Mon, Mar 27, 2023 @ 20:45 GMT
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Powell Sparks Buy Everything Rally

You had the feeling that Wall Street, with perpetually itchy buy-button trigger fingers, was primed for this FOMC. As expected, the FOMC raised the Fed Funds target by 0.75%, to a target range of 2.25%-2.50%. It was what Mr Powell said afterwards that turbocharged the FOMO gnomes of Wall Steet. Mr Powell said that it may be appropriate to slow the pace of increases going forward and that the decision on that would become a meeting to meeting one, effectively throwing out the forward guidance.

I should also mention that Mr Powell couched that by saying that he “wouldn’t hesitate” to implement sharper increases if the data warranted it. For some time, the US bond markets have been pricing a US recession, inflation peaking and falling by early 2023, and Fed rate cuts to start in H2 2023. Therefore, markets happily ignored the “wouldn’t hesitate” remarks and concentrated solely on the potentially slower pace of rate hikes bit, ignoring the fact that the Fed still seems intent on getting to a 3.50% terminal rate; it’s just whether it happens sooner or later.

The result was predictable, of course. The street piled into the buy everything, sell US Dollars trade. Wall Street soared, led by the rate-sensitive Nasdaq, which booked over four per cent gains. In my mind, the big winner was Meta, as the buy everything trade limited the fallout of their poor earnings results and forward guidance. Cryptos rallied, Bitcoin rising over 8.0%, meaning that in addition to being a haven asset, an inflation hedging asset, a Dollar debasement hedge, and a deflation hedge, it is now a peak Fed/Fed Funds hedge. I’m impressed. Even gold rallied overnight, but US bond markets were surprisingly steady, suggesting that for once, a plan had come together perfectly.

Asian currencies didn’t really catch a tailwind either, although they may play some catchup today. Early price action on Asia-Pacific equities shows only modest gains and certainly not FOMO gnome exuberance. It could be that Asia is also watching rising oil prices, China’s covid zero and property market travails, Europe’s imminent gas-induced recession, and the ongoing Ukraine-Russia conflict giving them a more nuanced and less narrow world view, which doesn’t end at the East and West coasts of the United States.

The big winner in Asia looks like it’s going to be the Japanese Yen. US bond markets look extremely comfortable with their peak-yield stance right now, and I would have to say that the highs we saw in June could well be the highs in US yields for this cycle. USD/JPY has fallen by 1.0% in Asia today, and long USD/JPY remains a crowded trade executed at unattractive levels. I can well imagine USD/JPY trading at 132.00 now before it sees 138.00 again. It is ironic that it seems just a couple of weeks ago, there was so much noise about getting back in the “widow maker” trade, selling Japanese 10-year JGBs to break the Bank of Japan and stop USD/JPY from rising above 150.00. I think they must have been former $200 oil forecasters or “institution” crypto spokespeople in a different life. Thankfully dear readers, the voice of reason is still here for you.

We don’t have another FOMC meeting until the 21st of September now, and a lot of water could flow under the inflationary bridge before then. The FOMC’s priority is inflation, and the data flow they are now relying on could well be either good news or bad news on that front. With forward guidance sub-contracted out to data flow from now on by the Fed, we can assume that volatility gyrations will remain elevated, becoming “operations normal.” Thus, assuming the “buy-everything” trade will now be a one-way ticket to investor nirvana is perilous. That reality will seep into markets eventually, but perhaps not this week.

US GDP could well print a second negative quarter this evening, but forecasts vary widely. Perversely, a negative print will probably see another stock market rally and US Dollar sell-off in the context of the price action overnight. The PCE Index data tomorrow, if it shows signs of waning, could see a rinse repeat. It is a strange world where an impending US recession is a signal to pile aggressively into stocks, let alone richly valued technology stocks; I guess you could justify it by saying that financial markets are “forward-looking.”

Today’s calendar in Asia is light once again. Australian Retail Sales missed forecasts, rising just 0.20% in June. That’s perhaps the first recent data I can recall from Australia that wasn’t showing the Lucky Country being as lucky as ever. Tighter monetary conditions may finally be forcing the Battlers to shop less, but given the above forecast inflation print yesterday, it won’t dissuade the Reserve Bank Of Australia from hiking by 0.50% at its next meeting.

Presidents Xi and Biden are due to have a phone call today. US tariff reduction seems to have fallen off the news headlines, and there may be no moves there. China may well be more concerned about the US reiterating the one-China policy and Taiwan. I expect not much to emerge from the phone call and even less to impact markets.

Ahead of the US GDP data tonight, we receive German Inflation for July, which is expected to ease slightly to 7.20% from 7.40%. A higher print will jangle the nerves of investors and give the ECB more unenviable food for thought. Overall, Germany and Europe’s fate is much more closely tied to the Russian natural gas situation and, to a lesser extent, Italian politics. EUR/USD did manage to book an 80 pip gain to 1.0200 overnight but looks in danger of stalling once again. The peak-Fed, buy everything trade, is still in danger of passing Europe by.

Asian equities rise post-FOMC

As outlined above, the Powell post-FOMC remarks saw Wall Street explode higher overnight, led by the Nasdaq. Asian markets are duly following suit, moving higher this morning, but not markedly so, and with nothing like the FOMO rally seen on Wall Street overnight. It seems that Asia is struggling to move China risks, US recession risks, European recession risks, and slowdowns in the region where inflation is playing catchup. That appears to be tempering enthusiasm, and I am sure the rise in oil prices this week isn’t helping either.

Overnight, the post-FOMC rally saw the S&P 500 finish 2.62% higher, with the Nasdaq exploding 4.02% higher, while the Dow Jones gained just 1.37%. There was a definite peak-interest-rate bias to the stock market rally, as evidenced by the Nasdaq outperformance. I think it’s called growth over value. Futures markets are quiet in Asia, S&P 500, Nasdaq, and Dow futures edging just 0.10% lower.

Japan’s Nikkei 255 is just 0.20% higher today, an appreciating Yen and oil prices tempering stock market gains. South Korea’s Kospi, by contrast, is 0.90% higher as the Won remains stable. China’s Shanghai Composite and CSI 300 have risen by 0.80%, but Hong Kong is just 0.10% higher, and I suspect the HKMA’s 0.75% rate hike to match the Fed’s today is dampening sentiment and raising property concerns.

In regional markets, Singapore is 0.20% higher, Taipei and Kuala Lumpur have rallied by 0.85%, with Jakarta rising by 0.65%. Manila is 1.35% higher, and Bangkok is closed for the King’s birthday today and tomorrow. Australian markets are also higher; the All Ordinaries have risen by 0.75%, with the ASX 200 gaining 0.55%.

FOMC sparks US Dollar selloff

Jerome Powell’s remarks around rate hikes being driven by data sparked a sentiment rally overnight, as markets priced in peak inflation and interest rates. With equities rallying hard, the haven US Dollar resumed its downward correction, being sold heavily versus the G-10 space. That saw the dollar index plummet by 0.70% to 106.46. The dollar index has continued falling in Asia. Taking out the rising wedge support is at 106.45 as it falls 0.22% to 106.24. A daily close under 106.45 today will be a significant technical development, signalling deeper losses towards 1.0500 and 1.0350, potentially extending to the initial 102.50 long-term breakout. Resistance is at 107.45 and 108.00.

A weaker US Dollar saw EUR/USD reverse the previous day’s losses, rising by 0.81% to 1.1096 before gaining another 0.14% to 1.0215 in Asia. Despite the overnight gains, EUR/USD remains rangebound, with a weaker dollar offset by geopolitical and recession fears in Europe itself. The multi-day resistance around 1.0275 remains formidable. Only a sustained break above 1.0360 now suggests a longer-term low is in place. EUR/USD has support at 1.0100 and 1.0000.

GBP/USD broke through resistance at 1.2100 overnight, on its way to a 1.04% gain to 1.04% gain to 1.2156. It has risen another 0.14% to 1.2175 in Asia. The close above 1.2100 signals a test of 1.2200 is imminent. The rally could eventually target longer-term resistance at 1.2400. Support is now at 1.2100, and then 1.1960, followed by 1.1900 and 1.1800.

USD/JPY edged 0.25% lower to 136.60 overnight but has tumbled by 0.95% to 135.30 in Asia as local investors rush to price in a peak of the US/Japan rate differential that has been behind the USD/JPY rally. Long USD/JPY is still a crowded trade, and as I have been signalling for some time, the risks of a material move lower have been increasing. The technical picture has support at 135.00 now, and USD/JPY could potentially move lower to the 131.50/132.00 if more US Dollar longs capitulate. Initial resistance is now at 136.50 and 137.50.

AUD/USD rose 0.80% to 0.6995 overnight, where it remains in Asia. NZDI/USD rose by 0.55% to 0.6265. The technical picture for both remains constructive as both currencies staged upside breakouts higher a fortnight ago. They remain well above their breakout lines at 0.6790 and 0.6145. In the short-term, AUD/USD is running into some resistance here at 0.7000, while NZD/USD faces resistance at 0.6300.

Asian currencies are mostly sharply unchanged today, with the US Dollar selloff versus the DM space passing Asia by. The Korean Won, the Chinese Yuan, and Singapore Dollar have booked only modest gains. The performance of Asian currencies today perhaps reflects the lackadaisical rally by Asian equities today, with the region’s markets seemingly focused on a broader range of risks internationally. The impressive rally of oil prices this week may also be weighing on sentiment, and the Asia FX space remains, for the most part, at or near recent lows versus the US Dollar, suggesting that weakness will persist.

Oil rises once again overnight

Oil prices climbed once again overnight, boosted by a weaker US Dollar and a large drawdown of crude and gasoline stocks in the overnight official US Crude Inventory data. The inventory data was a surprise, and in combination with tumbling Russian natural gas supplies to Europe, it seems the reality that the physical market is as tight as ever is boosting prices.

Brent crude rose 2.45% overnight to $107.15 a barrel. In Asia, it has gained another 0.30% to $107.50, and it is testing formidable resistance at this level. A daily close above $108.00 would now be a significant bullish technical development targeting the 100-day moving average (DMA) at $110.15, followed by $115.00 a barrel. Support is at $104.00 and then 101.50 a barrel.

WTI rallied 2.75% higher to $98.10 overnight after the crude inventory release, gaining another 0.40% to $98.50 in Asia. WTI has resistance at $99.00, the week’s highes, and then $100.00. The 200-day moving average (DMA) at $94.95 is nearby support, followed by 92.50 a barrel.

Gold rises on weak US Dollar

Gold jumped 1.0% higher to $1734.50 overnight, boosted by heavy US Dollar selling after the post-FOMC press conference. The charts continue to suggest that gold is trying to form a medium-term low; however, the price action remains underwhelming, even after the rally overnight. Softer US Dollar today and tomorrow could spur more US Dollar selling and lift gold higher, however.

Gold needs to overcome heavy resistance at the $1745.00 an ounce triple top before the gold bugs can really start to get excited. ​ It has support at $1700.00 and $1680.00, and then the longer-term support around $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.

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