Volatility continued unabated yesterday, with oil trading in a $9.0 a barrel range, almost pedestrian by recent standards. Equities and currencies were also buffeted. The meeting between Ukrainian and Russian ministers in Turkey went nowhere, as expected, and China listed ADRs were pummelled in New York on regulatory and delisting fears.
Today, China's Covid-19 cases on the Mainland have hit 1,000, not normally a worry unless you are running a covid-zero policy. Fears of renewed lockdowns will permeate Mainland markets today, already facing slowing growth and a PPI shock from soaring energy and commodity prices.
Yesterday, the ECB surprised markets by accelerating the pace of tapering, setting markets up for a rate hike in Q4. Club Med government bond yields rose sharply in response as the prospective loss of the monetary cookie jar looms. In the US, inflation hit 40-year highs of 7.90%, and although base effects should start bringing that number down from next month, the Ukraine-derived wave of price rises sweeping the world may undo much of the base effects.
The rhetoric from the Federal Reserve suggests they will stay on track to start hiking next month, the first of what should be a series of constant hikes over the rest of the year. Similarly, the ECB is clearly more concerned about inflation now than the spillover effects from the war. A Bank of Japan official has said today that economic and price conditions don’t allow for a withdrawal of stimulus, and China’s Premier Li said high growth will be hard to maintain for a large economy. Additionally, Asia economies have shown a higher predilection than most to tolerate stagflationary conditions throughout the pandemic and will likely continue to prioritise growth. When taken in totality, it's not a big reach to say the US Dollar and Euro to a lesser extent will outperform Asian currencies. And the environment won’t be special for most equities either anywhere.
It is no surprise that Asian markets are looking soggy today, or that the US Dollar is bouncing hard. The bad news pouring in isn’t just from the front lines of Kyiv. With that in mind, we appear to be seeing similar price action to last Friday. That is, nobody wants to go into the weekend when markets are closed, overly long risk exposure. This will probably be a day the US Dollar and US treasuries and gold and oil, and short everything else until Monday.
Data wise, there is not much for financial markets to sink their teeth into today. German inflation will be overshadowed by yesterday’s ECB meeting, and UK GDP will impact only Sterling. The US releases Michigan Consumer Sentiment which could cause some equity wobbles if it is very weak. Elsewhere, China releases New Yuan Loans of the next 24 hours which should ease following January’s peak, and the National People’s Congress wraps up. That leaves us at the mercy of the headline RSS feed and the ebbs and flows of the tail-chasing fast money algo-gnomes. Stay battened down and stay safe, sentiment remains fragile out there. Happy Friday.
Asian equities sold heavily ahead of the weekend.
Although Asia has been quiet on the headline front today, the region clearly doesn’t want to carry heavy long exposures into the weekend, leading to Asian markets being sold heavily today as investors trim risk exposure. Yesterday, US markets edged lower after 40-year highs in inflation raised the prospect of more Fed hikes than expected. The S&P 500 fell by 0.43%, the NASDAQ lost 0.95%, and the Dow Jones edged 0.35% lower. US futures are trading heavily today as well, S&P 500 and Dow futures losing around 0.45%, while the NASDAQ futures have retreated sharply by 0.85%.
In Asia, it is a sea of red with major markets being sold heavily. The Nikkei 225 has dumped 2.65%, with South Korea’s KOSPI losing 1.10%. In China, the Shanghai Composite has fallen 2.05%, with the CSI 300 2.40% underwater. Hong Kong, having watched China ADRs on tech majors plummet in New York is having a miserable day, the Hang Seng has plummeted by 3.75%.
In regional Asia, Singapore had fallen just 0.25%, while Kuala Lumpur is 0.90% lower, and Jakarta has fallen by 0.55%. Taipei is down 0.95% with Bangkok 0.45% lower and Manila losing 0.95%. Downunder, Australian markets are also on the defensive ahead of the weekend, the ASX 200 and All Ordinaries falling by 1.10%.
European markets resumed their slide overnight after a one-day rally. Non-conclusive Ukraine-Russia talks and an ECB that was erring to the hawkish side saw Europe give back all its previous day’s gains. Short of a positive headline coming out of Eastern Europe today, it is hard to see why that sell-off will not continue. The ever-optimistic dip-buyers of New York are also likely to struggle to find reasons to be long equities into the weekend.
US Dollar eases
The US Dollar rebounded sharply after 40-year highs in inflation data and as risk sentiment soured once again over Easter Europe and the news tickers remained quiet on OPEC+ increases. US long-dated yields resumed their climb, despite a well-bid 30-year auction yesterday, providing more support to the greenback. Risk-hedging should keep the US Dollar well supported into the end of the week.
The dollar index rose by 0.53% to 98.53, where it remains in Asia, nicely parked in the middle of its broader 97.50 to 99.50 range. The Euro fell sharply yesterday after US inflation stoked fears of more Fed hikes, inconclusive talks in Turkey, and a faster-tapering ECB stoked recession fear. EUR/USD fell 0.80% to 1.0990 where it remains in Asia. 1.0800 and 1.1400 remain the critical longer-term support/resistance levels. GBP/USD fell 0.80% to 1.3088 and it is sitting close to support at 1.3075. A retest of 1.3000 into the weekend cannot be ruled out.
AUD and NZD booked 0.50% gains yesterday, but weekend risk hedging leaves both 0.25% lower in Asia at 0.7340 and 0.6850. Both currencies will continue to be buffeted by sentiment on one side and moves by commodity prices on the other. That suggests more choppy, but sideways, price action ahead. Having booked strong gains over the past weeks as commodities rallied, the antipodeans remain more vulnerable to risk-aversion flows now.
The Korean Won, Phillippines Peso, New Taiwanese Dollar led weakness in the Asian currency space yesterday, with USD/CNH climbing back to resistance at 6.3300. Surprisingly, the Indian Rupee has managed to cling onto its last two days' gains, trading at 76.3360, well below the week's high at 771.18. I am dubious about how long this will last, but it may be benefitting from fast-money flows into the equity market, the Sensex being one of the few markets to rise this week. Regional currencies will trade soft into the weekend as traders reduce risk and remain highly sensitive to negative developments in commodity markets.
Oil makes lots of intraday noise
Oil markets had another very choppy day yesterday but finished only slightly lower than the day before. Despite a strong intraday rally after Ukraine-Russia talks finished without any progress, the 7.90% US inflation print raised the spectre of more and faster tightening by the Fed, lifting recession fears and sending oil lower. Brent crude unwound all its gains and finished 2.60% lower at $109.15 a barrel, while WTI finished 3.50% lower at $105.80 a barrel. Trading in Asia is quiet, both contracts losing 20 cents a barrel today.
Brent crude has nearby support at 106.00 a barrel, and WTI at $104.00 a barrel. Both contracts could well move sharply below $100.00 a barrel from here on any news perceived as easing supply disruptions. Similarly, both contracts could easily be back at $115.00+ on any negative headlines, it's just that sort of market. Staying on the sidelines as oil markets become increasingly irrational will allow you to enjoy your weekend.
Gold trades sideways
Gold traded in a very choppy $40 an ounce range yesterday, but as the dust settled, closed only slightly higher from where it opened, rising 0.20% to $1996.25 an ounce. Silver displayed similar price action and closed near to its finish the previous day. In Asia gold has eased slightly by 0.19% to $1991.00 an ounce in directionless trading.
The large intraday range overnight, and the almost unchanged close suggests to me that the real money was either stopped out or has chosen to move to the sidelines once again. That has left movements in gold at the mercy of the schizophrenic fast-money algo-gnomes, hence the price action yesterday. Gold has had one of those sorts of weeks where unless you timed your entry and exit perfectly, you’ve probably had a tough week whether you were long or short gold.
With that in mind, I expect gold to range into the end of the week, supported by investor risk-hedging into the weekend. Support/resistance comes in at $1970.00 and $2010.00 an ounce which should cover it for the day. Obviously, a major headline hitting the wires will change that outlook.