Things didn’t improve from Friday overnight in New York, as the market scrambled to price in a 0.75% by the FOMC, whose two-day meeting starts today. Among the biggest casualties was the bond market, where yields soared, and the 2/10-year tenor spent part of the day inverted. 20+ basis point increases across the curve were the norm. Equities had another awful session, led by the Nasdaq and S&P 500, home to some of the most pimped-up valuations from the pandemic largesse. With the risk-free 10-year yield at 3.38% now and growth forecasts sure to be reigned in as the Fed moves harder on inflation, it’s hard to see that outlook improving this week.
The crypto space has been particularly hard hit with Bitcoin falling 15.50% overnight and down 5.0% to 21,370.00 this morning. Celsius suspending withdrawals yesterday gave extra downside momentum. I’ve always been confused about how the DeFi space can conjure up 17/20% returns from crypto “lending” activities. For a start, who in their right mind would pay that rate for financing? Two things have stuck with me over the decades though. Firstly, if something looks too good to be true, it always is. Secondly, each generation into the markets brings a tranche of bright young things saying, “this time it’s different.” In the end, it never is. (if I ever write a book about my time, that will probably be the title) I can only assume the next big level for Bitcoin psychologically will be $20,000. It will be interesting to see if that level, should it fail, spurs another wave of cross-margining selling.
The US Dollar has soared once again overnight and the dollar index, having broken out of a 5-year triangle earlier this year at 102.30, appears to be on the march again, having corrected back just below that level in mid-May. The technical target is somewhere in the 116.00 to 117.00 area, and if the Fed is going to start hiking rates harder and for longer, it is not unreasonable to assume a prolonged period of US Dollar strength lies ahead.
Although all the focus will be on the Federal Reserve this week, for Asia, perhaps the biggest risk is the usually sleepy Bank of Japan meeting on Friday. The 10-year JGB yield cap at 0.25% has been under severe pressure this week and the BOJ is tendering to buy a lot of JGBs across the curve today to maintain that cap. USD/JPY sitting at 20-year highs just under 135.00, and frankly, I’m a little suspicious that the 135.00 area has capped USD/JPY these past four sessions, as the US Dollar bulldozes all before it in the currency space. I guess it could be Yen repatriation by defensive Japanese investors, but I’m not completely buying it.
Anyway, with the Yen on its knees, Japan’s imported energy bill looking uglier than ever, and 10-year JGBs edging through 0.25%, a 0.75% to 1.0% hike by the Fed tomorrow evening (SGT), along with a very hawkish dot plot and statement, could be enough to get Tokyo to adjust the rate cap slightly higher. Given the weight of long USD/JPY positioning out there, we could see a very violent correction lower. Definitely, something to keep an eye on this Friday.
Asia could also get some temporary solace from China, which may choose to trim the 1-year MTF rate this week. That decision was due between the 13-16th of June, so that announcement could come at any time. A perception that China is getting serious about broader stimulus could help spare Asia’s blushes temporarily. However, I remain adamant that the greater risk in the medium term remains a return to omicron lockdowns under the covid-zero policy.
Looking ahead at today’s data calendar, Japan Industrial Production is unlikely to move the needle today, with markets more focused on the JGB and stock markets. India’s WPI Inflation for May should hold steady at 15.0% YoY and won’t be enough to shake the RBIs hawkish resolve. Germany’s ZEW Survey will still remain negative for a plethora of obvious reasons, but slightly less so. German Inflation later today has upside risks after last Friday’s US number and could see European bonds sold once again today. Eurozone yields have shot up this week along with US ones, another headwind for the European economic outlook and the Euro.
The US releases its PPI data this evening, with May headline PPI MoM expected to rise by 0.80%, and Core MoM by 0.60%. Herein lies an opportunity for markets to catch their breath if the PPI numbers come in below those forecasts. I don’t believe the buy-the-dippers have gone away, and softer PPI might be the chance for those 1.0% hiking expectations by the Fed we heard about so much overnight, to be pared back somewhat. It’s that sort of market and softer PPIs may bring temporary relief to equity and bond markets desperate for some good news.
Asian equities fall once again
Overnight, panic around rate hike expectations by the Fed increased and US bond yields rose aggressively across the curve. Recessionary fears increased and in the self-fulfilling negative feedback loop created, US equities were once again crushed. The S&P 500 slumped by 3.87%, the Nasdaq tumbled by 4.68%, and the Dow Jones lost 2.73% as the least ugly value horse in the glue factory. In Asia, some short-covering has lifted US futures slightly higher, but the gains pale in comparison to the overnight losses. Futures on all three main indexes are around 0.35% higher today.
The small gains by US futures seem to have taken the edge off the negativity in Asian markets today, although they are still in the red. One notable loser was Australia, where the ASX 200 and All Ordinaries have lost 5.0%. But for context, Australia was closed yesterday, and thus local markets were playing catch-up to the losses internationally on Friday and yesterday.
Elsewhere, Japan’s Nikkei 225 has fallen by 2.0%, with South Korea’s Kospi losing 1.20%. Mainland China’s Shanghai Composite is down by 1.70%, while the CSI 300 has lost 2.0%, with Hong Kong’s Hang Seng down just 1.10%, a surprisingly robust performance.
The more value-orientated regional APAC markets have also been spared the worst of the selling. Singapore is 1.0% lower, Kuala Lumpur and Jakarta have actually recorded 0.50% in what I can only assume is a resource play. Thailand is down just 0.40%, with Manila easing 0.65% lower.
European markets also fell heavily yesterday, coat-tailing US markets south as Eurozone yields also squeezed higher. That should continue this afternoon, although Asia’s performance today should mean the panic of yesterday subsides. In the US, lower PPI prints this evening could give Wall Street to unwind some shorts into the FOMC decision tomorrow.
Higher yields, safety first, sends US Dollar higher
The dollar index soared overnight, driven by risk aversion, higher yields and ramped-up hiking expectations from the FOMC this week. The dollar index finished 0.97% higher at 105.20, easing slightly in Asia to 105.10. Asia seems content to adopt a wait-and-see attitude among the major currencies today after the ructions overnight. Having taken out resistance at 105.00, the technical picture remains constructive. The dollar index has nearby support at 105.00 and then 104.00, with nothing on the charts until the 108.00 area.
EUR/USD slumped again overnight, finishing 1.05% lower to 1.0420 before edging slightly higher to 1.0420 in Asia. With the ECB only likely to hike by a total of 0.50% by September, with all bets off as far as the Fed goes, the single currency remains under serious pressure. Arguably the economic picture looks much darker for Europe than the US anyway. The fact that EUR/USD never seriously attempted to regain its multi-decade breakout around 1.0800 suggests that a medium-term high is now in place. EUR/USD’s last support ahead of parity is at 1.0350, with resistance at 1.0600.
Sterling fell by 1.50% to 1.2130 overnight, continuing its grim week. US Dollar strength aside, the UK published soft GDP data overnight and seems intent on provoking an economic conflict with the European Union over the Northern Island Protocol. Markets are also still expecting only a 0.25% hike from the Bank of England this week. That should all ensure the pressure stays on Sterling, despite climbing 40 points to 1.2170 on short-covering in Asia. The next support is at 1.2070 and then 1.2000.
USD/JPY continues to top out at 135.00, despite a massive increase in US yields over the past two sessions. Yen repatriation and perhaps some fears that the Bank of Japan is going to do “something” regarding monetary policy this Friday seem to be adding a note of caution to USD/JPY longs. USD/JPY is ranging between 134.00 and 135.00 for now with risks still skewed to the upside as the Bank of Japan aggressively intervenes on the yield curve this week.
Risk aversion sentiment pummelled AUD/USD and NZD/USD overnight, both falling by over 1.50%. Some stability in US equity futures in Asia today has allowed them both to stage a modest recovery, gaining 0.45% to 0.6960 and 0.6285 respectively. The technical picture remains challenging for both, which are at the mercy of swings in sentiment by global investors.
USD/Asia rose overnight, but by and large, Asian currencies are proving quite resilient to the US Dollar rally. USD/MYR, USD/PHP, and USD/INR showed only modest gains, while USD/KRW rose 0.85% to 1290.00 and USD/CNH rose 0.70% to 6.7815 before giving all those gains back today, falling to 6.7410. Neutral PBOC CNY fixes are adding some stability, but I suspect there are a few regional central banks around on the topside selling US Dollars. Some cracks are showing on the periphery though, USD/IDR has risen from 14,420.00 to 14,715.00 over the last couple of sessions. The technical picture suggests that further Asian currency weakness remains a case of when, and not if.
The supply-side squeeze keeps oil prices elevated
Oil prices remained almost unchanged overnight, with Brent crude finishing at $122.10, and WTI closing at 121.10 a barrel. The continuing squeeze on refined products globally, as well as a lack of investment to bring online more supplies from OPEC members, or other sources, means lost Russian production is nowhere near being covered by global markets. Adding to the noise is news that Libyan production has fallen from 1.1 million bpd to just 0.10 million bpd. Not a game-changer in normal times, but with the current situation, it is certainly enough to keep prices elevated.
In Asia, prices have climbed once again as regional buyers get impatient waiting for a risk-aversion dip to arrive. Brent crude has climbed 0.70% to $123.95, with WTI adding 0.40% to $121.60. In the near-term, Brent crude has support at $119.50 and $118.50, with resistance at 123.60 and a triple top at $124.40 a barrel. WTI has support at $118.00 ad $117.00 a barrel, with resistance at $122.25 and $123.00 a barrel.
Gold has once again teased gold bugs, only to whip the rug from under their feet. The huge rise in both US yields and the US Dollar was too much for gold to endure yesterday as it collapsed by 2.80% to $1819.50. The 50-dollar-an-ounce collapse hinted that once again, the fast money longs were shown the exit door. In line with price moves in other asset classes in Asia, stability in US equity futures has prompted a 0.50% gain to $1828.25 an ounce.
The inverse correlation to the US Dollar is as strong as ever it seems and the technical picture for gold has turned murky. Only a sharp US Dollar correction lower is likely to alleviate selling pressure on gold. Gold has resistance at $1840.00 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.