The roller coaster activity on US stock markets continued yesterday, with Wall Street deciding that inflation and recessions were an issue for two days in a row. A tiny rise in US Initial Jobless Claims probably tilted Wall Street over the edge, following the European Central Bank’s tilt to a hawkish bias at their policy meeting earlier in the day.
Thankfully, Friday is here on a number of levels, but most especially because we will see the release of US Inflation and Core Inflation data. Markets have been tying themselves up in knots over this all week, thanks to a thin data calendar. Like last Friday’s Nonfarm Payrolls, I am expecting a very binary outcome today with median forecasts for the headline at 8.30%, and core inflation at 5.90% YoY. A number at 8.40% or higher probably sparks a risk aversion sell-off across asset markets with the US Dollar winning. Conversely, a print at 8.20% or lower probably sees a buy everything, sell US Dollars rally, as Fed hiking expectations are pared ahead of next week’s FOMC.
China inflation has passed without incident. Inflation YoY for May was just under expectations at 2.10%. Inflation MoM fell to -0.20%, slightly higher than forecasts of -0.30%. The Covid-led consumer and industrial led slowdown continues acting as a brake on inflation. Markets in China today have their eyes focused elsewhere. President Xi Jinping sent out mixed messages yesterday, exhorting officials to maintain Covid-zero, while also supporting economic growth. Good luck with that.
A potential on again, off again Ant Financial IPO is also doing the rounds. Bloomberg ran a story yesterday saying Chinese officials had indicated a willingness for it to go ahead. Alibaba (NYSE:BABA) rallied 7.0% in New York before reversing all those gains after Chinese officialdom denied the report. Today, Reuters is also running an exclusive the IPO had received a tentative blessing from officialdom as well. Hong Kong equity markets though are showing no signs of taking the bait this time. Where there’s smoke there’s fire I suppose, but with a valuation of around half of what it was around the abortive 2020 date, you’d probably ask why Alibaba and Ant would bother right now. Perhaps the main message would be that China was moving past “peak crackdown” as the economy slows.
Far more front and centre for Mainland China markets, and Asian ones and sentiment, in general, are developments from Shanghai. One district was locked down yesterday and today it was announced that mass testing would take place in seven of its 16 districts, so basically half the city. Markets have naively assumed that China was “one and done” with Beijing and Shanghai, ignoring the experience of Covid-zero nations elsewhere. That reality might finally be permeating the most ardent dip-buyers now, and the prospect of a wave of renewed Covid lockdowns in Shanghai would have subdued Asian sentiment today, even without the bonfire on Wall Street last night.
The ECB policy meeting outcome has already been analysis paralysis’ ed to death already. What stands out to me is the price action of EUR/USD, which after the hawkish pivot yesterday, still closed 100 points lower at 1.0620. The devil is in the detail I suppose. ECB projections on growth and inflation suggest two years of stagflation ahead. A hike of 0.25% next month and one in September (they left the door open to a larger one), isn’t earth-shattering. It is telling that despite a pedestrian hiking schedule to errrr 0.0%, the Bund/BTP spread still blew out.
But I think the kicker is that the ECB will keep rolling over maturing bond purchases even if they stop adding more from July 1. So effectively, their answer to stagflation is raising interest rates to 0.0%, while at the same time continuing quantitative easing under the surface. In their defence, the war in Ukraine has thrown a stagflation spanner in the works, but they would have arrived at this point to some degree anyway. Given the ECB’s response, I’d sell Euro and European equities as well.
Oil eases in Asia on China fears
Oil prices consolidated their recent gains yeterday, with Brent crude edging 0.70% lower to $122.85, and WTI easing by 0.80% to $121.45 a barrel. Oil has continued retreating in Asia, driven by China slowdown fears after widened Covid mass testing was announced for Shanghai this weekend. Brent crude is 0.53% lower at $122.20, and WTI is 0.60% lower at 120.70 a barrel.
Oil markets probably have more downside risk in the short-term, with another wave of China slowdown fears capping the upside. Somewhat counterintuitively, higher than forecast US inflation today may also spur more selling as markets price in a higher recession likelihood. Any losses are going to be limited though, as the physical tightness of both crude and refined products globally remain powerful supportive factors. Weekend event risk should also limit pullbacks.
Brent crude has traced out a series of highs at $124.25 marking initial resistance. After that, the road opens to $125.00 and $128.00 a barrel, bringing the Ukraine invasion highs back into sight. Support is at $120.50 and $118.50 a barrel. WTI has resistance at $123.15, the overnight high, and then $125.00 and $127.00 a barrel. Support is at $119.35 and $117.50 a barrel.
Gold remains in a coma
Gold remains confined to a narrow $1840.00 to $1860.00 an ounce range, comfortably continuing to move in an inverted manner to US Dollar moves. Gold’s main hope for a directional breakout rests with US Inflation data moving the US Dollar materially one way or the other. In the meantime, bring a good book.
Gold has resistance at $1870.00, followed by the 100-DMA at $1890.00, and then $1900.00, where I expect there to be options-related sellers in the first instance. Support is at $1837, $1830.00, and then $1780.00 an ounce. I do not discount a disorderly retreat if the latter fails. The wider $1830.00 to $1870.00 range seems set to continue until the US data.