By Jeffrey Halley
‘Gone in 60 Seconds’ was a 2000 movie with Nicholas Cage stealing 50 high-end cars in three days. It is actually a remake of my favourite 1974 version, where the “hero” is set a much more reasonable target of stealing 48 cars in five days. The premise is that from start to finish, one must break into the car and be driving it off (preferably in a cloud of tyre smoke), within 60 seconds.
Gone in 60 seconds is what the equity market is looking like on Wednesday, with the outsized overnight rally on Wall Street, disappearing in a cloud of smoke Wednesday morning, with no reason why.
Although the S&P 500, Nasdaq and Dow Jones all finished over 3.0% higher overnight, US index futures headed south Wednesday morning, and Asian equities completely ignored Wall Streets’ overnight rally.
The term “bear market rally” comes to mind, and given that currency markets didn’t move overnight, and US yields rose, it seems as if Wall Street came back to work with a post-holiday glow, especially as equities did well worldwide over the US long weekend.
On top of that, US existing home sales continued to ease; maybe the FOMO gnomes of Wall Street felt it meant less Fed hiking? It seems that markets just can’t shake off fears of intensive central bank tightening and recession nerves.
It’s another slow day for data internationally.
UK Inflation is released, with the headline YoY for May expected to rise to 9.10%. A Bank of England member came out on the hawkish side of the fence, even if it meant a recession. That will be of little solace to the pound, which held steady overnight.
Britain is in the throes of a winter of discontent over the cost of living, with a huge rail strike disrupting the country this week. Anyone wondering why stagflation is fait accompli for central banks, need only look at Britain. Do nothing and expect protests on the streets, tighten policy and cause a recession.
With that in mind, all eyes will be on Fed Chairman Jerome Powell Wednesday night and Thursday, who has the unenviable task of semi-annual testimony on Capitol Hill.
Markets will be standing by to dissect every word the poor man utters for clues on the direction of monetary policy. The FOMO gnomes of Wall Street will be desperately looking for signs he is blinking on tightening, so that they can rush back into their buy-the-dip happy place.
On the side-lines, oil slumped by 3.50% in Asia, with no notable reason for it.
Maybe some large positions are being shopped, or perhaps it is a reaction to expectations that US President Biden will announce a suspension of Federal fuel tax. That’s about 19 cents a gallon, making it a drop in the ocean for gasoline prices. Maybe 3.50% of oil futures prices is equivalent to that?
In the equity space, South Korea Kospi is getting an outsized beating Wednesday. The Kospi is down 2.0%, rather a surprise after the successful test of a rocket to launch satellites on Tuesday.
More likely it seems, are reports of two monkeypox cases in South Korea. The pandemic has left markets frazzled about viruses.
We should also be paying attention to Europe right now, mostly the energy space.
Russian natural gas flows have slumped with each side blaming the other. Countries across Europe are activating emergency energy plans, including reactivating coal-fired power plants.
Even the greens are finally admitting that a clean energy transition is incompatible with the short-term goals of a war-time economy.
If Russian gas supply continues to fall, we can pencil in a European recession if they hold their nerve with Putin. The Euro is likely to make its way towards parity shortly thereafter.
A recession in Europe will be another headwind for worldwide growth and give the ECB a few more stagflation headaches.
Following Powell, we also have the Fed’s Barkin, Evans and Harker speaking Wednesday evening.
Barkin was particularly hawkish on the wires overnight, which made the Wall Street rally even more surprising.
We also have a 20-year bond auction and the bid-to-cover ratio will be interesting.
If all four are aligned as the four riders of the monetary policy apocalypse, Tuesday’s Wall Street equity rally looks more and more like gone in 60 seconds.
Oil slumps in Asia
Oil prices probed the topside intraday overnight, but gave back those gains with Brent crude almost unchanged at $114.60 a barrel, and WTI edging 0.55% lower to $109.65.
In Asia, both contracts slumped, with WTI notably, falling through longer-term support. Brent has fallen 3.40% to $110.75, and WTI has fallen by 3.80% to $105.50.
President Biden’s expected announcement of a temporary suspension of Federal fuel taxes has probably prompted the selling, and the US-centric WTI contract is leading the charge lower.
From here, a more likely outcome is a widening of the Brent premium over WTI. Brent is the internationally traded benchmark and in the real world, supplies remain as tight as ever.
WTI has fallen through its six-month support line at $106.30 a barrel and is attacking the 100-day moving average (DMA) at $105.40. A daily close below $105.40 would be a very bearish technical development for WTI.
Brent’s 100-DMA is at $108.40, with the six-month support line at $107.30. Failure of the latter would also be a powerful bearish technical signal, although Brent remains well clear of both levels.
The contortions of the futures market are not representative of the real-world situation. As such, we shouldn’t get our hopes up for sub-$100 oil just yet.
Gold range continues
Although gold’s interminable range-trading continued overnight, the falls of the past three sessions hint that any upward momentum for the yellow metal is doing an Elvis and is leaving the building. Gold has been grinding lower, even as US yields and the US Dollar trade sideways.
Overnight, gold edged 0.30% lower to $1833.00 an ounce, falling another 0.33% in Asia to $1827.00 as US Dollar strength returns. A bout of US Dollar strength post-Powell testimony could finally set up a meaningful test of the bottom of the recent range around $1800.00.
Gold has resistance at $1860.00 and $1880.00, the latter appearing an insurmountable obstacle for now. Support is at $1805.00 and then $1780.00. Failure of the latter sets in motion a much deeper correction, potentially reaching $1700.00.
On the topside, I would need to see a couple of daily closes above $1900.00 to get excited about a reinvigorated rally.
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.