Thursday is shaping up to be a frisky day for financial markets, but probably nothing today will be more important than when the bell tolls 6. A.M. in Berlin. The official Nord Stream 1 maintenance period finishes, and the natural gas from Russia is supposed to resume. President Putin has already signalled that flows will remain below capacity, and if they resume at 40%, the rate before the shutdown, that is probably the best Europe can expect. The European Union has already told member states that they will need to cut gas usage by 15% until March next year, and if flows are even lighter than 40%, the economic picture for Europe, and the UK, darken considerably.
European markets have piggybacked the bear market US equity rally this week. However, they ran into a brick wall yesterday as Euro-reality set in. Notably, EUR/USD failed ahead of 1.0300 and has fallen back to 1.0200. It isn’t just natural gas that is capping Eurozone risk; Italy’s government looks to be in imminent danger of collapsing after Mario Draghi won a non-confidence vote yesterday. It was a trojan horse, though, as the three largest members of the coalition boycotted the vote. Mr Draghi is expected to resign again, triggering new elections. It also imperils disbursement of further multi-billion tranches of the covid-recovery fund and threatens Italy’s reform path, and by extension, will probably push BTP yields higher.
I wouldn’t want to be the European Central Bank today, which is scheduled to announce its latest monetary policy decision this afternoon. It will be a damned if you do, damned if you don’t sort of meeting as they look across Europe’s wartime stagflationary economy and the ability of the Italians to shoot themselves in the foot so regularly since 1945. We can expect a token 0.25% hike to an inflation-slaying 0.25%, with the deposit rising to an equally frightening um, -0.25%. I have always said that something has been rotten in the state of Denmark with the EU since the GFC. While the rest of the world has many to squeeze in two or three economic cycles, Europe has basically sat at zero to negative interest rates since 2008 and has been quantitatively easing in some shape or form since then.
While the rate hike is a Hobson’s Choice for the ECB this afternoon, more attention is likely to be focused on the ECB’s anti-fragmentation tool to maintain government bond spreads between member states. Just don’t call it targeted quantitative easing, ok? With Rome pulling an Italian Job on the Eurozone at the worst possible time, it may be needed sooner rather than later. If markets are underwhelmed with the toolbox and Ms Lagarde’s press conference and rate outlook, European equities and the Euro may also be underwhelmed, and that’s before we see whether Russian gas returns this morning.
The US equity rally continued overnight, thanks to the zero-sum game in the Netflix results and even large American airlines reporting profits; who would have thought? Tesla’s results were also ok, although they’ve taken a bath selling their Bitcoin, but who hasn’t? Interestingly, Existing Home Sales slumped by -5.40% MoM for June as rate hikes bite. Equity markets ignored this as they are want to do, but it speaks volumes that although US yields were nearly unchanged, the US Dollar rallied quite impressively. And not just versus a running-on-empty Euro either. Sterling was Trussed-up and beaten down, as was AUD and NZD etc, and Asian currencies also retreated. More on that below.
News that both Alphabet and Microsoft are “assessing hiring requirements” has sent US futures lower in Asia. All I can say as I watch diverging asset class prices is that one should beware of stock market’s bearing “gifts.” I’ve been saying that for decades about investment banks, but it seems appropriate for the FOMO gnomes of Wall Street as well today.
In Asia today, the Asian Development Bank downgraded its Asia growth forecasts yet again while raising its inflation outlooks. We also have two central bank meetings of note. Firstly, the Bank of Japan announces its policy decision this morning. The BOJ is expected to temper its growth and inflation forecasts into 2023, and we can rightly assume there will be no change to its current ultra-easy settings. With US yields having settled down this week, the long USD/JPY trade has lost some momentum for now as well, likely easing some internal bureaucratic pressures.
Bank Indonesia is harder to call. BI has been a very reluctant rate hiker as its inflation environment remains benign, with a well-publicised priority to support Indonesia’s post-covid recovery. Unscheduled tightening last week by Singapore and Manila highlights the pressure central banks across the region are coming under as their currencies wilt under King Dollar. Notably, the rally by major currency heavyweights versus the greenback this past week did not flow meaningfully into the Asia FX space. In fact, looking at them this morning, all are at or near their recent lows, including USD/IDR, which continues nibbling at 15,000.00. That may force BI’s hand to enact a 0.25% hike, as with commodity prices falling, the help BI gets from a beefy current account surplus will dimmish.
The Turkish central bank will also announce its latest policy decision this afternoon. That’s always worth buying some popcorn and taking a comfortable seat as we watch Erdogan-omics Part 10. More fun than a John Wick sequel and with a higher economic body count. Expect no change. South Africa also announces, and there I expect a far-more-sensible 0.50% hike to 5.25% to occur, with upside risk. That probably won’t be enough to relieve the pressure on the Rand, and I expect this story to play out more in H2 across the EM and Asia FX space as the Fed keeps on hiking.
ADB and China nerves cause a mixed picture with Asian equities today
Wall Street’s rally continued overnight, boosted by the Netflix results apparently. In Asia, US futures are flirting with negative territory as Alphabet and Microsoft announce hiring assessments. Meanwhile, another China property developer is defaulting on offshore debt, Covid cases remain elevated in Mainland China, and the Asian Development Bank has downgraded regional growth while raising inflation assessments once again. Taken in totality, Asian markets are very mixed today as China nerves temper the urge to follow Wall Street in several markets.
Overnight, the S&P 500 rise by 0.59%, while the tech-heavy Nasdaq outperformed, rallying by 1.58%. The Dow Jones managed just a 0.15% gain. In Asia, US futures have run out of steam, with S&P 500, Nasdaq and Dow futures easing by 0.10%.
In Asia, Japan’s Nikkei 225 is up just 0.23% after the BOJ left policy unchanged. Meanwhile, South Korea’s Kospi has eked out a 0.40% gain after the sharp rise once again by the Nasdaq overnight. China markets are in negative territory, with the Shanghai Composite and CSI 300 losing 0.45% and Hong Kong falling by 1.25%.
In regional markets, Singapore has fallen by 0.65%, but Taipei, also highly correlated to the Nasdaq, has managed to rise by 0.70%. Jakarta is lower by 0.85% ahead of the BI decision, while Kuala Lumpur has gained 0.65%. Bangkok is 0.30% lower, while Manila has risen by 0.75%. Australian markets are also mixed, the All Ordinaries have risen by just 0.05%, but the ASX 200 has fallen by 0.30%.
European markets ran out of steam yesterday, having coat-tailed Wall Street higher this week. A combination of Italian political instability, the resumption-or not- of gas flows through Nord Stream 1 today, and the ECB policy meeting, combined to bring a dose of reality back to European markets. I expect European markets to also struggle today with so many irons in the fire. Although if gas flows resume this morning, that may give European stocks an initial boost, even if the flows are slight.
US Dollar rebounds overnight
The US Dollar rebounded overnight as a multitude of risk factors in Europe saw the Euro fall heavily, lifting the dollar index. The US Dollar strength was not confined to just them, though, with the greenback booking decent gains versus both the DM and EM space. The weak US housing data provided the catalyst for the rebound on a day when US yields remained almost unchanged.
The dollar index rose by 0.33% to 107.05 before edging 0.19% lower to 106.85 in Asia. The technical picture still suggests the correction lower has more to run, however, and the dollar index has now traced a triple bottom at 106.40. Failure of 106.40 now signals a deeper move towards 1.0500, and 1.0350 is possible. Resistance is at 108.00 and 109.30.
EUR/USD fell by 0.44% to 1.0180 overnight before rising by 0.27% to 1.0210 in Asia. The single currency faces a multitude of risks today, but markets seem poised to by Euros if gas flows resume through Nord Stream 1 this afternoon, even at reduced flows still. EUR/USD has traced out a triple top at 1.0175, which is initial resistance. That is followed closely by 1.0200. Only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0100, 1.0000 and 0.9900/25.
GBP/USD closed slightly lower at 1.1980 overnight, where it remains in Asia. Higher than expected UK inflation and the emergence of the final two new prime ministerial candidates having little impact. It has support at 1.1930, 1.1800 and 1.1760, with resistance at 1.2060 and 1.2200. A rise above 1.2060 suggests 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.
USD/JPY is sharply unchanged at 138.10 today, for the third day in a row. The BOJ policy decision and revised forecasts had zero impact on the currency. US bond yields have been steady this week, which likely explains the tight ranges in USD/JPY. 139.40 is initial resistance, followed by 140.00. Support is at 137.40 and 136.00.
AUD/USD and NZD/USD are also steady at 0.6895 and 0.6230 this morning, consolidating their respective topside wedge breakouts. Only a move below either 0.6800 or 0.6150 changes the short-term bullish technical outlook.
Asian currencies are slightly weaker versus the US Dollar today, in contrast with the moves by major currencies during the Asian session. A weaker CNY fixing by the PBOC this morning is playing its part, as are China’s economic and virus concerns. In the bigger picture, the US yield differential is still weighing on Asian currencies, in addition to global slowdown fears. That has kept the pressure up on regional currencies, with USD/KRW, USD/PHP, USD/IDR, USD/MYR, and USD/INR all pushing against recent highs and in some cases, record highs. This afternoon, a dovish BI could see USD/IDR break above 15,000.00, adding more pressure to Asia FX.
Oil prices are steady
Brent crude and WTI were steady once again overnight, with US official crude inventory data having little impact on prices, although the rise in gasoline inventories by 3.5 million barrels may have capped prices intraday. European gas concerns look to be supporting the downside for now. Another factor behind the lack of volatility could be that volatility in July has bordered on the absurd at times, and that may have prompted traders to move to the sidelines.
Brent crude has edged 0.40% lower to $106.05 a barrel in Asia, with WTI moving 0.90% lower to $98.90 a barrel on futures markets. 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, and then 97.50, the 200-DMA. WTI has support at $98.25 and $96.00 a barrel, followed by $94.30, its 200 DMA. Resistance is at $100.00, followed by 104.00 a barrel.
Gold’s moment of truth draws near
If any asset class yells that the risk sentiment rally could be a very false dawn, it is gold. Having completely failed to rally on material US Dollar weakness this week, it has edged even lower to longer-term support overnight and this morning. To say that gold’s price action is underwhelming is an understatement, and it appears to be facing imminent material downside risks if the technical picture is to be believed.
Gold fell by 0.86% to $1697.00 overnight, easing by another 0.30% to $1691.00 an ounce in Asia this morning. It is now just above longer-term support around the $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, now a triple top.