The FOMC Minutes, released overnight, settled a few nerves temporarily, signaling another couple of 50bps rate hikes in June and July before a pause in September. The dreaded 75bps hike threat was off the agenda and with some slowdowns in recent US data, notably in the housing market, it was enough to spur a relief rally of sorts in US equities and the US dollar.
Once again, that is translating to an uneven response by Asian markets thanks to China nerves. Although Shanghai seems to be emerging from its COVID zero restrictions at a faster pace, Chinese Premier Li warned of economic headwinds and that the economy, in some respects, is faring worse than in 2020.
This morning, the Bank of Korea hiked policy rates by 0.25% as expected. There has been zero impact on either the KOSPI or the Korean won suggesting the move was well priced in already by markets. The Reserve Bank of New Zealand’s Governor Orr was also on the wires today testifying before a parliamentary committee. Governor Orr was very hawkish and suggested that policy rates would need to remain elevated for an extended time to tame inflation.
It’s a pity he didn’t think the same thing 9 months ago when he had rates at zero and was quantitatively easing into a clearly overheating economy. Once again, the New Zealand dollar has barely reacted and has come off its highs since yesterday's 0.50% rate hike. That implies that it is a US dollar story and not a New Zealand dollar story. Either that or markets are concerned New Zealand is heading for a recession.
Australian data this morning was mixed. Building Capital Expenditure for Q1 QoQ fell by 1.70%, while Plant Machinery Expenditure rose by 1.20% for the same period. To a certain extent, it is old news with markets more focused on the RBA policy trajectory, the new government's fiscal policy, and whether the employment of housing markets start to show cracks.
Singapore releases Industrial Production for April today with the YOY number for April expected to slow to 3.40%. A softer number will increase slowdown fears in the City-state and weigh on local equities. Thailand’s Balance of Trade should continue to show a post-COVID rebound as its borders reopen for tourism.
There are a number of holidays in Europe today for Ascension Day. Heavyweights Germany and France are closed, as is all of Scandinavia. Indonesia is closed today as well. That is likely to mute activity in Europe this afternoon with the data calendar understandably, strictly second-tier.
In the US, Pending Home Sales will be closely watched given the weakness of recent existing and new home sales. That will overshadow 2nd estimate of Q1 GDP and Initial jobless Claims. Another ugly number will put the recession word back on Wall Streets' lips and we could see another rush for the exit. Soft results from Gap (NYSE:GPS) and Dollar Tree (NASDAQ:DLTR) could reinforce that sentiment.
Overall, though, it looks as if today will be a day of consolidation for financial markets as they await fresh inputs, and ahead of personal income and expenditure data out of the US tomorrow evening.
A mixed day for Asian equities
Wall Street bounced overnight as the FOMC Minutes were less hawkish than feared. The relief rally saw the S&P 500 rise by 0.95%, the NASDAQ jump 1.51% higher, while the Dow Jones added 0.60%. In Asia, we are seeing the usual trend move from the main session with US futures easing slightly. S&P futures are 0.15% lower, NASDAQ futures have fallen by 0.40%, and Dow futures are unchanged.
Once again, moves in the US overnight have led to an uneven response by Asian stock markets. Chinese Premier Li’s comments about the domestic economy spooked Asian markets, with Mainland stocks dropping initially. News that the Port of Shanghai is back to 95% operability seems to have lifted spirits in China, or maybe it is the “national team” buying, with various exhortations to banks to lend to small businesses also lifting sentiment. The Shanghai Composite and CSI 300 are 0.65%, but Hong Kong has fallen by 1.60%, making it a very Mainland-centric rally.
The mixed picture continues elsewhere, with Japan’s Nikkei 225 edging 0.25% lower, while South Korea’s KOSPI has edged 0.20% higher. Taipei is down 0.30%, but Singapore has gained 0.90% today as local investors piled into banking and property heavyweights. Kuala Lumpur is just 0.15% higher, with Bangkok climbing 0.55%, and Manila adding 0.25%. Australian markets are mixed. The All Ordinaries has fallen by 0.30%, while the ASX 200 is unchanged.
European markets face a muted opening this afternoon with quite a few holidays around and not much happening in the Asian session. UK markets will be waiting for the details to be released around the government's windfall tax on energy companies.
Currency markets are quiet
The US dollar staged a modest relief rally overnight after the FOMC Minutes came out. Nevertheless, some decent ranges were seen across the majors. The bounce looks more technical in nature after nearly two weeks of losses. The Dollar Index rose 0.30% to 102.07, notably fading ahead of the multi-year breakout line at 102.35, which forms initial resistance today. Support remains at 101.50 and 101.00 loom.
EUR/USD gave back some of its recent gains overnight, failing ahead of resistance at 1.0750. EUR/USD fell by 0.52% to 1.0680, creeping slightly higher to 1.0790 in Asia. Momentum already appears to be waning for EUR/USD, but I do not rule out at least another test of 1.0750 and 1.0825, the multi-decade breakout line. A weekly close above the latter is needed to suggest a medium-term low is in place. GBP/USD bucked the trend overnight, rising 0.40% to 1.2580, where it remains in Asia. Some of the EUR/GBP buying from the day before appears to have reversed. Sterling faces political risks today as the UK unveils its windfall tax on energy companies. It has support at 1.2470, with resistance at 1.2600 and 1.2640.
USD/JPY crept higher to 127.35 overnight as the US dollar strengthened. In sedate trading today, it has edged higher to 127.45. Support remains at 127.00, followed by 126.35, with resistance at 128.00. That range may be the story for the rest of the week for USD/JPY.
AUD/USD and NZD/USD traded in choppy 100 point ranges overnight, driven by volatility post the RBNZ rate hike. AUD/USD finished just 0.30% lower at 0.7085, easing to 0.7070 today. It ran out of steam ahead of 0.7150 with support now at 0.7025. In a similar vein, NZD/USD gained 0.30% to 0.6490 overnight, running out of momentum above 0.6500. It has faded by 0.30% to 0.6460 today, despite hawkish comments from the RBNZ Governor. The fading momentum suggests the Kiwi is now facing rising recession fears. A sharp move lower in global sentiment will impact the NZD more heavily than the AUD.
Asian FX had a quiet overnight session, regional currencies were content to range trade as the US dollar booked gains versus the DM space. The trend has continued in Asia with most Asian currencies unchanged versus the greenback today and awaiting new external drivers with the PBOC setting another neutral USD/CNY fixing today. The Korean won hardly reacted to the BOK policy hike today, suggesting it was already well priced in.
Oil markets slumber
Oil prices had another comatose session by their standards, barely rising from the day before. Nevertheless, both Brent crude and WTI have held on to all their recent gains, suggesting the weaker side is the upside in prices for now. While China slowdown fears are receding in the minds of traders, for now, fears persist around the increasing tightness of the US diesel market, and I suspect not ruling out export controls has unnerved international markets, and rightly so. I expect prices to remain firm for the rest of the week, with the global data calendar fairly light.
Brent crude rose 0.60% to $114.35 overnight, where it remains in an equally quiet Asian session. WTI rose 0.40% to $110.70, adding just 20 cents to $110.90 a barrel in Asia.
Brent crude has resistance at $115.00 and $116.00 today, with support at $112.00. A rally through $116.00 could set up a retest test of my medium-term resistance at 120.00. WTI is taking comfort from the White House stance and is sitting in a 108.00 to 112.00 a barrel range. Nevertheless, a topside breakout by Brent crude will drag WTI higher as well, allowing a test of the $115.00 to $116.00 resistance zone.
Gold weakens on US dollar strength
Gold fell by 0.70% to $1853.25 an ounce overnight, retreating another 0.45% to $1845.00 an ounce in Asia. As I have touched on before, the true test of gold’s underlying strength will be maintaining gains in the face of a US dollar rally.
The fall by gold over the last 24 hours in the face of modest US dollar strength does not fill me with confidence. Further US dollar strength could see gold face one of its ugly downside shakeouts.