I warned yesterday that with a dearth of heavyweight data this week until Friday’s US CPI, we were likely to experience choppy trading, driven by swings in sentiment and headlines hitting the news wires. Sure enough, that is what occurred overnight after US retailer, Target (NYSE:TGT), gave a soft outlook and announced it had too much inventory and would cut prices to shift it.
If that headline had come out on another day or week, it may well have been subsumed in the day. But, with little else to go on, and a genetic predisposition to pick the low in the equity markets, investors in New York immediately interpreted that as the high in US inflation was nigh. US yields duly fell, with US 10-years moving back below 3.0%. That saw some US dollar weakness, gold rallied a little and of course, lower inflation means buying equities, which is what happened. To be fair, consumer discretionary got a pasting, but other sectors such as big-tech roared higher.
Today, it may well be another headline that the FOMO gnomes of Wall Street don’t like, and markets could well unwind all the overnight moves, or not. Roll on Friday.
In Asia today, we have had a few data releases already ahead of the main event, the Reserve Bank of India’s policy decision. Circling back to yesterday briefly, the Reserve Bank of Australia surprised both markets, and the author, by announcing a 0.50% rate hike. Local equities got clubbed, and the Australian dollar traded in a near 100 point range and managed to hold onto most of them as the RBA becomes the latest central bank to climb off the fence on inflation. Interestingly, the incoming Philippines Central Bank Governor also signaled rate hikes ahead, and after a slow start, Asia-Pacific central banks are playing catchup to the Federal Reserve. That should partially insulate Asian currencies from further weakness for now.
This morning, Japan’s final Q1 GDP growth received a tiny upward revision to -0.10% as reopening saw strength in the consumer segment, if -0.10% could be called strength. The data is now historical and has been ignored by markets which remained laser-focused on the rapid ascent of USD/JPY, hitting 133.00 today, as the US Fed continues to signal more tightening, while the Bank of Japan signals it has no intention of adjusting its ultra-easy monetary policy. There has been an increase in verbal intervention from Tokyo officialdom, but not massively. I do not believe we are anywhere close to intervention in the Japanese yen by the Ministry of Finance yet. Japanese equities are enjoying a weakening yen though.
South Korean Q1 GDP got a slight downward revision from 0.70% to 0.60%. Again, in the context of recent events, the data is old news now and will be mostly ignored by markets. Cost of living and potentially softening consumer and export demand are far more pertinent and will probably keep the pressure up on the won, even though the Bank of Korea has itself, started raising interest rates.
Today’s main event is the Reserve Bank of India interest rate decision. Notably, the Indian rupee continues to weaken, despite recent US dollar weakness lifting other currencies across the world. USD/INR is trading at 77.6450 today, not far from recent highs around 77.80. That may factor into the RBI’s equations. A 0.75% hike would probably see the Sensex take a hit, but provide much-needed support for the currency, although India’s imported energy bill and wheat export bans will continue to erode the current account.
The data releases across Europe and the US today are strictly second-tier. Probably the most interesting will be the US official crude inventory data after last week’s surprise 5 million-barrel drop. With Brent crude and WTI both around $120.00 a barrel, sharp falls in headline crude inventories or refined products could spur another rally in oil prices. Otherwise, it is as I said earlier, markets swinging on sentiment shifts and headline risks.
Asian equities follow Wall Street higher
US markets seized on Target’s softened outlook to price in peak US inflation on a slow news day overnight, sending Wall Street sharply higher. The S&P 500 rose by 0.95%, the NASDAQ rallied by 0.94%, and the Dow Jones gained 0.80%. In Asia, US futures have dropped sharply. NASDAQ and S&P 500 futures have fallen by 0.45%, with Dow futures easing by 0.30%. The price action reinforces the theory that it is tail-chasing fast-money dominating moves on Wall Street this week.
Asia is ignoring the US futures moves today, as they often do, choosing to follow the overnight US main boards rally instead after a few very mixed sessions. The Nikkei 225 has risen by 0.85%, helped along by a weaker yen this morning. South Korea’s KOSPI has added just 0.20%, perhaps held back by the downward Q1 GDP revision this morning.
In Mainland China, markets appear to be suffering a bout of profit-taking after a strong performance this week. China’s Vice Commerce Minister said today that foreign trade faced huge pressures and uncertainty, which certainly won’t have helped sentiment. The Shanghai Composite is 0.70% lower, while the CSI 300 has lost 0.40%. Hong Kong is ignoring the mainland noise, however, remaining laser-focused on the overnight Wall Street gains as the Hang Seng rallies 1.65% higher today.
In regional markets, Taipei has rallied by 0.90%, with Singapore remaining a laggard, easing by 0.20%. Kuala Lumpur has added 0.20%, Jakarta has risen by 0.45%, Bangkok by 0.10%, and Manila by 0.30%. Australian markets have also posted modest gains after yesterday's post-RBA selloff. The All Ordinaries has risen by 0.30%, with the ASX 200 edging 0.15% higher.
European markets gave back some of Monday’s gains overnight but will probably use the price action from late in New York and Asia today as an excuse to open slightly higher.
US dollar eases with lower US yields
US yields eased overnight, pushing the US dollar lower as the choppy range trading in currency markets continues this week. The Dollar Index finished just 0.08% lower at 102.33, although the yen weakness probably flattered the final result. US dollar strength has returned in Asia, lifting the dollar index by 0.23% to 102.56 as the Japanese Yen selloff spills into other currency pairs. Support/resistance remains at 101.30 and 102.70.
EUR/USD probed 1.0650 overnight, before rallying to close 0.10% higher at 1.0705. The USD/JPY strength has spread to the broader FX market in Asia today and sees EUR/USD falling by 0.20% to 1.0683. Resistance between 1.0770 and 1.0830 remains a formidable barrier, while support remains at 1.0650. With the ECB expected to swing to a tightening bias this week, losses should be limited unless US yields continue to march higher from here.
Sterling got a BoJo glow overnight, finishing 0.50% higher at 1.2590 overnight, before easing 0.1% to 1.2565 in Asia. Resistance remains at 1.2670, allowing a potentially larger rally to 1.2800 and 1.3000. Support is at 1.2460 and 1.2400.
USD/JPY has been the big mover over the last 24 hours, rising 0.55% to 132.65 overnight, before adding another 0.36% to 133.05 this morning. There has been little noise from Japanese officials today, emboldening the fast-money momentum traders into adding to long positions. Notably, US yields fell overnight, but USD/JPY still rallied. That could be an ominous development for Tokyo, and I would expect to see more “watching closely” noise in the days ahead. USD/JPY has immediate support at 132.00, with 135.00 its next upside target.
AUD/USD finished 0.50% higher at 0.7230 overnight, holding onto most of its post-RBA gains. Ostensibly a bullish technical development, that picture has quickly muddied with both AUD/USD and NZD/USD sharply falling by 0.45% to 0.7200 and 0.6460 today. There seems no obvious reason other than the US dollar strength seen elsewhere and the negative comments on trade by the China Vice Commerce Minister. AUD/USD has support at 0.7150, with resistance between its 100 and 200-day moving averages (DMAs) at 0.7230 and 0.7255.
USD/Asia continues to range trade, with some US dollar strength lifting USD/Asia slightly higher today. The INR and MYR continue to be the worst performers in the region, Japanese yen aside. Today’s RBI meeting could strengthen the INR if a 0.70% rate hike is enacted, otherwise, with 0.40% priced in, INR weakness will persist.
Oil is steady in Asia
Oil prices rose slightly overnight as tight refined supplies persist in the US, and industrial action in Norway and a shutting down of a Libyan oil field continued supporting prices at recent highs. Brent crude finished 0.75% higher at $120.75 a barrel, and WTI rose 0.30% to $119.75 a barrel. Asia is once again adopting a wait-and-see position, with Brent and WTI unchanged in regional trading.
Oil prices remain at post-Ukraine invasion highs if you strip out the days when tanks rolled across the borders. Returning Venezuelan and Libyan production to Europe and North America, should it occur, will not be material enough in the shorter term to force prices lower. Refining margins globally suggest that demand for petrol and diesel remain in heavy demand, with the refining logjam in refined products backstopping crude prices. A reopening China is also supportive of oil prices.
Brent crude has resistance at $122.00, and $124.00, with support at $116.00 and $112.50 a barrel. WTI has resistance at $121.00, with now support at $115.00 and $111.25 a barrel.
Gold’s flip-flop ranging continues
A weaker US dollar into the end of the New York session saw yet another mechanical response by gold, which rose 0.56% to $1852.50 an ounce in another snooze-fest session. In Asia, some US dollar strength had sent it 0.25% lower to $1848.00 an ounce in an automatic response. Until we get a material move one way or the other by the greenback, gold’s range trading looks set to persist.
Gold has resistance at $1870.00, followed by the 100-DMA at $1889.00, and then $1900.00. Support is at $1837, $1830.00, and then $1780.00 an ounce. I do not discount a disorderly retreat if the latter fails. The wider $1830.00 to $1870.00 range seems set to continue until Friday.