The 'who can be the most hawkish Federal Reserve President' continued overnight as James Bullard came out swinging, suggesting that Fed Funds may need to rise to a “neutral” rate of 3.50%, and suggesting a 0.75% rate hike along the way wasn’t out of the question.
The impact of the statements was minimal in the end as it likely doesn’t reflect the views of the FOMC, yet. US bond and equity markets gyrated around unchanged in a noisy session, but ultimately didn’t move that much.
Upbeat results by Bank of America (NYSE:BAC) being balanced out by the Bullard comments. One exception was currency markets, where the US dollar rose again, notably bulldozing the perpetually low yield Japanese yen.
The Bullard comments really encapsulate the quandary that many of the world’s central banks have found themselves in. Having completely missed the ball around transitory versus embedded inflation, there are no palatable solutions.
Luckily, they have plenty of excuses in the shape of the pandemic and the Ukraine war. Central banks can now play catchup, hike aggressively and run the risk of recessions, something they have weaned the world of since the GFC via monetary policy. Getting the pain over and done may be the least worst option.
Alternatively, they can keep the lights on by letting inflation run hot, hoping that the asset price inflation and erosion of their citizens' spending power doesn’t cause social unrest.
The US and other Anglo-Saxon countries are probably looking at option one, while Europe and Asia seem to be erring towards option two. Naturally, the poor countries that lie in between will suffer the most.
Australia is an outlier in this respect, with the RBA minutes today suggesting the policy remains accommodative, which in central bank speak, is an understatement.
They did note, however, that the data suggested that the timing of a first rate hike will be brought forward.
Similarly, the Bank of Indonesia will likely be in a similar position today as core inflation and headline inflation measures creep higher. Ask anyone here trying to buy cooking oil at the moment.
Bank Indonesia should hold rates steady today, but may indicate that the first rate hikes are now very close. Thankfully, Indonesia is running commodity-export-driven record surpluses now, sheltering the rupiah from rate differential pressures.
If that changes, BI will need to rapidly reassess its cautious position. That is a story much of Asia will face this year if USD/JPY is anything to go by.
The day’s data calendar is fairly quiet except for the Bank Indonesia rate decision. Japan will release February Industrial Production and Capacity Utilization.
The data will only partly capture the impact of the Russian invasion of Ukraine, and thus the expected slight improvements to the numbers will be old news. Far more attention is now focused on the collapse of the Japanese yen in the face of a soaring interest rate differential.
US Housing Starts and Building Permits this evening for March carry some downside risks as mortgage rates soar in the US. Weak data will have the recession word bandied around but could be good for equities and bad for the US dollar as the street pulls in FOMC hiking expectations.
Conversely, a strong number will have the opposite effect. We have some more Fed talking heads, but equity markets will likely be closely watching results from Netflix (NASDAQ:NFLX) this evening.
Europe and the UK return to work today and were likely to be in a somber mood as Ukraine’s President Zelensky announced overnight that Russia’s eastern offensive had begun.
If correct, that will probably introduce some more geopolitical risk into financial markets again and with Europe on the frontlines, equities and the euro may suffer.
Gold could be a winner, as it spiked to $1998.50 an ounce after the initial headline, before beating a sharp retreat to unchanged. Gold has quietly ground its way higher over the past week, ignoring a strong US dollar and higher US yields, so it’s definitely been telling us something.
It likely faces some heavy option-related selling interest at $2000.00. Russian tanks rolling en masse across the plains of eastern Ukraine could be enough to finally overcome that barrier.
In the same vein, Bitcoin had a frisky 5.0%+ range overnight, dropping towards $38,000.00 before jumping to near $41,000.00 after the Zelensky headlines. It is too soon to say whether Bitcoin’s geopolitical risk-hedge time has finally come.
At various stages it has been a hedge against inflation, deflation, dollar debasement, political risk, geopolitical risk, Elon Musk risk, European energy restrictions shutting tanning salons prompting resignations at the ECB, trans fats and processed sugar.
My support/resistance levels are $$36,650.00 and $47,250.00. The wedge is narrowing, but until one of those sides breaks, I will ignore the noise, the empty pizza boxes next to computer monitors, and the HODL gnomes.
Asian equities are having a mixed session
New York equity markets had a noisy but ultimately ranging session overnight as upbeat Bank of America results were balanced out by Ukraine geopolitical caution and the Fed’s Bullard talking 0.75% rate hikes.
The S&P 500 edged 0.02% lower, the NASDAQ fell by 0.14%, and the Dow Jones slid just 0.10%. In Asia, futures rallied strongly though as the Bullard comments quickly faded as not being reflective of the FOMC in general.
S&P 500 futures have risen by 0.35%, NASDAQ futures have jumped by 0.60%, and Dow futures have gained 0.25%.
The good start by US futures in Asia prompted a cautious rally across most Asian markets as well. Japan’s Nikkei 225 has risen by 0.60%, with South Korea’s KOSPI jumping by 1.0%.
The malaise continued in China though, where state planner comments about targeted support have been unable to lift the gloom around China’s growth outlook. The Shanghai Composite was up just 0.12%, while the CSI 300 fell by 0.40%. Hong Kong’s Hang Seng was enduring a torrid day, perhaps also weighed down by China ADR delisting votes. The index plummeted by 1.85% today.
In regional markets, Singapore rose by 0.60%, Taipei by 0.35%, and Manilla and Bangkok by 0.50%. Kuala Lumpur was closed while Jakarta retreated by 0.80% on rate hike nerves ahead of the Bank Indonesia policy decision.
Australian markets enjoyed a good day after a strong performance by US futures. The ASX 200 was 0.50% higher, with the All Ordinaries rallying by 0.55%.
European markets are likely to face a challenging day as they return to the office. Statements by Ukraine that the Russian eastern offensive has started will weigh on sentiment, as will the rise in oil and natural gas prices over the past few sessions.
US dollar rally continues
The dollar index rose once again overnight, flattered by further losses by the Japanese yen and a slight rise in US yields overnight after the Bullard comments. The dollar index rose 0.32% to 100.80 overnight, adding another 0.18% to 101.00 as the yen tumble continued in Asia.
Resistance at 100.90 was taken out and a close above 101.00 signaled more gains targeting the 2020 pandemic-panic highs at 103.00. Support was between 99.40 and 99.55.
One note of short-term caution is that the relative strength index (RSI) was in extreme overbought territory. That meant that the dollar index was vulnerable to a potentially ugly, if temporary, pullback in the days ahead.
Both the euro and sterling held steady overnight, finishing almost unchanged. The real action was seen in the Japanese yen where USD/JPY rose 0.43% to 127.00 overnight, before soaring another 0.93% to 128.18 in Asian trading today.
With the Bank of Japan capping 10-year JGBs at 0.25% and US yields edging higher again overnight, the soaring US/Japan interest rate differential was quickly turning the yen sell-off into a rout.
Oddly, the rhetoric from the MoF and BoJ was almost silent today and I did not think we were near intervention levels. Having said that, a near 200 point loss in 24 hours will have alarm bells ringing.
Although USD/JPY’s next target should be 130.00, the extremely overbought RSI and scale of the sell-off in the past four sessions does leave USD/JPY vulnerable to a technical pullback.
That could extend to near 126.00 if the fast money bolts and runs, but I would suggest that if USD/JPY falls to those levels, there will be a wall of fresh money waiting with open arms.
Both the Australian and New Zealand Dollars were benefiting from the yen’s demise, with AUD/JPY and NZD/JPY buying in evidence. That helped AUD/USD hold above critical support at 0.7320, trading at 0.7375 today.
A sharp drop in USD/JPY could weigh on both AUD/USD and NZD/USD and the technical picture for NZD/USD remained very negative.
The weakness of the yen appeared to be spilling over into other regional currencies, with the SGD, KRW, TWD, and MYR notable losers overnight, that weakness continuing today.
A rise by USD/JPY through 130.00 was likely to spark further waves of selling in regional currencies, not helped by oil prices tracing out large gains in the past few sessions.
Markets, at this stage, appeared to be pricing a more gentle, even reluctant hiking scenario by regional Asia, exacerbating a widening US/Asia rate differential. I expect this theme to dominate trading over the rest of Q2.
The offshore and onshore Chinese yuan remained steady, USD/CNH and USD/CNY hovering just below one-year resistance lines at 6.3920 and 6.3750 as US dollar strength was offset by weakness of the euro and yen in the CFETS trade basket.
Markets in China looked set to remain steady until the one and five-year Loan Prime Rate (LPR) decisions tomorrow. A cut should see both USD/CNH and USD/CNY finally break higher.
Libya nerves lift oil prices
Libyan officials announced several force majeures on oil deliveries overnight, as expected. With export terminals effectively shut down due to protests or occupation, oil prices edged higher, helped by the Ukrainian comments that Russia’s eastern assault had begun.
As yet, there was little concrete evidence to confirm the latter, but it was a matter of when, not if. It was enough to send an always nervous oil market slightly higher.
Brent crude rose 1.40% to $122.40 a barrel, where it remained in subdued Asian trading. WTI leapt 3.25% higher to $104.30 a barrel, coat-tailing surging US natural gas prices as a spring cold snap swept northern US states. It edged 0.50% lower to $103.70 in Asia.
Markets in Asia seemed content to adopt a wait-and-see approach today, reluctant to chase rallying prices any higher. China's growth concerns were capping gains, but it seemed that Asia was waiting for confirmation of the Russian offensive and potentially, another wave of geopolitical buying to hit the market.
With so much volatility in intraday oil prices, and extreme reactions to headline risks, technical levels have become rather irrelevant. Overall, therefore, I continue to expect that Brent will remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. Brent crude had further support at $96.00, and WTI at $93.00 a barrel.
Gold’s rally continues
Gold spiked 20 dollars to $1998.50 an ounce overnight after President Zelensky of Ukraine said that Russia’s eastern offensive had begun. With little evidence, at time of writing, to back that up, and with hawkish Bullard comments sending US yields and the US dollar higher, gold retreated to finish almost unchanged.
It closed 0.27% higher at $1978.70 an ounce, retreating slightly to $1972.50 in the face of Asian US dollar strength today.
Gold’s price action, it must be acknowledged, remains constructive. It was managing to maintain gains on US dollar strength, while also grinding higher even as US yields and the greenback both strengthen.
Gold still had initial resistance at $2000.00 an ounce, although I believe option-related selling there will be a strong initial barrier. Certainly, the price action suggested just that overnight as the gold rally hit a brick wall ahead of $2000.00 an ounce.
However, if $2000.00 is cleared, gold could quickly gap higher to $2020.00 an ounce, and potentially, test $2080.00 an ounce.
A retreat through $1960.00 and $1940.00 an ounce will signal a whipsaw move lower, chopping out the short-term money. Failure of $1915.00 will signal a retest of important support at $1880.00 and possibly $1800.00 an ounce.