Wall Street did another U-turn yesterday, finishing lower as the dearth of tier-1 data and the pre-FOMC media blackout left the FOMO gnomes chasing their tails once again. Wall Street closed modestly lower, ostensibly because Apple (NASDAQ:AAPL) said it would slow hiring, joining its other tech-giant brethren.
That was despite Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) producing decent earnings results, although investment banking revenue took a hit as IPOs and SPACs have dried up. More than likely, the stock market pullback was just noise on a slow news day. The losses overnight have been dwarfed by the gains from Friday, so the bear market rally thesis still has life; it just won’t be a linear progression.
Elsewhere, currency markets ignored Wall Street, with the US Dollar falling again yesterday. Once again, the greenback mostly retreated versus the majors, while Asian FX booked only modest gains. The greenback was long overdue a correction, and this is playing out nicely. The interest rate differential play remains real in Asia. Readers should beware of the “dollar smile”; running into the FOMC, the US Dollar’s grin may get wider again. US yields also edged higher yesterday, but it seems like noise, nothing special. Gold remains in an induced coma near $1700.00 an ounce, and risks remain skewed towards more gold bugs getting squashed.
Oil had another frisky session, Brent and WTI rallying by around 5.0% yesterday. That seems to be becoming the norm for oil prices these days, and with intraday vol like that, risk managers are probably telling the trading desk to cut position sizes intraday, creating a negative feedback loop on the liquidity front. It's hard to say what made New York want to push oil higher, but I suspect they belatedly realised that Joe Biden came away with nothing from the Saudis. The + in OPEC+ is clearly more important to OPEC at the moment. Gazprom (MCX:GAZP) also announced some force majeures on European gas customers yesterday, apparently, something that doesn’t bode well for the reopening of Nord Stream 1 on Thursday this week. Gas-margeddon Thursday is clearly playing its part in the oil rally, and it makes the European stock market rally even more surprising.
The major news flow washing over Asia today appears to be China’s announcement that it may allow mortgage payment holidays for local buyers on uncompleted housing projects. Although the structure isn’t at all clear yet, it appears that local authorities and state-owned banks making will be “invited” to take up the slack. It appears to be a response to the mortgage payment protest by citizens in China, something the CCP is acutely sensitive to, and may mark the first steps by government entities to take on the credit risk from developers to get projects completed.
China markets seem to be interpreting the announcement as a quasi-stimulus to backstop the property market. I won’t disagree with that, as trying to quietly work out the developer debt problem under the radar over time clearly hasn’t worked. Shanghai industrial commodity futures are on fire in early trading; nickel, aluminum, coking coal (to make steel), and rebar prices, amongst others, are all between 3 and 6% higher today, suggesting markets believe government intervention is about to unlock the construction sector. That’s a bit of a reach, given have no concrete details of the plan yet, but one must respect the momentum.
It is a desert on the data front in Asia today, but the China developments should see some positive spill over into Asian markets, which could well shrug off the noise from Wall Street yesterday. This afternoon, Eurozone inflation data for June looks set to print at 8.60%. Given that it is final and not flash or preliminary, I expect that to be priced in. UK employment and earnings today could throw a recession curve ball if both surprise to the upside. That will lead to some recalculations on BOE tightening and could support the sterling.
US Housing Starts and Building Permits for June look to be the day’s data highlights. I wouldn't rule out an upside surprise today with sales and consumer confidence data holding up nicely last week. Since stock markets rallied after that higher data last week, I wouldn’t bet against the same thing happening again today.
Finally, the only release of note in Asia today, the RBA Minutes, has dropped. The RBA members noted that rates were well below the neutral rate, given the conditions in the economy. You could probably leave a blank space in that sentence and put – insert central bank name here – at the moment. The Australian dollar is sharply unmoved this morning, suggesting the minutes revealed nothing that wasn’t already priced in.
A day of headline-watching beckons.
US Dollar correction continues
The US Dollar fell once again against the major currencies as its downward correction continued. Notably, Asia FX made very limited gains yesterday, and this US Dollar move seems very much contained to the major currency space. The dollar index closed 0.53% lower at 107.41 yesterday but traded in a very choppy 115-point range between 106.90 and 108.05. These mark initial support/resistance today. Above that, resistance is at 108.70, 109.30, and then 110.00. The drop to 106.90 yesterday may have taken out many of the weak long positions, but should it fail again, the next target is the 1.0585 breakout point, followed by 1.0500. In Asia, the dollar index is 0.12% higher at 107.53.
EUR/USD rallied to test 1.0200 intraday, only to retreat, finishing 0.56% higher at 1.0145. In Asia, it has edged lower to 1.0130. The technical picture still suggests a correction back towards 1.0200 is possible, but only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0000 and 0.9900/25. The single currency faces serious event risk in the latter half of the week, firstly from the ECB policy decision, and secondly, from Russian natural gas flows which are due to resume after pipeline maintenance.
GBP/USD rallied by 0.70% yesterday to 1.1952, testing 1.2030 intraday. Like the euro, the extent of the intraday rally suggests that quite a lot of the weaker shorts were taken out, leaving positioning more balanced. It has support at 1.1870, 1.1800 and 1.1760, while resistance at 1.2060 and 1.2200 remains intact. A rise above 1.2060 suggests a larger rally to the 1.2400 regions, but it would take a sustained break of 1.2400 to call for a longer-term low by sterling. It is unchanged in Asia.
USD/JPY fell by 0.28% yesterday at 138.15, where it remains in Asia as Japan returns from holiday. Thursday’s high around 139.40 is initial resistance, followed by 140.00. Support is at 137.40 and 136.00. Given the sentiment in the market this week, a fall in US yields this week could finally translate to a meaningful downside correction by USD/JPY, which is a crowded trade.
AUD/USD and NZD/USD finished sideways, testing and failing ahead of resistance at 0.6850 and 0.6200, respectively, price action that mirrored EUR/USD and GBP/USD. AUD/USD has risen 0.25% to 0.6830 today, while NZD/USD gained 0.15% to 0.6165. Both currencies are showing falling wedge formations and a sustained break above 0.6850 or 0.6200 signals more gains ahead this week by the antipodeans.
The overnight retreat by the US Dollar bypassed Asian currencies once again, which posted only modest gains. That suggests that China's growth fears, and the impending widening of the US interest rate differential at the short end of the curve, continue to weigh on AsiaFX performance. Today, USD/Asia is barely changed from their overnight closes.
Oil prices explode higher
Brent crude and WTI prices exploded higher yesterday after Gazprom declared a backdate force majeure on some major European customers. That raised fears that gas flows would not return through the Nord Stream 1 pipeline to Germany at the end of the week, causing a knock-on impact on oil prices. Markets also seem to have concluded that President Biden effectively returned from Saudi Arabia empty-handed from his weekend visit.
Brent crude leapt 4.80% higher to $105.65 yesterday, adding another 0.35% to $106.00 a barrel in muted Asian trading. Brent crude has nearby resistance at $106.50, followed by $108.00 a barrel. Support is distant at $99.50.
WTI leapt 4.55% higher yesterday to $102.05, adding 0.45% to $102.45 a barrel in Asia. It has now-distant support at $96.00 a barrel, with resistance nearby at $103.00 and $105.00 a barrel.
The intraday volatility in oil prices is rendering technical levels somewhat meaningless for now, and it seems that extra volatility is feeding into less intraday liquidity, exacerbating movements in a negative feedback loop. I note that both contracts have held and rallied from their 200-day moving averages on a daily closing basis. When combined with the fact the futures curves are still in backwardation, a bullish set-up for prices that reinforces that despite speculative volatility, the underlying supply/demand imbalance is as tight as ever. Oil prices may have peaked, but they certainly don’t look like they’re going materially lower from here unless we get a huge surprise from OPEC+.
Stubbornly firm economic data from the US and improving data from China are other supportive factors. Risks remained skewed to the upside if Russian gas does not start flowing back to Europe at the end of this week.
Gold’s remains unimpressive
Gold has another unimpressive session yesterday, peeping above $1720.00 intraday but closing almost unchanged at $1709.00 an ounce by the session's close. It has edged 0.10% lower to $1708.00 an ounce in another comatose session in Asia.
Gold’s inability to hold onto even modest rallies in prices, even as the US Dollar falls and US bonds trade sideways, is a major concern in my option. It suggests that risks remain heavily skewed towards the downside. The US Dollar index is over 150 points off its peak from last Friday, yet gold remains glued to 11-month lows. It seems that only a much deeper correction lower by the US Dollar will grant gold a stay of execution.
Gold has initial support at $1700.00, followed by the more important $1675.00 an ounce zone. A sustained failure of $1675.00 will signal a much deeper move lower, targeting the $1450.00 to $1500.00 an ounce regions in the weeks ahead. Gold has resistance nearby at $1725.00 and then $1745.00 an ounce.