The post-FOMC rally ran in equities out of steam within 24 hours with Wall Street plummeting overnight once again. Even the most ardent FOMO gnome had a conviction crisis as a swath of central banks followed the Fed’s lead and hiked policy rates. Taiwan hiked 12.50 bps, the Bank of England hiked 25 bps and the Swiss National Bank shocked markets, hiking policy rates by 50 bps.
It was probably the SNB that broke the camel’s back because if the Swiss are worried about inflation, we all should be. Stock markets went looking for ABE (anything but stocks), and it looks like a US 10-year yield approaching 3.50% yesterday was just too tempting. US bonds saw some impressive ranges and as money poured into the US curve, the 10-year fell from near 3.50% to close around 3.25%.
That set of a negative feedback loop in the US Dollar which suffered heavy losses overnight. They were led by a post-SNB rally by the Swiss Franc, which spilt over into Euro and Sterling strength as well, helped along by the BOE hike. EUR/USD rallied by 1.0% and probably would have had an even better day if EUR/CHF wasn’t getting simultaneously crushed. Falling US yields also eroded US Dollar strength as did a huge rally of the Japanese Yen.
With hiking policy rates this season’s new black for the world’s central banks, offshore markets moved to rapidly price in that the Bank of Japan would raise the 0.25% yield cap on 10-year JGBs at this morning’s policy meeting. USD/JPY fell by just over 1.0% overnight helped along by falling US yields as well. Japanese markets are having none of it though, with USD/JPY rising by 0.80% already today to 133.25.
One side or the other is seriously wrong. We will know which sometime after 1100 SGT today. As a hint, the longer that no noise emerges from BOJ HQ after 1100SGT, the more likely it is we are going to get a surprise, from my experience. We should get a binary outcome once again from the decision. If the BOJ makes no changes and reiterates its commitment to a super-easy policy, USD/JPY will likely be trading on a 135.00 handle by Monday. If they do raise the cap, the correction lower by USD/JPY should continue, possibly in a quite disorderly manner. And I suspect 130.00 or lower wouldn’t be out of the question. You’ve got to love Fridays.
Gold also rallied overnight, but that was because the US Dollar fell, with the inverse correlation as strong as ever. The Yen gains overnight boosted Asian currencies although the KRW, THB, TWD, and CNH are moving lower with the Yen this morning as well. Oil held steady overnight despite probing the downside, no amount of noise elsewhere changes the fact the world doesn’t have enough of it or that refineries can’t refine enough of it. The underachiever overnight was the crypto space. Bitcoin ran into buyers again ahead of $20,000.00 overnight but remains uncomfortably close to the danger zone at $20.700.00 this morning. The weekend session promises to be emotional.
My overall take on the state of play for markets at the moment is that even the most ardent buy-the-dipper in the equity space is starting to realise inflation is a threat, with central bank banks prepared to hike the world into a slowdown and possible recession to get on top of it. A recession isn’t good news for pimped-up valuations either. The street is looking for anything but equities into the end of the week, and tasty government bond yields seem to be the preferred home.
In other data recently, US Housing Starts and Building Permits in May slumped from April. We can draw a line straight to rocketing mortgage rates on that one and the US won’t be the last to feel housing market pain. Singapore Non-Oil Exports (NODX), surprised to the upside today, rising by 12.40% YoY in May, boosted by electronics. That will be a welcome offset for slowing domestic consumption but unless China really reopens, will start to fade in the coming months.
We have the Bank of Japan meeting shortly, Eurozone Inflation this afternoon, and US Industrial Production and Manufacturing this evening. Federal Reserve Chairman Jerome Powell is also speaking at 2045 SGT. And apart from testing every resident of Shanghai for covid-19 this weekend, China releases its 1-year and 5-year Loan Prime Rates on Monday. Cryptos may generate some headlines this weekend as well if Bitcoin breaks $20,000.00.
Finally, there are apparently $3.40 trillion of options expiries on listed US equity markets today where liquidity may be reduced ahead of a US holiday on Monday. That may distort price action on Wall Street this evening. Tonight’s session could be a good one to avoid.
Asian equities follow Wall Street lower
Wall Streets’ post-FOMC rally ended after less than 24 hours as a plethora of central banks from around the world followed the Fed’s lead and hiked interest rates. The S&P 500 closed 3.24% lower, the Nasdaq slumped by 4.08%, and the Dow Jones fell by 2.37%. In Asia, US futures have rallied on some short covering with S&P 500 futures rising 0.60%, Nasdaq futures gaining 0.90%, and Dow futures have added 0.40%.
The rally in US futures today has taken the edge off the bearishness in Asia, most of the region is in the red. Japan’s Nikkei 225 has fallen by 2.0%, with South Korea’s Kospi down 1.25%. In Mainland China though, markets have once again mysteriously and abruptly reversed early losses, suggesting China’s “national team” is around. The Shanghai Composite is now unchanged for the day, while the CSI 300 is now 0.25% higher, and Hong Kong has risen by 0.35%.
In regional markets, Singapore is unchanged, while Taipei has lost 1.30%. Kuala Lumpur has fallen by 1.35%, with Bangkok down 0.30%, Jakarta slumping 1.70%, and Manila retreating 1.50%. Australian markets have remained laser-focused on Wall Street’s main session and are deeply in the red. The ASX 200 and All Ordinaries have slumped by 2.25%.
European markets had the SNB rate hike to contend with, as well as a weak Wall Street session, leaving them deep in the red overnight. The price action in Asia will give Europe no reason to turn bullish today, and ahead of weekend risk, are likely to start the day lower once again. In the US, a holiday Monday and huge option expiries today mean it might be best avoided altogether.
US Dollar retreats as central banks hike
The US Dollar fell overnight as traders turned short of USD/JPY ahead of the BOJ meeting, and central banks in the UK and Switzerland hiked policy rates. A rotation from equities to bonds overnight drove down US yields, further eroding short-term support. The dollar index slumped by 1.0% to 1.0380 overnight but has recouped some of those losses in Asia, rising 0.37% to 104.18 as USD/JPY rallies on the just-released no change from the Bank of Japan. The dollar index has support at 1.0350 with resistance now distant at 1.0570.
EUR/USD rose 1.0% to 1.0550 overnight as USD/CHF weakness and lower US yields boosted the single currency. The rally looks more to do with temporary US Dollar weakness and the SNB, rather than a vote of confidence in the Eurozone. It has eased 0.20% to 1.0530 in Asia, and has initial resistance at 1.0600, the overnight high, with challenging resistance at 1.0650. Support is distant below 1.0400 now although I note that EUR/USD has traced out to bottoms at 1.0350. It is a bit too soon to judge whether the current Euro bearish outlook has turned though.
Sterling traded in a 300 point overnight, but a 0.25% Bank of England hike, with hints of more to come, won the day for Sterling, GBP/USD closing 1.45% higher at 1.2353. Probably the main supportive factor was the BOE split decision on a 0.25% versus 0.50% rate hike, suggesting the latter is possible at later meetings with UK inflation expected to hit 11.0% this year. GBP/USD has initial resistance at 1.2400 and 1.2500, with support distant at 1.2200 and then 1.1950.
USD/JPY slumped 1.20% to 132.20 overnight as the offshore market positioned for a possible lifting of the Bank of Japan JGB target of 0.25% today. Japanese markets spoke loudest though, immediately lifting USD/JPY through 133.00 this morning. The BOJ has just announced no change to its policy setting and USD/JPY is now 1.05% higher at 133.65 today. With the BOJ unchanged, and the Federal Reserve now on an aggressive hiking path, it seems just a matter of time before the US/Japan rate differential reasserts full control of the cross. A return to 135.00+ appears to be the path of least resistance. Last night’s low of 131.50 could well be the bargain of the month for some lucky buyer.
A weaker US Dollar lifted the AUD and NZD overnight. AUD/USD rose by 0.70% to 0.7050, and NZD/USD rose 1.23% to 0.6365. A stronger greenback in Asia has pushed both 0.35% lower to 0.7025 and 0.6340 today. Both Australasians have traced out bottoming patterns this week on the charts and as long as 0.6850 and 0.6200 hold respectively, further gains to 0.7150 and 0.6450 cannot be ruled out initially.
Asian currencies rallied overnight, led by the usual sentiment indicators, the KRW, THB, and CNH, with SGD, MYR, INR, and IDR having little to show for overnight US Dollar weakness. USD/THB has risen by 0.70% today, unwinding most of the THB strength, while USD/CNH has gained 0.36% to 6.7100 as the USD/JPY rallies. The price action in the Asian currency space has not given to many clues this week, other than USD/Asia continues to consolidate at or near its recent highs. That suggests that they remain vulnerable to further weakness into next week, despite the US Dollar retreating against the DM space overnight.
Oil trades sideways
Oil, once again, endured big ranges overnight, only to finish not far from where it opened. Once again, Brent crude and WTI saw some heavy selling intraday as markets tried to price in a plethora of central bank hikes and potential recessions. Unfortunately, none of that changes the fact that despite those risks, the world remains short of crude supply from OPEC+, and global refining capacity, squeezing gasoline and diesel prices higher in a stagflationary embrace. Little surprise then that physical buyers eagerly lapped up the overnight futures selling.
Brent crude fell to $115.60 intraday, only to reverse and finish 0.20% higher at $119.05 a barrel. WTI plummeted to $112.40 intraday, only to reverse impressively to finish 1.10% higher at $117.05 a barrel. In Asia, Brent has eased to $118.90, and WTI to $116.65 a barrel in what looks like a nothing session today.
With the battle between the physical buyers and the speculative sellers, either closing longs or turning short, set to continue, I won’t rule other another crazy intraday spike lower today in New York. but once again, I suspect it is doomed to failure. Brent crude has initial support is at $115.50, with resistance at $120.25 a barrel. WTI has support at $112.50, with resistance at $118.00 a barrel.
Gold’s range continues
Gold staged a decent recovery overnight as the US Dollar fell and US yields retreated. Gold rose by 1.25% to $1857.00 an ounce, before retreating just as quickly on US Dollar strength in Asia today. It has fallen 0.73% to $1843.50 in regional trading.
The overnight recovery, and equally fast retreat in Asia, demonstrate that gold’s fate is not it’s own. Despite the noise of this week, it still remains anchored in the middle of its one-month range. The overnight price action shows that the inverse correlation to the US Dollar is as strong as ever.
Gold has resistance at $1860.00 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, while I would need to see a couple of daily closes above $1900.00 to get excited about the upside.