Oil prices continued falling on Tuesday, powering the equity relief rally on Wall Street which has extended into Asia on Wednesday morning. Yesterday, the New York Empire State Manufacturing Index fell into negative territory and US PPI came in ever so slightly under expectations. In a market hungry for reasons to buy the dip, that was enough to pull back on hawkish FOMC expectations from their policy decision later today. That, of course, is complete nonsense, and I believe the oil retreat is the underlying reason. That too is built on very marginal foundations, on the hopes that Ukraine-Russian negotiations will yield fruit. If nothing else, it shows that the pre-programmed need to buy the dip in equities is alive and well.
Helping things along in Asia today is news that China COVID cases have fallen to around 3,000, and, most notably, the government has shortened post-infection isolation requirements. That is providing more than a little solace to embattled Chinese stocks today which have taken a beating on soaring oil and commodity prices, delisting fears, and most especially, growth concerns around escalating lockdowns.
Whether markets are now reaching a point of pricing in Ukraine, is too early to say. The perpetual mega-bull gnomes of the stock market will say yes, but if we take the example of China tech stocks over the last six months, that light at the end of the tunnel has sadly been the train coming the other way each time. The stagflationary wave emanating from the Ukraine conflict will continue rolling over the world long after the conflict concludes one way or the other, and with its impact on growth, it is hard to see it being a conducive environment for equity markets. It will be interesting to see if the earnings downgrades begin at the next quarterly earnings cycle.
The Asian data calendar is light today and doesn’t really matter anyway, because all roads lead to the Federal Reserve and the FOMC’s latest policy decision. All the noise around a Russian default on bond payments today, is just that, noise. In a market conditioned to thinking in trillions these days, what’s a few hundred billion? What will matter will be how hawkish, or not, the FOMC is around future rate hikes after they raise rates by 0.25% tonight. The FOMC rate decision and dot plot have been analysis-paralyzed to death. I prefer to wait for the decision and statement to emerge, and then play what is in front of me. The FOMC may blink on Ukraine disruptions, or they may not, and I know not.
Asia stock markets rally
Asian stock markets are rallying today, especially under-pressure Chinese equities, as the price of oil fell overnight, and China eased isolation conditions domestically. Yesterday, US markets gorged themselves on lower oil prices as readily as they have convinced themselves that Ukraine-Russia talks will bear fruit recently. The buy-the-dippers were out in force, unwinding the previous day’s selloffs. Unfortunately, oil is also rallying in Asia today as well, tempering gains across the region.
The S&P 500 rose an impressive 2.15%, while the NASDAQ rocketed 2.90% higher, and the Dow Jones rallied by 1.86%. US futures in Asia have eased by a modest 0.15% as short-term money books some profits. In Japan, the Nikkei 225 is 1.50% higher, with South Korea’s KOSPI up 0.75%.
China markets have given back some early gains but still remain in respectably positive territory. The Shanghai Composite has risen 1.10%, with the CSI 300 rallying 1.60%, and Hong Kong climbing 1.22% higher. Singapore has risen by 1.20%, Kuala Lumpur by 0.30%, Jakarta by 0.50%, but Taipei has eased by -0.30%. Australian markets are also rallying modestly, the ASX 200 and All Ordinaries climbing by 0.90%.
Gains today will be limited across Asia, Europe, and the US ahead of the FOMC policy decision this evening.
The US dollar remains firm
Currency markets are refusing to buy into the Ukraine talks, or a more dovish FOMC story, with the US dollar maintaining its recent gains versus the majors and continuing to grind higher versus key Asian currencies. The Dollar Index was almost unchanged at 99.01 overnight, although it traded in a choppy 40 point range, easing only slightly to 98.89 in Asia today. 98.50 and 99.50 appear to be the key levels for now.
EUR/USD tested 1.1000 overnight but retreated to 1.0950 as Russian statements appeared to pour cold water on the progress with talks. EUR/USD has edged higher to 1.0965 in Asia with 1.1020 resistance, while multi-year support remains at 1.0800. The single currency remains at the mercy of Ukraine headlines and how hawkish, or not, the FOMC is this evening. GBP/USD is mid-range at 1.3050 today, having traced out a double bottom at 1.3000 with resistance at 1.3100. A hawkish FOMC today will put the pressure on the Bank of England to follow suit tomorrow with a 0.25% hike. AUD/USD and NZD/USD remain at the bottom of their ranges despite risk sentiment improving. Both remain vulnerable now that commodity prices have also eased. USD/JPY is consolidating above 118.00, and a hawkish FOMC this evening likely sees the rally towards 120.00 resuming.
The PBOC set a neutral USD/CNY fix today after a few weaker ones signaling its displeasure at further CNY appreciation. USD/CNY is trading at 6.3600, and USD/CNH at 6.3800 today, with nerves around China's growth being offset by news that Saudi Arabia is looking to accept oil payments in yuan. That has capped gains in USD/CNY and USD/CNH for now.
Notably, theKRW, THB, and PHP have only made modest gains versus the US dollar in the last 24 hours, and all remain near recent lows versus the greenback. The fall in energy prices has provided no respite and with inflationary pressures to remain elevated, China's growth fears swirling, and the PBOC signaling a weaker yuan, regional Asian currencies will remain under pressure.
Oil rallies in Asia
Oil prices slumped in overnight trading, Brent crude tumbling 6.85% to $98.70 a barrel, and WTI plummeting 7.0% to $95.10 a barrel. Oil markets continued to correct from the mayhem of last week, helped along by Iran nuclear deal hopes, fears over slower China growth, and persistent hopes of a Ukraine-Russia agreement to end the conflict.
There is a lot of hope, and not much sign of reality in that reasoning, and oil prices have rallied once again in Asia. Quite reasonably, Asian buyers could not resist Brent crude under $100 a barrel, with the region a massive net energy importer. Brent crude has risen 2.05% to $100.70 a barrel, with WTI rising 1.70% to $96.70 a barrel.
Failure of support on Brent crude at $96.00 a barrel could spur a deeper correction to the $90.00 region. Looking to the week ahead, I suspect that Brent will trade in wide $90.00/$110.00 a barrel range as the street adjusts to the new cold war reality and the initial panic subsides.
Gold’s capitulation continues
The reduction in fear sentiment, eroding haven demand, and a market clearly long and wrong above $2000.00, sparked more capitulation for gold overnight after support at $1950.00 an ounce failed. As more long positions were cut, gold fell 1.70% to $1917.70 an ounce, where it remains today in Asia.
With the technical indicators now lying in exactly neutral territory, gold has the potential to move either way. However, given the recent price action, the risks remain skewed towards further downside pain for long-suffering gold investors. A Ukraine-Russia breakthrough is probably worth another $100 an ounce of gold’s price, while a hawkish FOMC this evening will weigh heavily if all other things remain the same.
Gold has support at $1907.50, but its real support lies at $1880.00 an ounce. A sustained failure signaling a fall back to $1800.00. Gold will struggle to reclaim resistance at $1950.00 unless geopolitical developments darken noticeably.