I was feeling like I was watching constant replays of the Child's Play horror movies at the moment. Chucky the evil doll saying "I'm back" was playing over and over again as equity markets, once again, tried pricing all the bad news that was out there.
Be it Ukraine, Federal Reserve rate hikes, or the commodity squeeze and when did we last talk about COVID or China property developers? Naturally, if you were a perpetual mega-bull FOMO gnome of the stock market, that meant buy equities.
Even currency markets joined in overnight, the US dollar giving back its intraday gains. Last night's excuse appeared to be that the EU wasn’t going to sanction Russian oil imports, which anyone with half a brain, knows was impossible anyway.
Alas, other parts of the financial universe were still saying “not so quickly.”
Oil prices remained near recent highs with US API Crude Inventories plummeting by 4.28 million barrels overnight. Official crude inventories will be very closely watched tonight. Additionally, it appeared that Russia was reducing crude flows through the Caspian Pipeline Consortium’s pipeline after it received "storm damage" on the part crossing Russian territory. The pipeline can carry up to 1.4 million barrels per day. Tight supplies anyone?
US bond markets were also disagreeing with equity markets. Yields rose once again overnight as two more Fed officials came out, all guns blazing, on the fighting inflation front. Fed Chair Powell speaks again tonight, and I suspect the message will be the same as Monday’s.
US yields rose once again overnight, notably in the 30-year tenor, and I note that US 10-year futures were being heavily sold in Asia today (yields up). The US yield curve was simultaneously moving higher while flattening. One instrument not ignoring this was USD/JPY, which topped 121.00 in double-quick time. It remained to be seen how long equity markets could ignore this reality, although TINA (there is no alternative) may have been supporting them. Holding cash, or bonds when yields rise, aren't appealing either.
In Asia today, South Korean PPI surprised by falling by -0.40% in February. It was led by agriculturals and what appeared to be a reversal of Lunar New Year distortions in January. The KOSPI was rallying with New York, and USD/KRW was only slightly weaker. I suspect today’s number will be an outlier and not a trend. Thailand’s Balance of Trade will show improvements as it reopens borders to tourism, although Russian tourists in Phuket and Bali were apparently having trouble paying their hotel and bar bills, thanks to sanctions.
Most closely watched will be Singapore core and headline inflation this afternoon. A headline print by core inflation above 2.50% (exp) will lock and load a tightening of policy by the Monetary Authority of Singapore in April. The finance minister had been warning about inflation and stagflation already. It should be a modest positive for the Singapore dollar but was likely to weigh on the property and bank-heavy Straits Times Index.
The United Kingdom releases a raft of Inflation data today, including headline and core inflation, PPI and RPIs. The Bank of England enacted a dovish rate hike last week. Ukraine nerves meant it desperately wanted to keep sitting on the wall. High prints from today’s data may make it as nervous as Humpty Dumpty and fall off that wall. The data should be mildly positive for sterling, which had bounced on peak bad news denial like the euro.
In the US, the calendar is quiet. MBA Mortgage Approvals, while official Crude Inventory data could spark a further rise in oil prices if it follows yesterday’s API data lower. More volatility is likely to come from Mr. Powell and Ms. Daly of the Fed, who both speak today. President Biden is also in Europe, and an announcement of more sanctions evolving or news heading from Ukraine could spark volatility. I’ll not guess on direction, just volatility.
Asian equities follow Wall Street higher
The perpetual armies of bullish investors dominated New York overnight, and also key fast-money markets like Japan today, as they wishfully priced there was no more bad news to come from Eastern Europe or the Fed.
That sparked an "efficient market pricing" rally that saw New York record some impressive gains, with "value" the winner, over growth. The S&P 500 finished 1.15% higher, while the NASDAQ leapt 1.96% higher, and the Dow Jones gained 0.76%. In Asia, the rally continued. US futures on all three indexes crept 0.15% higher despite US yields also rising in Asia, along with Australian CGBs and Japanese JGBs.
The Nikkei 225 saw hot money pouring in thanks to a much weaker yen today boosting export hopes (while ignoring the energy bill). The Nikkei 225 soared 2.75% higher, while South Korea’s KOSPI rose by 0.75%. Mainland China markets climbed modestly, COVID-19 fears tempering gains. The Shanghai Composite and CSI 300 rose by 0.35%. China's tech-heavyweight buyback fever has lifted the Hang Seng to a 1.25% gain.
In regional markets, Singapore was 0.45% higher ahead of inflation data, while Taipei rallied by 0.90%, and Kuala Lumpur gained 0.70%, with Jakarta unchanged. Bangkok was 0.20% higher and Manilla fell by 0.35%. Australian markets, perhaps with one eye on higher US and Australian yields today, posted only modest gains. The ASX 200 and All Ordinaries rose by around 0.50%.
European markets also joined in the US "peak-Ukraine, peak-Fed” fever yesterday, a palpable sigh of relief flowing through European markets as the EU declined to embargo Russian oil. The slowing flows via the CPC may yet deliver another dose of reality to Europe and its energy vulnerability. European equities have posted some impressive gains this past week, maintaining them from here will be challenging, I believe.
US dollar holds steady
The US dollar spiked higher in overnight trading, the dollar index rising to 99.00 at one stage as US bond yields moved higher once again. Thereafter, the peak-risk rally by equities seemed to have spilt over to currency markets, and the US dollar retreated, leaving the dollar index just 0.06% lower at 98.42. In Asia, trading was moribund, the index rising slightly to 98.45. The dollar index was holding near recent highs despite all the noise, and with intraday volatility making direction a turkey shoot, I will await a break of either 97.75 or 99.50 to signal the greenback’s next directional move. My money was still on further gains as reality bites.
EUR/USD reclaimed 1.1000, rising to 1.1030 as of this morning, thanks to late New York US dollar weakness. EUR/USD remained midrange between critical long-term support at 1.0800, and resistance between 1.1150 and 1.1200. Short of a peace agreement arriving between Ukraine and Russia, the single currency will struggle to maintain gains above 1.1100 for now, especially with US yields on the move higher in Asian trading.
GBP/USD staged a sharp 0.70% rally to 1.3285 overnight, where it remained in Asia. Firm inflation data this afternoon could see markets pricing in backtracking on rate hikes by the BOE, sending it higher. GBP/USD had nearby resistance at 1.3300, followed by 1.3400, with support at 1.3125 and major support at 1.3000. Like EUR/USD, I had doubts about sterling maintaining gains over 1.3300.
USD/JPY continued to skyrocket higher, as good as an example of the effects of a widening US/rest-of-the-world rate differential as any. USD/JPY jumped 1.14% higher to 120.83 overnight, before rallying through 121.00 to 121.10 this morning. US yields continued rising in Asia, and the 10-year JGB was at 0.22%, approaching the BOJ’s upper band at 0.25%. That’s as good a reason as any to conclude that 122.00 will arrive sooner rather than later. Only a fall through 119.00 changes the bullish outlook.
AUD/USD and NZD/USD both booked one per cent gains overnight, riding the improved risk-sentiment wave higher. AUD/USD was trading at 0.7460, and NZD/USD at 0.6960. Both currencies were displaying inverse head-and-shoulders formations, bullish technical indicators. Having ridden the Ukraine commodity shock higher, both were maintaining their gains as that negative sentiment ebbs, ostensibly ebbs. That was another bullish indicator, but there was a lot of good news built into AUD and NZD at these levels. I was cautious that we could have a potentially ugly pullback from these lofty heights before any upward resumption.
Oil prices soar overnight
Oil markets were a mess of volatility, along with my oil data feeds, as Brent crude and WTI endured another day of very choppy trading in a very wide intraday range. Brent crude gave back all its intraday gains, even after API Crude Inventories fell, to finish 1.85% lower at $114.50 a barrel. WTI followed the same pattern, rising aggressively before reversing to finish 1.95% lower at $108.70 a barrel.
Asia, as it has done for the week at least, walked in and immediately started buying the dip. Both contracts unwound those losses completely. Brent crude rising 2.30% to $117.30, and WTI rising 1.75% to $110.55 a barrel. It may be that Russia reducing the flow of crude through the Caspian Pipeline Consortium (CPC) pipeline was finally filtering through to markets this morning. The Financial Times reported that the CPC was equivalent to 2.50% of global seaborne volume, and you don’t have to be a genius to know what Russia reducing its flows, or closing it, will do to an already tight market.
I will not try to guess the next $5.0 price movement, that is a fool’s errand. Suffice to say, I still believed that Brent crude and WTI will continue to trade in a roughly $100.00 to $120 range. Even the most tenuously positive Ukraine news should see both contracts quickly back below $110.00 a barrel. But if Russia was using "storm damage" to reduce the CPC flows, the $120.00 level could be in danger.
Gold eases as US yields rise
Gold produced a disappointing night of price action as higher yields pushed it 0.76% lower to $1921.00 an ounce, despite the greenback also falling. In Asia, gold was completely side-lined from traders’ minds, remaining unchanged in Asian trade. Gold tested and failed, once again, to hold above the $1940.00 an ounce level overnight. It had now traced out four consecutively lower daily highs above that region, an ominous development price-wise.
The risks were increasingly skewed to the downside, especially if the US dollar decides to rally in sympathy with higher US yields. Gold had well-denoted resistance between $1940.00 and $1950.00, followed by $1960.00 an ounce. Support lay at $1900.00, and failure will spark a retest of major support at $1880.00 an ounce. Failure of $1880.00 will likely spark a rapid capitulation trade targeting the low $1800s.