were tempered by the collapse of the Italian government, and post the ECB meeting, German/Italian bond spreads started widening noticeably. The ECB’s Lagarde said policy decisions would be made on a meeting-by-meeting basis going forward, tossing their forward guidance out.
Perhaps more importantly, Russian gas started flowing back down the Nord Stream 1 gas pipeline yesterday, albeit at flows resembling the 40% of capacity before it closed for maintenance. Still, when it comes to Europe and energy, any news is good news as fears had risen that Russia would leave it turned off. EUR/USD had already started rallying on this news, which was likely the major reason that oil prices fell overnight in another 5.0% intra-day range session. European equities were far more mixed, with some stark winners and losers. For that, we can thank the Italian political situation, widening North/South bond spreads, and the ECB’s 0.50% rate hike.
In the US, a multi-month high for US Initial Jobless Claims and a soft Philly Fed Business Conditions Index spooked bond markets and saw US yields move quite a bit lower overnight. The US curve now looks bowl-shaped after US 10-years fell by over 15 basis points. That saw the US Dollar weaken as well, as US recession fears also ramped up. I must say, Initial Jobless Claims rising by 7,000 to 251,000 does seem like clasping at straws.
Wall Street liked what they saw, rallying powerfully once again overnight. Lower bond yields and some solid earnings results keep sentiment perky during the main session. That has changed a bit after hours after weak Snap. Inc results saw their stock price plummet by 25%. That dragged down the other social media-esque giants. As Meta found out earlier in the year, markets will severely punish richly valued tech stocks at the first sign of trouble, and there is now some risk to the broader equity markets from the FAANGS yet to report.
This morning, we have seen Australian and Japanese Manufacturing and Service PMIs come in on the soft side, along with Japanese Inflation, which edged lower in June YoY to 2.40%. We have a bunch of S&P Global PMIs still to come for the European heavyweights, the Eurozone, and the US today. It looks like they will all have downside risks for obvious reasons, but I am not sure it will be enough to deter the FOMO gnomes of Wall Street.
I will be covering my last FOMC meeting next week, and it seems likely that this will be the defining moment for markets in what has been a tumultuous month. 0.75% or 1.0% I know not, although my gut says 0.75%. The statement will be crucial and, depending on how it plays out, could stop what I consider a bear market rally, in its tracks. Inflation remains and will remain stubbornly high, geopolitical risk abounds, growth is slowing around the world, and recession risks are rising. I can’t see how that is a productive environment for equities, and that’s before the rest of big-tech reports quarterly earnings.
That said, the technical pictures across the equity and currency space suggest we have more room for a further retracement. AUD/USD and NZD/USD have broken up out of falling wedges, with GBP/USD about to do so. The S&P 500 is approaching resistance at 4,020.00, as is the Dow right here at 32,030.00, although the Nasdaq’s lies far away still at 13,500.00. Failure of 106.40 by the dollar index will signal a much deeper correction lower, and the slump in US yields overnight is setting up USD/JPY for a serious culling of long positions.
Two warning signs remain for me. One is that the US Dollar moves lower has all but passed the Asia FX space buy. Most USD/Asia pairs remain at or near recent highs, which in some cases, are record highs. We likely need to see a much bigger fall in US yields and/or oil prices to change that. I can’t see the Fed being so happy to see the US yield curve slump at this stage in the process, though. The second is gold. Gold’s price performance has been appalling in July, remaining at multi-month lows no matter whether the US Dollar or US yields have rallied or fallen. The US Dollar usually rallies during a recession, part of the “dollar smile” complex. Gold seems to be telling us that we call “peak dollar” at our peril.
One news event that may lift sentiment in Asia today is an announcement by Turkish officials overnight, saying that an agreement to resume Black Sea grain exports from Ukrainian ports will be signed at some stage today. Fingers crossed on that one.
Happy Friday, everybody.
Asian markets are content to follow Wall Street higher.
Asian markets are mostly higher today, content to follow Wall Street’s overnight rally. The Snap after-market results are tempering US futures, taking the sheen of Asia’s rallies today. The fall of oil prices overnight is also supportive of Asian markets, although weekend event risk may also be staying investors’ hands.
On Wall Street, the S&P 500 finished 0.99% higher, the Nasdaq jumped by 1.36%, with the Dow Jones rose by 0.51%. In Asia, the Snap results have seen tech companies come under some pressure, pushing US futures lower. S&P 500 futures have fallen by 0.40% lower, Nasdaq futures are off 0.65%, with Dow futures down 0.20%.
In Asia, Japan’s Nikkei 225 is 0.20% higher, but South Korea’s Kospi has fallen by 0.40%. In China, the Shanghai Composite has gained 0.35%, while the CSI 300 has climbed by 0.55%, and Hong Kong has risen by 0.60%.
Singapore is 0.70% higher in regional markets, with Taipei edging 0.15% higher. Jakarta has added 0.10%, Kuala Lumpur by 0.37%, Bangkok by 0.30%, and Manila is unchanged. Australian markets are also relatively subdued, the All Ordinaries have risen by just 0.10%, and the ASX 200 is unchanged.
European markets had a very mixed day, with a resumption of gas flows from Russia offset by the surprise 0.50% rate hike by the ECB and Italian political chaos, although given that has been the natural state of affairs since 1945, we should be used to it. The widening of German/Italian bond spreads was more troublesome, and the ECB may need to roll out that fragmentation tool sooner than later. With weekend event risk ahead, and the reality of gas flows resuming at reduced rates, Italian politics, and the decade of ECB negative interest rates being over, it is hard to see European equities finishing the day on a high note.
US Dollar falls overnight.
The US Dollar resumed its correction lower overnight as the Euro rose on renewed Russian gas flows, US yields fell, and investor sentiment rose in the equity space. The dollar index fell by 0.40% to 106.60 overnight, although heightened nerves in the equity space today have seen it rise by 0.23% to 108.84. The 106.40 area was tested for the 4th time overnight and now looms as a critical inflexion point. Failure signals more losses towards 1.0500 and 1.0350. Resistance is at 107.30 and 108.00.
EUR/USD traded in a wide range overnight, bounced around by Russian gas, Italy, and the ECB. In the end, it had onto much of its gaseous gains, finishing 0.50% higher at 1.0230. The first sign of trouble in US stock futures has prompted a US Dollar rally in Asia, which doesn’t bode well for the single currency. EUR/USD has fallen 0.32% to 1.0197 as a result. It has resistance at 1.0275, but only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0150 and 1.0100.
GBP/USD closed almost unchanged overnight at 1.2000, having spiked to a low of 1.1900 intraday. In Asia, the dollar rebound sees GBP/USD easing 0.25% to 1.1975. Sterling has support at 1.1900 and 1.1800, with resistance at 1.2060 and 1.2200. A rise above the 1.2060 wedge formation signals a larger rally to the 1.2400 regions, but it would take a sustained break above 1.2400 to call for a longer-term low by sterling. Its fate is probably tied to EUR/USD’s direction today.
Lower US yields across the curve saw the Japanese Yen emerge a winner overnight as the US/Japan rate differential narrowed, with the street still long to the eyeballs of USD/JPY. USD/JPY finished 0.65% lower at 137.35 overnight, rising slightly to 137.55 in Asia. A loss of 137.00 could set off a deeper correction to 135.50 initially. Initial resistance is distantt at 139.00, followed by 139.40. The US/Japan rate differential continues to hold USD/JPY in its thrall.
AUD/USD and NZD/USD rose overnight, falling 0.20% and 0.35% to 0.6920 and 0.6230 on US Dollar strength in an inconclusive Asian session this morning. They continue consolidating their respective topside wedge breakouts. Only a move back below either 0.6800 or 0.6150 changes the short-term bullish technical outlook.
Bank Indonesia surprised markets by holding rates unchanged yesterday, and unsurprisingly, USD/IDR is above 15,000.00 at 15,015.00 this morning. Asian currencies were a mixed bag overnight, without any strong directional moves. The US Dollar correction continues to pass the Asia FX space by, with regional currencies remaining at, or near, recent lows versus the greenback. We may need to wait for the FOMC outcome next week to see another directional move.
Oil prices fall overnight.
Brent crude and WTI had another session of 5.0% intraday ranges overnight, closing quite a bit lower than their opening levels. Global recession fears and the resumption of Russian gas flows to Europe seem to have been the catalyst, although I am sure that trading volatility recently is reducing liquidity as well, exacerbating movers. The futures markets remain deeply in backwardation, suggesting that prompt supplies are as tight as ever in the real world.
The leaders of Saudi Arabia and Russia had a phone call today, with Saudi Arabia affirming Russia’s importance to the OPEC+ group and further emphasising which side OPEC’s bread is buttered regarding US relations. Along with Saudi Arabia making noises about rapidly approaching production capabilities, that has sent oil prices higher in Asia today ahead of the weekend.
Brent crude closed 2.45% lower at $103.85 overnight, climbing 1.30% to $105.20 a barrel in Asia today. WTI closed 3.55% lower at $96.40 overnight, gaining 1.0% to $97.55 a barrel in Asia. Brent crude has well-denoted resistance at $108.00 a barrel on the charts and then 111.00. It has support at $104.00 and $101.00 a barrel. WTI traced a double bottom at $94.30, its overnight low and 200-day moving average. (DMA). That makes this level quite pivotal now, a sustained failure signalling a retest of $90.00. Resistance is at $100.00, followed by 104.00 a barrel.
Gold remains on the long-term injured list.
Gold traded in a wide $40.00 range overnight between $1680.00 and $1720.00, with the price action suggesting that some sell-at-worst long-liquidation occurred as $1700.00 failed. The longer-term support is around $1675.00 an ounce, barely holding but also emphasising its importance. In the end, a weaker US Dollar and falling US yields allowed gold to record a decent gain for the day, although on the scale of recent moves in other asset classes, gold remains entrenched in the danger zone.
Gold finished 1,32% higher at $1719.00 overnight, easing 0.26% lower to $1715.00 an ounce in Asia today as US Dollar strength resumed. It has support now at $1680.00, and then the longer-term support around $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. Gold has resistance nearby at $1720.00, then $1745.00, and now a triple top.
