After what seems like an interminable wait, we are finally at FOMC day, and the last one I shall be covering as the voice of reason in this missive. Markets have baked another 75 basis points into their loaves of bread, but it's going to be all about what the Fed and Jerome Powell say and not what they do. The IMF downgraded world growth forecasts, and there are plenty of recessionary signs around the world. What we’re not yet seeing, is easing commodity prices and supply chain pressures flowing through to lower prices.
Markets will be betting heavily that the Federal Reserve may mollify some of its inflationary language. These were the same markets that just recently were pricing in 100 basis points today in a panicked manner, so don’t take their “wisdom” as gospel. Although the Fed may well be pleased that some of their harsh medicine is taking effect by virtue of voice and intent rather than action, it wouldn’t make much sense for them to take their foot off the brakes right now and pivot to being dovishly hawkish. The Fed already has a credibility issue thanks to being so vehemently in Team Transitory, and although my expectations for them are nearly as low as the Reserve Bank of New Zealand, monetary custodial of my beloved but now thoroughly messed up country, I expect them to “stay on message.”
As such, some complacency may be shaken out of the US bond market this evening, and the US Dollar’s downward correction may base, while the FOMO gnomes of Wall Street may have a tough day. Or I could be completely wrong, please circle back to the “wisdom” comment above. Either way, the big loser will probably be the White House as November’s mid-terms loom closer, and the tears flow harder.
Wall Street fell yesterday as it continued absorbing the Walmart (NYSE:WMT) earnings shocker, but US index futures are bouncing quite impressively in Asia after Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) results. Both tech giants just missed on earnings, but both maintained very upbeat outlooks; that was enough for the FOMO gnomes. Meta Platforms (NASDAQ:META) announces after the close of trading today, and if we are looking for an online ads selloff, Meta’s results may be that catalyst. If you’re wondering why, go and look at your Facebook and Instagram feeds, which have become a wasteland of actual content from your “community” but a dumping ground for pointless adverts. They look more desperate than Joe Biden at the moment.
Interestingly with US earnings, McDonald's (NYSE:MCD), Coca-Cola (NYSE:KO) and Chipotle (NYSE:CMG) all produced decent results. That circles back to this year’s winners being companies making things that people need no matter what the economic climate is, while companies that rely on the discretionary consumer wallet may find the going tough. Eating and drinking is one of those necessities, although I am not advocating that readers should consume a diet of fizzy drinks, burgers, and Mexican food. For Asia’s part, South Korea’s SK Hynix Inc (KS:000660) and LG Display (KS:034220) announce results today, and it will be interesting to see if the pandemic boom demand for electronic goodies is finally tailing off.
In Asia, Australian Inflation has just been released. YoY Q2 Inflation rose to 6.10% from 5.10%, but slightly less than the 6.20% forecast. MoM Inflation was slightly lower than forecast at 1.80% as well. Australia remains the lucky country, even on inflation, it seems. The slightly softer results have seen RBA hiking expectations pared, sending the Australian Dollar lower for now, while I expect local equity markets did not react.
China Industrial Profits has also just been released, climbing by 0.80% in June YoY, a vast improvement on May’s -6.50%. An easing of lockdowns in China likely accounted for most of the boost, and as readers will know, I continue to believe that China’s covid-zero policy remains a key risk for domestic markets, with a likely spill over into regional ones in the event of extended lockdowns. Its impact appears to be muted today.
Ahead of the FOMC today, the US releases Durable Goods and Existing Home Sales. Both have downside risk, especially existing home sales after new home sales produced a very soft number. That data will probably only be a driver for intraday volatility, though, as we await the pronouncements of Powell and the FOMC.
Currency markets range-trade
It was another session of range trading for currency markets yesterday, which seem reluctant to aggressively position until the FOMC is out of the way. One exception was the euro, which fell heavily on natural gas-derived recession fears. That lifted the dollar index, which finished 0.68% higher at 107.20, having bounced off rising wedge support. In Asia, it has moved 0.17% lower to 107.01. The rising wedge support is at 106.40 today, and a daily close under 106.40 signals more losses towards 1.0500 and 1.0350, potentially extending to the initial 102.50 long-term initial breakout. Resistance is at 107.30 and 108.00.
EUR/USD slumped by 1.03% to 1.0117 yesterday, dogged by energy fears dragging the Eurozone into a deep recession. In Asia, it has managed to recover 0.26% to 1.0143 as the US equity index futures rally sees some modest US Dollar selling sweep Asia. The fall yesterday has swung the technical picture to the negative, and the multi-day resistance at 1.0275 is formidable. Only a sustained break above 1.0360 now suggests a longer-term low is in place. EUR/USD has support at 1.0100 and 1.0100.
GBP/USD had a very choppy day but ultimately settled just 0.14% lower at 1.2030, rising to 1.2050 today in Asia. The rising wedge support is at 1.1960, followed by 1.1900 and 1.1800. Rising wedge resistance is at 1.2100, followed by 1.2200. It would take a sustained break above 1.2400 to call for a longer-term low by sterling.
With US yields moving sideways yesterday, USD/JPY edged higher to 136.95, where it remains in Asia. A loss of 135.50 sets the scene for a larger downside correction, potentially reaching 132.00. Initial resistance is distant at 138.00, followed by 139.40. The US/Japan rate differential continues to hold USD/JPY in its thrall, and it is clearly marking time until today’s FOMC.
Weaker US stock markets saw AUD/USD and NZD/USD ease yesterday to 0.6937 and 0.6230. Weaker inflation data has pushed AUD/USD down to 0.6920, with Kiwi unchanged. The technical picture for both remains constructive as both currencies stay well clear of their breakout lines at 0.6790 and 0.6145. Asian currencies eased slightly yesterday before booking some slight gains today. As a whole, the Asian FX space is almost unchanged and is in a holding pattern ahead of the FOMC today.
Russia trades in a choppy range
Oil prices finished almost unchanged yesterday, but that belied another large range intraday, with both contracts moving sharply higher before reversing. Russia’s moves on European natural gas continue to underpin prices, while global recession fears continue acting as a headwind.
Brent crude finished almost unchanged at $104.60, easing slightly to $104.45 in muted Asian trading. Notably, Brent crude rose above $107.00 once again overnight, only to retreat sharply. The series of daily highs between $107.50 and $107.70 a barrel is a formidable barrier. A daily close above $108.00 would now be a significant bullish technical development targeting the 100-day moving average (DMA) at $110.00, followed by $115.00 a barrel. Support is nearby at $104.00 and then 101.50 a barrel.
WTI finished 0.80% lower at $95.50 yesterday, having traded as high as $99.00 a barrel intraday. In Asia, it has edged lower to $95.30. It looks the more vulnerable from a technical perspective, and a large gain by official US crude inventories today could spark more selling. WTI has resistance at $99.00 and then $100.00. The 200-day moving average (DMA) at $94.85 is nearby support, followed by 92.50 a barrel. A daily close under the 200-DMA would be a negative technical development.
Gold trades sideways
Gold was almost unchanged at $1717.50 an ounce yesterday, where it remains in Asia, as its flatline price action continues. The charts continue to suggest that gold is trying to form a medium-term low; however, the price action remains underwhelming, and we will have to wait until we get into the meat of the week's calendar to see if this scenario plays out. Like everything else, it is on hold for the FOMC now.
Gold needs to overcome heavy resistance at the $1745.00 an ounce triple top before the gold bugs can really start to get excited. It has support at $1680.00, and then the longer-term support around $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.