Wall Street did another U-turn overnight, finishing lower as the dearth of tier-1 data and the pre-FOMC media blackout left the FOMO gnomes chasing their tails once again. Wall Street closed modestly lower, ostensibly because Apple said it would slow hiring, joining its other tech-giant brethren. That was despite Goldman Sachs and Bank of America producing decent earnings results, although investment banking revenue took a hit as IPOs and SPACs have dried up. More than likely, the stock market pullback was just noise on a slow news day. The losses overnight have been dwarfed by the gains from Friday, so the bear market rally thesis still has life; it just won’t be a linear progression.
Elsewhere, currency markets ignored Wall Street, with the US Dollar falling again overnight. Once again, the greenback mostly retreated versus the majors, while Asian FX booked only modest gains. The greenback was long overdue a correction, and this is playing out nicely. The interest rate differential play remains real in Asia. Readers should beware of the “dollar smile”; running into the FOMC, the US Dollar’s grin may get wider again. US yields also edged higher overnight, but it seems like noise, nothing special. Gold remains in an induced coma near $1700.00 an ounce, and risks remain skewed towards more gold bugs getting squashed.
Oil had another frisky session, Brent and WTI rallying by around 5.0% overnight. That seems to be becoming the norm for oil prices these days, and with intraday vol like that, risk managers are probably telling the trading desk to cut position sizes intraday, creating a negative feedback loop on the liquidity front. It’s hard to say what made New York want to push oil higher, but I suspect they belatedly realised that Joe Biden came away with nothing from the Saudis. The + in OPEC+ is clearly more important to OPEC at the moment. Gazprom also announced some force majeures on European gas customers overnight, apparently, something that doesn’t bode well for the reopening of Nord Stream 1 on Thursday this week. Gas-margeddon Thursday is clearly playing its part in the oil rally, and it makes the European stock market rally even more surprising overnight.
The major news flow washing over Asia today appears to be China’s announcement overnight that it may allow mortgage payment holidays for local buyers on uncompleted housing projects. Although the structure isn’t at all clear yet, it appears that local authorities and state-owned banks making will be “invited” to take up the slack. It appears to be a response to the mortgage payment protest by citizens in China, something the CCP is acutely sensitive to, and may mark the first steps by government entities to take on the credit risk from developers to get projects completed.
China markets seem to be interpreting the announcement as a quasi-stimulus to backstop the property market. I won’t disagree with that, as trying to quietly work out the developer debt problem under the radar over time clearly hasn’t worked. Shanghai industrial commodity futures are on fire in early trading; nickel, aluminium, coking coal (to make steel), and rebar prices, amongst others, are all between three and six per cent higher today, suggesting markets believe government intervention is about to unlock the construction sector. That’s a bit of a reach, given have no concrete details of the plan yet, but one must respect the momentum.
It is a desert on the data front in Asia today, but the China developments should see some positive spill over into Asian markets, which could well shrug off the noise from Wall Street overnight. This afternoon, Eurozone inflation data for June looks set to print at 8.60%. Given that it is final and not flash or preliminary, I expect that to be priced in. UK employment and earnings this afternoon could throw a recession curve ball if both surprise to the upside. That will lead to some recalculations on BOE tightening and could support the sterling.
US Housing Starts and Building Permits for June look to be the day’s data highlights. I wouldn’t rule out an upside surprise today with retail sales and consumer confidence data holding up nicely last week. Since stock markets rallied after that higher data last week, I wouldn’t bet against the same thing happening again tonight.
Finally, the only release of note in Asia today, the RBA Minutes, has dropped. The RBA members noted that rates were well below the neutral rate, given the conditions in the economy. You could probably leave a blank space in that sentence and put – insert central bank name here – at the moment. The Australian Dollar is sharply unmoved this morning, suggesting the minutes revealed nothing that wasn’t already priced in.
A day of headline-watching beckons.
Asian equities are trading soft
Asian equity markets are a very mixed picture today. Price action appears to be erring on the negative side after Wall Street fell overnight, with the rise in energy and commodity prices also weighing on the sentiment of the major importing countries. Balancing that, the impending China property support measures appear to be taking the edge of the negative sentiment.
Overnight, Wall Street finished lower after Apple said it would limit hiring. On a slow news day, with no important data, that was enough for the ever-flighty Wall Street to unwind some of the previous day’s gains. The S&P 500 fell by 0.84%, the Nasdaq by 0.83%, and the Dow Jones by 0.69%. US futures have rebounded in Asia, unwinding some of the overnight session losses. S&P 500 futures have gained 0.35%, Nasdaq futures have jumped by 0.60%, and Dow futures have added 0.15%.
Given the rebound in US futures this morning, the negative edge to early Asia equity trading is slightly surprising. I suspect the 5.0% rise in oil prices overnight is weighing on sentiment in energy-hungry Asia. Japan returns from holiday, with the Nikkei 225 rising by 0.73%, but South Korea’s Kospi has edged 0.30% lower. In China, the Shanghai Composite is unchanged, but the narrower Shanghai 50 has fallen by 0.75%. The CSI 300 is down by 0.55%, while Hong Kong’s Hang Seng has fallen by 0.95%.
In regional markets, Singapore and Taipei are 0.30% lower, with Kuala Lumpur falling by 0.55%, but Jakarta has rallied by 0.50%. Manila is unchanged, with Bangkok falling by 0.90%. Australian markets have edged lower, with commodity price rises offsetting a negative Wall Street session. The ASX 200 and All Ordinaries are down slightly by 0.20%.
European markets booked another impressive day of gains overnight, but with Wall Street lower and Asia looking very mixed, the rebound may struggle for traction this afternoon. I expect nerves around Russian gas flows on Thursday to start eroding sentiment as the week progresses.
US Dollar correction continues
The US Dollar fell once again against the major currencies as its downward correction continued. Notably, Asia FX made very limited gains overnight, and this US Dollar move seems very much contained to the major currency space. The dollar index closed 0.53% lower at 107.41 overnight but traded in a very choppy 115-point range between 106.90 and 108.05. These mark initial support/resistance today. Above that, resistance is at 108.70, 109.30, and then 110.00. The drop to 106.90 overnight may have taken out many of the weak long positions, but should it fail again, the next target is the 1.0585 breakout point, followed by 1.0500. In Asia, the dollar index is 0.12% higher at 107.53.
EUR/USD rallied to test 1.0200 intraday, only to retreat, finishing 0.56% higher at 1.0145. In Asia, it has edged lower to 1.0130. The technical picture still 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 rallied by 0.70% overnight to 1.1952, testing 1.2030 intraday. Like the Euro, the extent of the intraday rally suggests that quite a lot of the weaker shorts were taken out, leaving positioning more balanced. It has support at 1.1870, 1.1800 and 1.1760, while resistance at 1.2060 and 1.2200 remains intact. 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. It is unchanged in Asia.
USD/JPY fell by 0.28% overnight at 138.15, where it remains in Asia as Japan returns from holiday. 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 finished sideways overnight, testing and failing ahead of resistance at 0.6850 and 0.6200, respectively, price action that mirrored EUR/USD and GBP/USD. AUD/USD has risen 0.25% to 0.6830 today, while NZD/USD gained 0.15% to 0.6165. Both currencies are showing falling wedge formations and a sustained break above 0.6850 or 0.6200 signals more gains ahead this week by the antipodeans.
The overnight retreat by the US Dollar bypassed Asian currencies once again, which posted only modest gains. That suggests that China’s growth fears, and the impending widening of the US interest rate differential at the short end of the curve, continue to weigh on AsiaFX performance. Today, USD/Asia is barely changed from their overnight closes.
Oil prices explode higher
Brent crude and WTI prices exploded higher overnight after Gazprom declared a backdate force majeure on some major European customers. That raised fears that gas flows would not return through the Nord Stream 1 pipeline to Germany at the end of the week, causing a knock-on impact on oil prices. Markets also seem to have concluded that President Biden effectively returned from Saudi Arabia empty-handed from his weekend visit.
Brent crude leapt 4.80% higher to $105.65 overnight, adding another 0.35% to $106.00 a barrel in muted Asian trading. Brent crude has nearby resistance at $106.50, followed by $108.00 a barrel. Support is distant at $99.50.
WTI leapt 4.55% higher overnight to $102.05, adding 0.45% to $102.45 a barrel in Asia. It has now-distant support at $96.00 a barrel, with resistance nearby at $103.00 and $105.00 a barrel.
The intraday volatility in oil prices is rendering technical levels somewhat meaningless for now, and it seems that extra volatility is feeding into less intraday liquidity, exacerbating movements in a negative feedback loop. I note that both contracts have held and rallied from their 200-day moving averages on a daily closing basis. When combined with the fact the futures curves are still in backwardation, a bullish set-up for prices that reinforces that despite speculative volatility, the underlying supply/demand imbalance is as tight as ever. Oil prices may have peaked, but they certainly don’t look like they’re going materially lower from here unless we get a huge surprise from OPEC+.
Stubbornly firm economic data from the US and improving data from China are other supportive factors. Risks remained skewed to the upside if Russian gas does not start flowing back to Europe at the end of this week.
Gold’s remains unimpressive
Gold has another unimpressive session overnight, peeping above $1720.00 intraday but closing almost unchanged at $1709.00 an ounce by the session’s close. It has edged 0.10% lower to $1708.00 an ounce in another comatose session in Asia.
Gold’s inability to hold onto even modest rallies in prices, even as the US Dollar falls and US bonds trade sideways, is a major concern in my option. It suggests that risks remain heavily skewed towards the downside. The US Dollar index is over 150 points off its peak from last Friday, yet gold remains glued to 11-month lows. It seems that only a much deeper correction lower by the US Dollar will grant gold a stay of execution.
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 lower, targeting the $1450.00 to $1500.00 an ounce regions in the weeks ahead. Gold has resistance nearby at $1725.00 and then $1745.00 an ounce.
