US markets got little solace but more clarity from the FOMC Minutes overnight. It was clear from the minutes that the committee members remained highly focused on culling inflation, even if it was at the expense of a sharp economic slowdown. For July’s meeting, a 0.50% to 0.75% Fed Funds rate hike was most likely. The minutes touched on the need for credibility and as such, I believe there will be no wimp-out by the FOMC at the end of this month, as that would achieve exactly the opposite plus interest.
That was enough to shift the US yield curve higher although most of the gains were concentrated in the two-year tenor which closed back at 3.0% overnight. Ominously, the inversion widened to around eight basis points to the 10-years which finished at 2.92%. Clearly, the street remains on recession watch, and that sentiment will only increase if the inversion across the 2s/5s/10s part of the curve increases.
Still, the US continues to deliver a mixed bag of data although I do accept that the positive releases seem to be generally showing as a series of lower highs. The ISM Non-manufacturing PMI for June edged lower from May, but still posted a healthy 55.3, with the business activity and new order sub-indexes also healthy. Ominously, the employment sub-index slumped to 47.4, contractionary territory. The US Jolts Job-Opening data for May also slowed modestly, but still came in at an impressive 11.254 million job openings, not the stuff of recessions. Still, May seems like a long time ago now and much has changed.
The US data and another night of slumping oil prices likely saved the equity market’s bacon overnight. European stock markets had a huge up day, reversing Tuesday’s losses after the Norwegian Government stepped in to impose a settlement on both sides of the oil workers’ strike. Wall Street could only manage a sliver of modest gains though, in the face of hawkish FOMC Minutes, a soaring US Dollar and rising US bond yields which also continued pricing in a recession.
The Minutes and solid US data also propelled the US Dollar to another series of powerful gains across the currency space, boosted by higher US yields. The big loser was gold which met my next downside target within one day and now threatens long-term support. Despite more credit implosions in the crypto space as the reality of concentration risk in a lending portfolio hits home to those bright young things, Bitcoin has clung to the $20,500.00 region, although it can probably thank its Nasdaq correlation for that.
Oil prices crashed another 5.0% lower overnight, with Brent crude dipping under $100.00 a barrel at one stage. The wipe-out still looks to be very much driven by a culling of speculative longs and trend-following fast money to me, with nothing changing materially in the real world vis-à-vis the supply/demand imbalance.
One part of the world absolutely loving the price slump in oil is Asia’s Caligula’s of energy importing. Japan, China, South Korea, and Taiwan. I expect India to feel the same warm afterglow later today. Equity markets in the first four are rallying powerfully today as Brent nibbles at $100.00. Oil is rising in Asia as physical buyers quite rightly jump in to fill their boots with this mid-year Christmas present.
Elsewhere, Australia’s Trade Balance massively outperformed in May, leaping to just shy of AUD 16 billion. The trade balance was boosted by increased exports of natural gas and thermal coal along with accompanying price rises in both. Australian GDP has an upside risk now and will be another reason for the RBA to stay off the fence and keep tightening. Even currency markets couldn’t ignore the data from the Lucky Country today, AUD/USD has climbed 0.50% today, dragging up its feathered Kiwi friend, the New Zealand Dollar, by 0.55% also.
The news isn’t so good from China where the announcement of incentives to buy more electric cars has been tempered by rising cases in Beijing and Shanghai. Tokyo’s local government is also considering new covid restrictions, but the impact has been non-existent. In China, fears over renewed restrictions in Beijing and Shanghai are tempering the oil-induced rally there today.
There is much else on Asia’s data calendar for the rest of the day. Yesterday, Bank Negara Malaysia did what was necessary, and hiked policy rates by 0.25%, but any benefit to the Ringgit was squashed under the US Dollar juggernaut. Markets will be focused on German Industrial Production for May this afternoon, and then US ADP Employment this evening, from which they will try to derive bad guesses on tomorrow evening’s US Non-Farm Payroll release.
Given the amount of conflicting noise across asset classes and in the media space now from officials here and there, it wouldn’t surprise me in the least if Asia, quite wisely, decides to sit out the last two days of the week from the side-lines and let the heavily-caffeinated gnomes of Wall Street do their thing. They won’t be able to resist $100 a barrel Brent crude though, merry early Christmas Asia!
Asian heavyweights rally on lower oil prices
The North Asian energy-importing heavyweights are booking impressive gains today as Brent crude slumped to around $100 a barrel overnight. In contrast, Wall Street had a restrained session as hawkish FOMC Minutes push US yields higher and tempered that genetically programmed urge to by the dip. Still Wall Street did manage modest gains, thanks to decent US data elsewhere. The S&P 500 gained 0.36%, the Nasdaq added 0.35%, while the Dow Jones rose 0.23%. US futures are slightly higher in Asia, the S&P and Dow adding 0.10%, with the Nasdaq futures rising by 0.35%, following the Asian heavyweights for a change.
In Asia, lower oil prices and a still-weak Yen have propelled the Nikkei 225 1.45% higher, with South Korea’s Kospi having leapt 2.0% higher. Mainland China markets are also rallying, but less so as covid restriction fears permeate. Still, the Shanghai Composite has risen by 0.50%, while the CSI 300 has climbed by 0.60%. The news is not so good in Hong Kong where virus cases are accelerating, the Hang Seng has edged 0.40% lower today.
In regional markets, Taipei has had a 2.20% oil boost, with Singapore adding 0.25%. Kuala Lumpur and Jakarta are 0.15% higher, Bangkok is 0.30%higher, and Manila has unwound some of its outperformance this week, falling by 1.10%. Australian markets are still very much sticking to the script from Wall Street, with falling resource prices offsetting an impressive trade balance print today. The All Ordinaries has climbed 0.35% higher, while the ASX 200 has added 0.45%.
European markets unwound the Norwegian oil strike sell-off yesterday and may get a further boost from slumping oil prices overnight, although European natural gas prices remain the centre of focus. European markets are unlikely to replicate yesterday’s rally though but should still book a modestly positive start.
US Dollar rally continues unabated
The US Dollar continued its upward momentum overnight after hawkish FOMC Minutes lifted US bond yields higher across the curve. Recession nerves are also serving the greenback well as haven inflows continue to boost it. The dollar index rose 0.52% to 107.04 overnight, easing to 106.87 in Asia. The technical picture remains constructive although the daily relative strength index (RSI) is flirting with overbought territory, suggesting a temporary downward correction is possible. Having broken out of a 5-year triangle at 102.50 in April, its longer-term target remains the 1.1700 area with 1.1000 immediate resistance. Support is at the 1.0585 breakout point, and then 1.0500, followed by 1.0350 and 102.50.
EUR/USD remained under pressure with recessionary woes higher there than in the US. EUR/USD fell by 0.78% to 1.0185 overnight, before edging higher to 1.0200 in Asia. Europe’s energy vulnerability continues to weigh on the single currency and the Norwegian strike settlement, ominously, had no positive impact on the Euro. Since breaking a multi-year support line at 1.0850 in April, Euro has never looked back. An oversold RSI could allow for a more extended recovery, with resistance at the 1.0300 and the 1.0350 breakout, followed by 1.0600. Support is at 1.0160 and then 1.0000.
GBP/USD coat-tailed the Euro lower overnight, with UK politics having little impact on either Sterling or UK equities. GBP/USD fell by 0.30% to 1.1925, rising to 1.1950 in Asia. Immediate support is at 1.1880 and 1.1800, with 1.1400 the medium-term target. Resistance is at 1.2000 and 1.2200.
USD/JPY tested 135.00 overnight, but the rise in US yields lifted back to 135.90, leaving it almost unchanged overnight. In Asia, it has edged 0.15% lower to 135.70. Markets appear to be waiting now to see if the rise in US yields continues, or runs out of steam, dictating the direction of the pair. USD/JPY has resistance at 136.65 and 138.00, with support at 134.25 and 132.00.
AUD/USD and NZD/USD ranged overnight, finishing slightly lower in New York. The huge Australian trade balance number has lifted AUD/USD today, rising 0.60% to 0.6825. That has dragged the Kiwi higher as well, NZD/USD rising 0.65% to 0.6190. AUD/USD has nearby resistance at 0.6850, and NZD/USD at 0.6200. Risks remain skewed to the downside.
Asian currencies faded on US Dollar strength overnight. Although the USD/CNY held steady, the KRW, THB, and PHP lost more ground after a hawkish FOMC Minutes. A raft of new rules to encourage INR inflows by the Reserve Bank of India yesterday say USD/INR trade in a wide range, but ultimately, INR strength proved temporary, and USD/INR closed almost unchanged. Lower oil prices may boost INR today and that is a pattern we are seeing across the Asian FX space, with most Asian currencies booking roughly 0.20% gains versus the greenback. Still, the bigger picture shows Asian currencies remain vulnerable to tighter US monetary conditions and a US recession and today’s strength looks temporary.
Asia buys oil after another overnight slump
Oil had another hugely volatile session overnight as hawkish FOMC minutes and recession fears prompted more long liquidation and attracted algo-driven momentum sellers. Brent crude tumbled by 4.80% to $99.75 a barrel in another mind-boggling session. WTI tested $95.00 intraday, before gaining back some losses to finish 2.80% lower at $98.10 a barrel.
In Asia, the lure of $100 a barrel of Brent crude has proved an irresistible lure to physical buyers, and oil prices have rallied today. Brent crude is 1.70% higher at 101.45 a barrel, while WTI has climbed by 1.20% to $99.20 a barrel. This perhaps highlights the disconnect between the speculative market on the futures exchanges, and the reality of the physical market where futures contracts remain heavily in backwardation, signalling immediate oil supplies are as tight as ever. I remain unconvinced that the fall in prices is anything more than an adjustment to recessionary fears and speculative noise in the futures space. We are yet to see demand destruction.
Having said that, the failure of the 2022 support lines on both contracts so comprehensively must be respected, as are looming recession risks around the world. But with Russian oil supplies set to drop as the year progresses and it runs out of Western parts to maintain fields, and with the rest of OPEC hopelessly uninvested in maintaining production capacity, I fear the days of $100 oil will be with us for some time yet.
Brent crude has resistance at $106.00 and then its 2022 trendline at $108.85, followed by the 100-day moving average (DMA) at 110.30. It has traced a double bottom at $98.60, followed by the 200- day moving average (DMA) at $96.35 a barrel. WTI has resistance at $102.00 and then its 100-DMA at $107.00 a barrel. Support is at $96.65, $95.00, and then its 200-DMA at $93.50 a barrel.
Gold is in trouble
The continuation of US strength overnight, and high US yields, delivered another kidney punch to gold which slumped ponce again, falling 1.45% to $1739.50 an ounce. In Asia, the shorter-term oversold technical picture sees a modest 0.45% bounce to $1746.00 an ounce.
Since breaking $1780.00, gold’s technical picture has deteriorated rapidly, and it is clear it remains at the mercy of the US Dollar’s direction. The only positive note to be seen is that its RSI has fallen into oversold territory, allowing for a modest corrective rally to occur.
Gold has resistance at $1780.00, $1785.00, and $1820.00, 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.
