By Jeffrey Halley
The FOMC minutes were released overnight and signalled a faster pace of balance sheet runoff than on previous occasions, targeting $95 billion per month from September, easing into the process from next month.
The minutes also suggested that some 50 bp Fed Fund hikes were on the cards and expect that to happen from next month. It seems only the Ukrainian war stayed the FOMC’s hand this month.
The reaction in the markets was mixed as much of the minutes’ contents had already been telegraphed by Lael Brainard the day before.
The US Dollar and US bond yields rose modestly. Equities, though, took another dive lower. That makes sense given that equity markets have been steadfastly ignoring the reality of tighter monetary policy and the end of 0% interest rates and central bank back-stopping of the party.
It will be interesting to see in the coming months, the reaction of housing markets to policy normalisation, both in the US and abroad.
The International Energy Agency announced a coordinated release of 120 million barrels of oil overnight to ease tight global supplies. The net release is actually only 60 million barrels as it includes 60 million from the US which is part of their 180 million barrel release.
The US tightened sanctions on Russian banks and prominent citizens overnight as well. But once again, the impact was muted.
From the US and European perspective, one gets the impression that the sanction low hanging fruit has been picked. Anything from here will require material economic sacrifice, particularly for the Europeans.
That reality may go some way to explaining why European equities had such a poor session overnight.
In Asia, Australia’s Trade Balance suffered a serious hiccup. The headline number fell to AUD 7.457 bio versus an expected print of AUD 12 bio. Exports rose by 0.20% (6.0% exp), but it was imports that shocked, rising by 12.0% (1.0% exp).
The surplus was the smallest since March 2021 and has pushed the AUD down 0.30% Thursday after it endured a torrid session overnight as markets priced in a far more rapid hiking cycle from the FOMC than the RBA.
German Industrial Production will likely fall to 0% Thursday afternoon, and Eurozone Retail Sales could suffer the same fate, as the Ukraine malaise deepens. The US calendar is also quiet on Thursday, but I count five Fed speakers in the evening which could provide some volatility.
Wall Street retreat spills into Asia
Asian equity markets are lower as they follow Wall Street south, digest the implications of a faster tightening Federal Reserve, and cast a nervous eye over at China and its virus situation.
Overnight, the FOMC Minutes confirmed the hawkish comments of Lael Brainard the day before, causing more pain on Wall Street.
The S&P 500 fell by 0.97%, the Nasdaq tumbled by 2.22%, while the Down Jones eased 0.42% lower. Index futures continued falling in Asia, with Dow and S&P 500 futures down 0.25%, and Nasdaq futures down 0.15%.
In Asia, Tokyo’s Nikkei 225 slumped by 1.75%, with South Korea’s Kospi retreating by 1.25%. Mainland China’s Shanghai Composite and CSI 300 have lost 0.50%, while rather surprisingly, Hong Kong’s Hang Seng is unchanged.
Currency markets ranging
Overall, it appears that currency markets had already absorbed the fast quantitative tightening comments from Lael Brainard, with the FOMC minutes not adding to the narrative. US Yields were steady overnight as well. The dollar index crept 0.14% higher to 99.62, easing slightly to 99.55 in Asia.
EUR/USD was almost unchanged at 1.0900 overnight, rising slightly in Asia to 1.0910. Long-term support at 1.0800 remains the most important level to monitor. A sustained break would target 1.0600 and 1.0300 initially. Resistance is now at 1.1200, with longer-term resistance at 1.1320.
With little movement in US yields overnight, USD/JPY was almost unchanged at 123.70. The late March highs at 125.10 are now in sight again, followed by 125.80. USD/JPY should find plenty of support into 122.50.
Asian currencies have been surprisingly resilient overnight, edging only slightly lower.
One exception was the Indian Rupee, USD/INR rose 0.65% to 75.777 overnight. I am putting that down to US warnings to India not to get too cosy with Russia. India is in a challenging position, being also a member of the QUAD security grouping, containing the United States.
Trying to argue that Russia and China are totally separate security issues will be a leaky argument to make and India faces some geopolitical risks now if it wants US support on China while being the buyer of last resort for Russian oil.
Oil prices fall on IEA release
Oil prices dipped overnight after the IEA announced a globally coordinated reserve release of 120 million barrels, which is actually a net 60 million release when the US contribution is stripped out.
Brent crude and WTI fell by over 4.0% overnight, assisted by higher than expected US Crude Inventories, to $101.70 and $96.40, respectively.
Short of a serious escalation of virus restrictions in Mainland China, it looks like most of the bearish news for oil prices is now out there. I expect Brent to remain in a choppy $100.00 to $120.00 range, with WTI confined to a $95.00 to $115.00 a barrel range.
Gold consolidation continues
Gold continued its sideways trading overnight, with the US Dollar and US yields barely moving. That meant another sideways day for gold once again, closing just 0.14% higher at $1926.00 an ounce.
Further US Dollar strength on Thursday has pushed gold lower in Asia, falling 0.20% to $1922.00 an ounce.
Jeffrey Halley is Senior Market Analyst, Asia Pacific OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
