By Jeffrey Halley
New York had a relatively quiet session overnight, with Europe’s announcement that its next round of sanctions would include Russian coal imports, having no impact on energy prices.
A relatively slow calendar and few new developments from eastern Europe saw Wall Street reverse intra-day losses to close slightly higher, long-dated US yields edged higher, and the US Dollar booked very modest gains.
St Louis Fed President Bullard was the latest talking head to come out with a series of hawkish statements on future monetary policy. The fact that equities recovered intraday losses suggests that the 225 basis points of Fed Fund hikes that the futures markets have priced in could be enough for now.
The real stress point for the US Dollar will be the Federal Reserve’s quantitative tightening, slated for a May start, and the appetite from the market to absorb the sales.
In Asia, markets are growing warier about China as the Shanghai lockdown drags on with over 24,000 virus cases daily. China’s Covid-zero policy continues to be its Achilles’ heel although there are plenty of other reasons to be a little cautious.
A serious spread outside of its finance and commercial to other large cities will be a big headwind for China’s growth, China stocks, and by default eventually, much of Asia.
Despite talking up assisting SMEs and propping up the stock market, little has happened since the initial comments from Premier Li Keqiang. The PBOC has set neutral USD/CNY fixes this week and has net drained CNY 580 bio from the system this week via open market operations.
Perhaps some could be interpreted as draining excess liquidity post this week’s two-day holiday, but until China backs up its rhetoric with action, much like the Fed ironically, the environment for China equities will be challenging.
Friday’s main event in Asia will be the latest Reserve Bank of India interest rate decision.
The INR has remained steady in April after a roller-coaster ride in March, but the RBI has shown little regard for the currency in its policy mix over the past two years, tolerating stagflationary pressures as the price of keeping the economy going.
That is unlikely to change, especially given the event of the past six weeks. Policy rates should be left unchanged at 4.0%.
Elsewhere, the data calendar across Europe and the US is decidedly second-tier and quiet. If oil keeps falling, equities should finish the week on a positive note, temporarily at least.
Keep an eye on France’s first round of the presidential election runoff this weekend. It should narrow the second runoff on April 24 to President Macron and far-right candidate Marine Le Pen. A strong showing by Le Pen this weekend will send chills through Europe and be another reason to sell Euros and European equities on Monday.
Asian equities are mixed
Wall Street reversed intraday losses to post some modest gains overnight, with markets seemingly moving past the Brainard shock on Wednesday.
With oil prices easing after the details of the IEA reserve release came out, Wall Street staged a modest relief rally. The S&P 500 finished 0.43% higher, Nasdaq closed 0.06% higher, with Dow Jones finishing 0.25% higher. Futures on all three indexes are almost unchanged in Asian trading.
That has sparked a relief rally in parts of Asia, although not with the North Asian giants of Japan, China, and South Korea. The Nikkei 225 is flat for the day, with the Kospi down 0.10%. The Shanghai Composite is also down 0.10$ with the CSI 200 unchanged, and Hong Kong down 0.40%.
Currency markets ranging
Currency markets had a choppy night with decent ranges seen across the majors.
The dollar index closed 0.10% higher at 99.75 with USD strength persisting as US long-dated yields edged higher removing inverse yield curve nerves. The dollar index has climbed to 99.85 in Asia, and I expect weekend risk-hedging to be US Dollar supportive. A weekly close at these levels implies further gains targeting 100.50 next week.
EUR/USD eased 0.16% lower to 1.0880 overnight, falling another 0.14% to 1.0863 in Asian trading. A weekly close at these levels would be ominous for the single currency, with multi-year support close by at 1.0800.
USD/JPY edged 0.15% higher to 123.97 overnight, popping up to 124.25 Friday before retreating to 123.95. If seems when, and not if, USD/JPY will retest 125.00 now. That may have to wait until next week.
Oil prices ease in Asia
Oil prices traded in a $5.0 range overnight, but despite the overcaffeinated traders of the oil market raising their blood pressures intraday, both Brent and WTI ultimately settled almost unchanged. This is as good a reason not to get caught up in short-term market moves generally, as any. Brent crude fell 0.30% to $101.40 a barrel, and WTI finished 1.35% lower at $97.00.
Oil is softening in Asia Friday with regional buyers absent for a change from the open.
Markets fear deeper economic disruption, and by default, lower China energy consumption, weighing on prices. Brent crude has slipped through $100.00 a barrel, falling 1.50% to $99.85 a barrel. WTI has fallen by 1.50% to $95.55 a barrel.
Gold consolidation continues
Gold continued its sideways trading overnight. Despite the US Dollar and US yields edging higher, it finished 0.30% higher at $1931.50 an ounce.
Gold is comatose in Asia Friday, easing 0.10% lower to $1929.70. The yellow metal has confined itself to a $1920.00-1940.00/ounce range this week and is showing little proclivity to react to geopolitical events or moves in the US Dollar or US bond yields.
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.