Gone in 60 Seconds was a movie released in 2000 starring Nicholas Cage who is charged with stealing 50 high-end cars in three days. It is actually a remake of my preferred 1974 version, where the “hero” is set a much more reasonable target of stealing 48 cars in five days, but I guess that is productivity progress for you. The premise is that from start to finish, one must break into the car and be driving it off (preferably in a cloud of tyre smoke), within 60 seconds, thus avoiding the long arm of the law.
Gone in 60 seconds is what the equity market is looking like today, with the outsized yesterday t rally on Wall Street, disappearing in a cloud of smoke this morning, with no real reason why. Although the S&P 500, NASDAQ and Dow Jones all finished well over 3.0% higher yesterday, US index futures have headed south this morning, and Asian equities completely ignored Wall Streets' rally yesterday for a change.
The term “bear market rally” does come to mind, and given that currency markets didn’t move yesterday, and US yields actually rose, it does seem as if Wall Street came back to work with a post-holiday glow, especially as equities globally did quite well over the US long weekend. On top of that US existing home sales continued to ease, maybe the FOMO gnomes of Wall Street felt it meant less Fed hiking? It seems that markets just can’t shake off fears of intensive central bank tightening and recession nerves.
It's another slow day for data internationally, leaving markets to stew in their recessionary juices and react to headlines. UK inflation is released at 1400 SGT, with the headline YoY for May expected to rise to 9.10%. A Bank of England member did come out on the hawkish side of the fence, even if it meant a recession. That will be of little solace to the pound, which held steady yesterday. Britain is in the throes of a winter of discontent over the cost of living, with a huge rail strike disrupting the country this week. Anyone wondering why stagflation is fait accompli for central banks, need only look at Britain. Do nothing and expect protests on the streets, tighten policy and cause a recession.
With that in mind, all eyes will be on Fed Chairman Jerome Powell today, who has the unenviable task of semi-annual testimony on Capitol Hill tonight. (he is also speaking tomorrow) Markets will be standing by to dissect every word the poor man utters for clues on the direction of monetary policy. The FOMO gnomes of Wall Street will be desperately looking for signs he is blinking on tightening so that they can rush back into their buy-the-dip happy place.
On the side-lines, a few things are happening in Asia today. Oil has slumped by 3.50% although I cannot see any notable reason for it. Maybe some large positions are being shopped, or perhaps it is a reaction to expectations that US President Biden will announce a suspension of Federal fuel tax tonight. That’s about 19 cents a gallon, making it drop in the ocean for gasoline prices. Maybe 3.50% of oil futures prices is equivalent to that?
In the equity space, South Korea KOSPI is getting an outsized beating today. The KOSPI is down just over 2.0% at the moment, rather a surprise after the successful test of a rocket to launch satellites yesterday. Perhaps markets believe it can also be loaded with high explosives and pointed north? More likely it seems, are reports of two monkeypox cases in South Korea. The pandemic has left markets frazzled about viruses. I welcome any input from readers more connected or cleverer than I. (the latter being a low bar)
We should also be paying attention to Europe right now, most especially the energy space. Russian natural gas flows have slumped with each side blaming the other. Countries across Europe are activating emergency energy plans, including reactivating coal-fired power plants. Even the greens are finally admitting that a clean energy transition is incompatible with the short-term goals of a war-time economy. (nb: I’m a tree hugger but also a realist, especially around nuclear power and transitioning the energy transition and war-time economic needs. Don’t email me accusing me of wanting to cut down the Amazon forest) If Russian gas continues to fall, we can pencil in a European recession if they hold their nerve with Vladimir. The euro is likely to make its way towards parity shortly thereafter. A recession in Europe will be another headwind for growth globally and give the ECB a few more stagflation headaches.
Following Mr Powell, we also have the Fed’s Barkin, Evans and Harker speaking. Barkin was particularly hawkish on the wires yesterday, which made the Wall Street rally even more surprising. We also have a 20-year bond auction and the bid-to-cover ratio will be interesting. If all four are aligned as the four riders of the monetary policy apocalypse, yesterday’s Wall Street equity rally looks more and more like gone in 60 seconds.
Currency markets continue their sideways trading
With the notable exception of the Japanese yen once again, currency markets refused to buy into the snake oil promises of the equity markets. The US Dollar did push lower intraday across the board but recovered as US yields held firm. The dollar index finished almost unchanged at 104.42, edging higher to 104.60 in Asia, as equities sink. The dollar index has support at 1.0350 with resistance now distant at 1.0570.
EUR/USD rose just 0.22% to 1.0535 yesterday, an intraday rally fading ahead of 1.0600 once again. In Asia, risk sentiment has soured, sending the single currency 0.22% lower to 1.0510, unwinding yesterday's gains. It has initial resistance at 1.0600, with challenging resistance at 1.0650. Support is at 1.0450 and 1.0400. Sterling rose just 0.25% to 1.2280 yesterday, unwinding that move and falling 0.30% to 1.2240 in Asia. GBP/USD has initial resistance at 1.2360 and 1.2400, with support at 1.2200 and then 1.1950.
USD/JPY was the big mover in the DM space yesterday, rocketing 1.15% higher to 136.65, a 24-year high. In Asia, it has fallen 0.35% to 136.20 after some belligerent comments about currency moves by the Bank of Japan. The Bank of Japan minutes though, reveal the committee is comfortable with monetary policy settings, and although not happy with the Yen vol, is not hitting the panic button at all. US yields firmed yesterday, boosting USD/JPY, and although I don’t rule out some nasty downside corrections, they are likely to be short-lived in the current environment. Only a sharp, and I mean sharp, fall by US yields is likely to stop the USD/JPY rally. USD/JPY has support at 135.00 and 134.50, with resistance at 136.65 and 138.00.
AUD/USD and NZD/USD booked modest gains yesterday but have slumped today as risk sentiment has soured. AUD/USD has fallen 0.60% to 0.6930, and NZD/USD has slumped 0.95% to 0.6275. While supports at 0.6850 and 0.6200 hold respectively, further gains to 0.7150 and 0.6450 cannot be ruled out, but both down under dollars remain as tied to swings in investor sentiment as ever.
Asian currencies saw no sentiment-driven gains yesterday, and in fact, most post small losses versus the US Dollar. Another warning sign that the overnight Wall Street rally was a solitary rear-guard action. With the US Dollar strengthening today, Asian currencies are in retreat. USD/KRW, USD/CNH, USD/CNY, USD/INR and USD/PHP have all gained around 0.40% today. A hawkish Jerome Powell today, with reinforcement from the other Fed speakers could prelude more Asian FX weakness, and I wouldn’t be surprised to see the Bank of Korea, Bank Indonesia and the BSP Manila all intervening tomorrow.