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Enough Noise To Make Your Eardrums Bleed

Published 04/29/2022, 01:03 AM

As readers may have noticed, I tend to take a “big picture” view of the equity markets. I do this because I am getting a bit older now and things like my hearing are precious to me, if only so that I can hear Mrs Halley “communicating” with me. This week is a classic case in point. I can’t imagine how many spreads the FOMO gnomes of New York (and other places) have crossed this week as stock markets have gyrated to a barrage of contradictory inputs. Ironically, it looks at this stage, as if the NASDAQ, S&P 500, and Dow Jones will all close roughly unchanged for the week as it closes.

The petrified tail-chasing we have seen this week as equity markets swing from “we’re all doomed, get me out,” to “I don’t want to miss the absolute bottom of the stock market, get me in” is perhaps indicative of the state of confusion out there. These sorts of periods of volatility usually happen before a big directional move. Markets are being buffeted by wars, inflation, slowdowns, overheating economies, supply chain disruptions, energy shortages and monetary policy moves etc. I know which way my money is placed, and I believe much of the gyrations are partly down to denial that after over a decade, the unlimited free money forever central bank QE spigot is being turned off around the world.

It was Amazon (NASDAQ:AMZN) and Apple's (NASDAQ:AAPL) turn to drive market direction, trampling over US GDP and PCE data. We’ll come back to that but turning to the double AAs, Amazon disappointed on earnings as it struggles with supply and cost increase issues and a cloudy outlook. Apple posted spectacular results, but in the ensuing press conference, warned of revenue hits from supply chain problems as well. Intel (NASDAQ:INTC) also released decent results but also warned of a challenging outlook. In extended trading, both Apple and Amazon stock was sold heavily.

We should ignore equity markets and look elsewhere in the financial world for the true direction of travel I believe. Oil prices rallied as reports emerged that previously reluctant Germany and Hungary were getting on board with a ban on Russian oil imports. Gold held support at $1880.00 an ounce and has moved back above $1900.00. In currency markets, the low yield forever Japanese yen fell 2.0% while the greenback continued rallying versus both DM and EM currencies, notably the Yuan. Rather oddly, US bond yields hardly moved for the second day in a row, perhaps girding their belts for next week’s FOMC. The rest of the price action though, suggests markets are moving to batten down the hatches for more turbulence ahead. That said, I will take price moves in Europe and the US today with a huge grain of salt, as we are month-end with the ensuing institutional rebalancing flows. Keep your eye on the prize and wear earplugs if necessary.

US Advanced GDP Growth for Q1 had a surprising fall of 1.40% QoQ. Meanwhile, Adv PCE Prices for Q1 rose by a more than expected 7.0% QoQ. Before you start looking up stagflation definitions again, the GDP numbers were heavily distorted by a build-up of inventories, distorting the import side of the equation. The production, export and consumption side buried in the number was very healthy. Q2 data should show a sharp rebound and the US economy remains robust. The key takeaway is that the data won’t detract the FOMC from a 0.50% rate hike next week. Today we get actual US Personal Consumption and Expenditure, Core PCE Prices and the Employment Cost Index. All three have upside risks I believe, and robust data will be further ammunition for a hawkish FOMC next week.

South Korean Construction, Industrial Production and Retail Sales for March continued their softening trend. Blame it on a China slowdown/Covid-zero, or supply chain disruptions, but the direction of travel is slightly concerning. It won’t do the Won any favours and South Korean officials have threatened to intervene today if the Won falls too quickly. Philippines and Australian PPIs both rose by more than expected. That will weigh on the Peso and highlight s the growth versus inflation quandary much of Asia will have to deal with this year. The PPI data will heighten pressure on the Reserve Bank of Australia to start its hiking cycle with a 0.15% rise next week.

Singapore Bank Lending held steady once again, but its PPI release this afternoon also has upside risks, and with the MAS six-monthly tightening passed, the Singapore Dollar could come under pressure again. Germany, France, Italy and Spain release flash GDP Growth Rates for Q1, along with aggregated Eurozone flash GDP. There are downside risks for obvious reasons and with the ECB determined to stay dovish, the euro could have a tough end to the week. There is also risk around energy companies breaking sanctions by opening Rouble natural gas accounts, and a potential EU ban on Russian oil now that Germany is on board with the idea.

Finally, we need to talk about holidays because there are lots of them. Thanks to the start of Eid Al Fitr and Labour Day, Singapore is on holiday until Wednesday and thus, so am I. Today, Japan is on holiday and Golden Week next week means they are away from Tuesday through Thursday. Most of the Muslim world, including Indonesia and Malaysia, will be away next week for Eid Al Fitr. China is away on Monday through Wednesday, and Hong Kong and the United Kingdom are off for Labour Day on Monday. Many regional Asian markets such as Thailand and South Korea also have holidays next week.

All of that adds up to one thing, some seriously reduced liquidity in financial markets in Asia next week, especially on Monday. China may be on holiday until Thursday, but they are releasing official and Caixin PMI over the weekend, along with the South Korean Balance of Trade on Sunday. Add in a potentially volatile finish to the week by New York, and any weekend news developments, and with just Japan and Australia at their desks, the scene is set for some potentially ugly volatility on Monday, especially if the China PMI data is poor. Asia also releases a raft of PMIs on Monday as well. Did I mention FOMC, RBA and BOE policy decisions next week? Given the number of countries on holiday on Monday, if I were Japan’s Ministry of Finance, Monday would be an ideal day to quietly add some two-way risk into USD/JPY. ​ Volatility will be the winner next week. I’m glad I am away until Wednesday.

Asian equity markets are cautiously higher.

Asian equity markets are cautiously higher ahead of a barrage of holidays next week. Although US index futures have fallen in Asia today after Amazon and Apple fell in extended trading, regional markets clearly fell the outsized gains in the official Wall Street session overnight outweigh those risks for now.

Wall Street rallied powerfully in the official session as the tail-chasing FOMO gnomes decided that the world wasn’t going to end, despite changing their minds on that point numerous times this week. The S&P 500 rallied an impressive 2.54%, with the NASDAQ leaping 3,14% higher, and the Dow Jones climbing by 1.86%.

In Asia, Japan is on holiday, but South Korea’s KOSPI has gained 0.72%, with Taipei rallying by 1.0%. In China, the removal of coal import duties and a move to halve stock transfer fees in Shanghai have had a minimal effect. Any gains are being weighed down by China officials reiterating their Covid-zero policy and Beijing schools being closed early to help prevent the virus spread there. Weekend PMI data and holidays next week are also muting activity. The Shanghai Composite is just 0.37% higher, and the CSI 300 is unchanged, but Hong Kong’s Hang Seng has followed the US rally and jumped by 1.80%.

European markets rose yesterday in sympathy with New York and perhaps because of the capitulation on Ruble payments by large energy companies. Whether their political masters allow that to happen is another thing altogether, have signalled they will be breaking sanctions if they do. Additionally, a European oil import ban on Russia seems to be coming closer with oil prices rising overnight, with Germany and Hungary seemingly moving into that camp now. That is likely to limit gains on European markets which also face the usual weekend risk as well as a slew of GDP data today.

I am taking the rally today in Asia with a grain of salt as month-end flows may be distorting the true picture. Similarly, readers should apply the same scepticism to large moves in European and US markets this afternoon, although with Wall Street of its schizophrenia medication this week, anything could happen there.

US Dollar eases in Asia

With liquidity reduced by a Japan holiday today, Asian markets have seen a wave of US Dollar long-covering giving some well-overdue relief to the major and regional currencies. Yesterday's session was notable for the pounding once again, of the Japanese Yen and Euro as the dollar index tested 104.00 intraday, before finishing 0.65% higher at 103.67. The dollar index has eased by 0.16% to 103.50 in Asia. The US Dollar fall in Asia looks very much corrective, and not a turn in sentiment. We can expect distortions today as well from month-end rebalancing flows from institutional investors.

The dollar index remains on track for a weekly close above 103.00, the top of a multi-year symmetrical triangle. That suggests a new wave of US Dollar strength in the months ahead targeting a move above the 120.00 region. In the short-term, resistance is at 104.00, with support at 101.00 followed by 99.75. The index is severely overbought on short-term indicators, so a deeper correction in the weekend is entirely possible.

EUR/USD remains under pressure, shrugging off the Rouble gas payment news and trading as low as 1.0470, finishing 0.56% lower at 1.0500. ​ It has booked a small gain to 1.0515 but the failure of the multi-decade decade support line at 1.0800 is a significant bearish development. A weekly close below 1.0800 consolidates that view. Although a short-term relief rally is not out of the question thanks to the oversold short-term technical picture, EUR/USD remains on track to test 1.0300. The response of European officialdom to the alleged plan to pay for gas in Roubles and any indications of a Europe oil ban on Russia will likely dictate if parity is tested in the weeks ahead.

GBP/USD traded as low as 1.2425. In Asia, it has gained 0.29% to 1.2488 as some long-covering of US Dollar positioning occurs into the weekend, with month-end flows also in play. ​ Any relief rally will be short term as the broader technical picture is now signalling further losses to 1.2200 and potentially sub-1.2000 in the weeks ahead. GBP/USD would need to reclaim 1.2970, and then 1.3050 to change the bearish outlook.

AUD/USD has reversed its overnight losses on short-covering, rising 0.50% to 0.7130. The rally remains unconvincing with resistance at 0.7200 and support at 0.7050. NZD/USD rose to 0.6505 today, having tested 0.6450 yesterday. ​ Unless global risk sentiment swiftly reverses, both AUD/USD and NZD/USD are on track to test support at 0.7050 and 0.6525 respectively next week. RBA and election nerves will limit AUD gains over the next couple of weeks, but the New Zealand Dollar still looks like the most underweight lamb in the paddock.

USD/Asia is a mixed bag today. USD/CNY and USD/CNH shot higher once again yesterday and remain 0.15% higher in Asia at 6.6350 and 6.6710 respectively. The reiteration of commitment to Covid-zero policies by officials today has quickly offset a generally weaker US Dollar in Asia. With PMI data over the weekend, and holidays next week, the offshore USD/CNH, faces substantial upside risks.

Regional currencies have booked some gains on US Dollar long-covering today ahead of the weekend. Leading the pack is USD/KRW, which has fallen by 0.45% to 1266.65 today after government officials threatened intervention if the Won moved too quickly. Elsewhere, regional currencies have booked modest gains of between 0.10% to 0.20% in quiet trading as books are trimmed ahead of a heavyweight holiday schedule next week.

Europe/Russia oil ban fears lift oil prices

Oil markets rallied and are also having a “wax-on, wax-off” week as they are bounced between China slowdown fears, and European energy bans, be they Russia or European-derived. It was the energy bans that won the day as reports emerged that Germany and Hungary had moved into the ban on Russian oil imports camp. That sent Brent crude 2.05% higher to $107.35, with WTI gaining 3.05% to $105.10 a barrel. Asia is taking no chances ahead of weekend event risk and holidays next week. Brent crude has risen in Asia by 1.0% to $108.35, and WTI has gained 0.80% to 105.90 a barrel.

I believe there has been far too much complacency of late around the risks associated with either Russia or Europe imposing respective energy bans, or developments in the Ukraine war. If Europe is suddenly required to look for huge amounts of gas or oil supplies in international markets, that will offset China's slowdown fears and send prices higher. That reality seems to be slowly permeating markets in the latter half of the week. In the short term, risks are skewed towards a retreat of $112.00 by Brent crude and $109.00 by WTI.

That would only lift oil prices into the middle of my wider expected medium-term range though. Neither event risk, is at this stage, enough, in my opinion, to move Brent crude out of a choppy $100.00 to $120.00 range, or WTI from a $95.00 to $115.00 range.

Gold gains on safe-haven flows

The rot finally stopped in gold, which tested support at $1880.00 an ounce, as well as its 100-day moving average, before rallying to close 0.45% higher at $1904.25 an ounce. Significantly, it achieved that even as the US Dollar continued to rally in New York markets. In Asia, pre-weekend hedging and a weaker US Dollar has lifted it another 0.53% higher to $1904.60 an ounce.

There is a definite sense that gold is benefitting from haven flows in the past 12 hours. That makes complete sense given the month-end and weekend risks in the world, as well as regional investors looking to hedge risk over the barrage of holidays next week. However, it is too soon to say that gold has completed its medium-term corrective sell-off as nothing breaks bullish traders’ hearts like gold.

A deeper correction by the US Dollar could ease the pressure on gold but I believe risks are still weighted to the downside. Failure of the 100-DMA at $1876.00 and the overnight low of $1872.00 signal further losses targeting the breakout triangle at $1835.00. It faces resistance at $1915.00, and $1940.00 an ounce.

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