By Jeffrey Halley
Federal Reserve Chairman Jerome Powell’s semi-annual testimony on Capitol Hill was the centre of attention overnight.
Speaking to Congress on Wednesday, Powell finally dispensed with soft landings, describing them as challenging, and instead said that a recession is “certainly a possibility.”
That should have been enough to spark a somewhat counterintuitive risk sentiment rally, as Fed hiking expectations were dialled back, but instead, we got a mixed response as Powell asserted, quite forcefully, that soaring inflation had to be brought back to earth.
That left markets in somewhat of a no man’s land.
US equities were clearly dying for any excuse to hit the ‘buy’ button. But while Powell was talking recession possibilities and being “nimble” from one FOMC meeting to the next, the reality that a recession probably isn’t great for stocks tempered animal spirits.
US yields flopped overnight, notably at the long end, which is a bit of a concern, given the market’s infatuation with inverse yield curves. The fall in yields was enough to stop the rot in equities, leaving them roughly unchanged, but the US Dollar fell slightly versus the Euro and Yen.
The Bank of Japan would have been breathing a sigh of relief as lower US yields took USD/JPY back below 136.00, but in the Asian EM space, regional currencies generally weakened.
Notably the Korean Won, with a high beta to the health of the US economy, had a tough day at the office. The Australian and New Zealand Dollar, both global sentiment indicators like the Won, both finished the day lower as well.
Gold, of course, did nothing, while in the crypto space, Bitcoin had another almost unchanged day, hovering once again, just above $20,000.00.
Depending on your point of view, Bitcoin is tracing out a major bottom in prices before the new dawn, or it is consolidating a dead cat bounce before heading lower.
To help readers understand my point of view, here is a story from Thailand overnight. https://www.nationthailand.com/in-focus/40016806. Basically a chap in Bangkok robbed a gold store to cover his crypto losses. I’m humming “Ironic” by Alanis Morissette.
We have another day of Powell testimony on the Hill Thursday evening, so stand by for more intraday choppiness and analysis paralysis of his every word.
In Asia, we have a busy day ahead. South Korean PPI YoY for May held steady at 9.70%, although the MoM number fell to 0.50%. Australian Manufacturing and Services Flash PMIs for June were steady at 55.8 and 52.6, respectively.
Japan Jibun Bank June Flash Manufacturing PMI edged lower to 52.7, but the Services PMI rose from 52.6 to 54.2, quite the surprise. I am putting that down to a gradual reopening of borders and government stimulus.
S&P Manufacturing and Services PMI releases from France, Germany and the Eurozone should hold steady, or increase slightly, from April, due to the knock-on effects of China’s covid-zero reopening.
Powell’s testimony aside, Initial Jobless Claims could be interesting if the weekly number jumps sharply higher Thursday night. That will reinforce recession fears although frankly, I would need to see the monthly JOLTS number plummet from 11.50 jobs to confirm that.
US API Crude Inventories leapt higher to 5.60 million barrels overnight, quite a surprise. More surprising is that oil didn’t move lower because of it, having plummeted in Asia.
If Thursday night’s official US Crude Inventory data shows a huge increase as well, instead of the forecast modest drawdown, we could see some more short-term pressure on prices, especially WTI.
Oil prices edge lower in Asia
Oil prices tumbled in Asia Wednesday, but managed to recover some of their losses throughout the rest of the day. Nevertheless, oil still recorded a substantial loss for the session.
Brent crude finished 4.0% lower at $110.00 a barrel, while WTI finished 4.75% lower at 104.40, with the Brent premium over WTI widening substantially.
In Asia, oil prices have started moving lower once again, Brent crude and WTI losing 1.10% to $108.90 and $103.20, respectively.
Both Brent and WTI are still heavily in backwardation, suggesting that prompt oil supplies remain as tight as ever, even as prices across the curves fall.
Increasing recession fears appear to be prompting a culling of heavy speculative long positioning in both contracts, even as in the real world, energy tightness is as real as ever. WTI’s underperformance can be laid at Powell’s overnight comments, President Biden calling for a suspension of federal fuel taxes, and the surprise jump to 5.6 million barrels by the overnight US API Crude Inventories.
Still, even the US API number didn’t provoke a heavy negative response. Part of this could be that the US issue isn’t enough crude, it is enough crude refining capacity, which is running at an unsustainable 96.0% across the country.
If the official US Crude Inventory number jumps like the API, WTI may come under more sustained selling pressure than Brent.
The technical picture is interesting. Brent tested its 100-day moving average at $108.45, and the 2022 support line at $107.30 overnight, but managed to bounce back to $110.00. It may only be a reprieve, though, as oil prices start moving lower in Asia once again. A daily close under $107.30 implies a deeper move potentially reaching $100.00.
WTI’s technical picture is much softer, having closed below its 2022 support line at $106.30, and its 100-DMA at $105.50 overnight. Failure of its overnight low at $101.50 could trigger a capitulation by speculative longs that moves WTI under $100.00.
How well oil performs likely relies on how many times Jerome Powell says “recession”, and what the headline and gasoline stocks numbers are from the US Crude Inventories data set.
Although I have never subscribed to the panic-mongering predictions of $150.00 and $200.00 a barrel of oil, I remain skeptical as to whether this is a structural turn in oil prices or just a culling of massive speculative positioning.
As such, for now, oil will behave much like inflation, topping out as the year goes on, but not really falling by that much. A $100.00 to $120.00 a barrel medium-term range seems as sensible an outlook as ever.
Gold range continues
There isn’t much to say with gold, a slightly softer US Dollar saw gold edge higher by 0.26% to $1838.00, while Asia has seen it drift 0.26% lower to $1833.00 an ounce, leaving it in its usual nil-all draw.
The yellow metal traded in a $22.00 range overnight, but it is telling that it failed ahead of $1850.00 and finished almost unchanged once again. Until we get a material directional move by the US Dollar, it seems unlikely that gold will sail out of the equatorial doldrums.
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.