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FOMC minutes settle nerves

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By Jeffrey Halley 

The FOMC Minutes, released overnight, settled a few nerves, temporarily signalling another couple of 50bps rate hikes in June and July before a pause in September. The dreaded 75bps hike threat was off the agenda and with some slowdowns in recent US data, notably in the housing market, it was enough to spur a relief rally of sorts in US equities and the US Dollar.

Once again, that translates to an uneven response by Asian markets thanks to China nerves.

Although Shanghai seems to be emerging from its covid-zero restrictions at a faster pace, Chinese Premier Li warned of economic headwinds and that the economy, in some respects, is faring worse than in 2020.

Thursday morning, the Bank of Korea hiked policy rates by 0.25%, as expected. There has been zero impact on either the Kospi or the Korean Won suggesting the move was well priced in by markets.

The Reserve Bank of New Zealand’s Governor Orr was also on the wires Thursday testifying before a parliamentary committee. Adrian Orr was hawkish and suggested that policy rates would need to remain elevated for an extended time to tame inflation.

It’s a pity he didn’t think the same nine months ago when he had rates at zero and was quantitatively easing into a clearly overheating economy.

Once again, the New Zealand Dollar has barely reacted and has come off its highs since Wednesday’s 0.50% rate hike. That implies that it is a US Dollar story and not a New Zealand Dollar story. Either that or markets are concerned New Zealand is heading to a recession.

Australian data on Thursday morning was mixed.

Building Capital Expenditure for Q1 QoQ fell by 1.70%, while Plant Machinery Expenditure rose by 1.20% for the same period. To a certain extent, it is old news with markets more focused on the RBA policy trajectory, the new government’s fiscal policy, and whether the employment of housing markets start to show cracks.

Singapore releases Industrial Production for April Thursday afternoon with the YOY number for April expected to slow to 3.40%. A softer number will increase slowdown fears in the City-state and weigh on local equities. Thailand’s Balance of Trade should continue to show a post-covid rebound as its borders reopen for tourism.

Europe closed

There are a number of holidays in Europe Thursday for Ascension Day. Heavyweights Germany and France are closed, as is all of Scandinavia.

In the US, Pending Home Sales will be closely watched given the weakness of recent existing and new home sales. That will overshadow second estimate of Q1 GDP and Initial jobless Claims.

Another ugly number will put the recession word back on Wall Streets’ lips and we could see another rush for the exit. Soft results from Gap and Dollar Tree could reinforce that sentiment.

Overall, it looks as if Thursday will be a day of consolidation for financial markets as they await fresh inputs, and ahead of personal income and expenditure data out of the US Friday evening.

UK markets will be waiting for the details to be released around the government’s windfall tax on energy companies.

Mixed day for Asian equities

Wall Street bounced overnight and the FOMC Minutes were less hawkish than feared. The relief rally saw the S&P 500 rise by 0.95%, the Nasdaq jump 1.51% higher, while the Dow Jones added 0.60%.

In Asia, we see the usual trend move from the main session with US futures easing slightly. S&P futures are 0.15% lower, Nasdaq futures have fallen by 0.40%, and Dow futures are unchanged.

The mixed picture continues elsewhere, with Japan’s Nikkei 225 edging 0.25% lower, while South Korea’s Kospi has edged 0.20% higher. Taipei is down 0.30%, but Singapore has gained 0.90% Thursday as local investors piled into banking and property heavyweights. Kuala Lumpur is just 0.15% higher, with Bangkok climbing 0.55%, and Manila adding 0.25%.

Australian markets are mixed. The All Ordinaries has fallen by 0.30%, while the ASX 200 is unchanged.

Oil markets slumber

Oil prices had another comatose session, barely rising from the day before. Nevertheless, both Brent crude and WTI have held on to all their recent gains, suggesting the weaker side is the upside in prices for now.

While China slowdown fears are receding in the minds of traders, for now, fears persist around the increasing tightness of the US diesel market, and not ruling out export controls has unnerved international markets, and rightly so. I expect prices to remain firm for the rest of the week, with the global data calendar fairly light.

Brent crude rose 0.60% to $114.35 overnight, where it remains in an equally quiet Asian session. WTI rose 0.40% to $110.70, adding just 20 cents to $110.90 in Asia.

Brent crude has resistance at $115.00 and $116.00, with support at $112.00. A rally through $116.00 could set up a retest test of my medium-term resistance at 120.00.

WTI is taking comfort from the White House stance and is sitting in a 108.00 to 112.00 a barrel range. Nevertheless, a topside breakout by Brent will drag WTI higher as well, allowing a test of the $115.00 to $116.00 resistance zone.

Gold weakens

Gold fell 0.70% to $1853.25 an ounce overnight, retreating another 0.45% to $1845.00 in Asia.

The true test of gold’s underlying strength will be maintaining gains in the face of a US Dollar rally. The fall by gold over the last 24 hours in the face of modest US Dollar strength does not fill me with confidence. Further US Dollar strength could see gold face one of its ugly downside shakeouts.

Gold has nearby support at $1842.00, followed by $1836.00. Failure sees the possibility of a mini-capitulation by longs that could reach as far as $1780.00. On the topside, gold has resistance at $1870.00, followed by $1886.00, its 100-day moving average.

 

Jeffrey Halley is Senior Market Analyst, Asia Pacific at 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.