By Jeffrey Halley
Readers should stop watching US stock markets for economic wisdom, as the price action overnight confirmed that part of the financial world has as little future insight as anywhere else.
Last week, US equities rallied on the back of the arcane logic that a US recession would mean lower terminal Fed funds rates and thus, was bullish for stocks, especially bombed-out tech stocks. That premise was boosted by weak Michigan Consumer Sentiment data last week.
Overnight, even weaker US Conference Board Consumer Confidence data provoked the opposite reaction, with US stocks plummeting.
The nervous outlook was helped along by the Richmond Fed Manufacturing Index plummeting to -19 overnight, joining the ugly numbers from the Dallas Fed the night before. Both the Richmond and Dallas Services Indexes also fell heavily overnight.
Equity investors continue to conjure up excuses to buy the dip, and I’m sure China cutting hotel quarantine to one week on Tuesday will elicit a similar reaction over there. Just remember, the virus only has to get lucky once in China’s covid-zero world.
If the equity markets hope versus reality keeps revealing itself to be a paper tiger, currency markets appear to be something resembling the adult in the room. With the stock market rallies last week boosting risk sentiment across asset classes, the US Dollar traced out a modest retreat as Fed hiking zeal was downgraded.
As equity markets decided that a recession isn’t good for stocks, after all, the US Dollar index managed to unwind almost all of last week’s retreat in just one session.
USD/JPY is back above 136.00 Wednesday morning, and the Indian Rupee took a pasting to a new all-time low. Notably, US yields barely moved overnight, so the Yen and INR have no excuse on that front.
It seems that markets are far more comfortable rushing into the apparent safety of the US Dollar at the first sign of trouble, and I suspect that it was only a few Asian central banks’ offers around that stopped the rest of USD/Asia from rallying.
The G7 Summit continues to be very busy with most attention focused on a mechanism to cap the price of Russian oil on international markets.
Reuters reported that talks with China and India about participating in the measures were “positive.”
I’m still unsure about how such a mechanism would work, it seems to involve ramping up insurance premiums for seaborne cargoes so high that it drops the net price Russia would receive. It would need to be high enough to keep Russia pumping, but low enough to entice China and India to sign on, and not open arbitrage opportunities that would upset the other OPEC+ members.
Game theory supercomputers will be burning the midnight oil. I’m not sure how that plays with Russia and China’s “unlimited” partnership mind you?
For the consumer this means very little price-wise, and that’s what the oil markets think as well, as Brent and WTI futures rose once again overnight. The sell-off early last week looks increasingly like a culling of speculative positioning and I won’t buy a material fall in oil prices until the backwardation in the Brent and WTI futures curves shrinks markedly. That didn’t happen last week.
OPEC and OPEC+ meet Wednesday and Thursday, but we should expect a rubber stamp. Given that OPEC+ can’t even meet its present targets, and hasn’t for a long time, I expect no bearish surprises.
Wednesday afternoon sees a slew of European business and consumer confidence data releases, as well as German Inflation for June.
All eyes and ears will be on the ECB summit in Portugal.
ECB Chair Christine Lagarde will be speaking again after hawkish remarks on Tuesday. The main event will be Federal Reserve Chair, Jerome Powell, who is also speaking at the summit.
As ever, markets will be dissecting his every word, looking for hints that the Fed is wavering on its hawkish bias as recessionary fears rise. They are likely to be disappointed, but it should be good for some intraday volume.
Oil rally continues
Oil’s march higher continued unhindered overnight, with Brent and WTI posting another set of impressive gains. A surprise drop by US API Crude Inventories by 3.8 million barrels helped the bullish momentum, with markets ignoring the rise in refined product stocks.
Disruptions to Libyan and Ecuadorian production were supportive, but Macron’s remarks Tuesday around Saudi Arabia and the UAE’s limited production capacity seems to have been the main driver.
The OPEC meeting Wednesday and Thursday is likely going to be just a rubber stamp exercise. More important will be the US official Crude Inventory data from the EIA, which is a double header release, including last week’s delayed release due to technical issues.
Brent crude rose by 2.40% to $118.15 overnight, but retreated by 1.30% to $116.70 a barrel in Asia Wednesday. WTI rose by 1.90% to $111.90 overnight, falling 0.90% to $111.00 in Asia. The price action seems to be in line with the general correction lower by the US Dollar in Asia.
Notably, Brent tested and held its rising longer-term support line, at $108.00, and its 100-day moving average (DMA) last week. That is a technical development that should be respected. Brent has support at 115.75, and then 111.50. Resistance here at $118.50, and then $120.00.
WTI’s technical picture improved markedly overnight after regaining its rising 2022 support line at $108.00 a barrel. It has resistance at $112.50 which clears the way for a retest of $116.00. Support is at $109.75 and then $108.00.
Gold is sleepless in Singapore
Gold remains the forgotten asset class, finishing 0.15% lower at $1820.00 overnight, before creeping up to $1821.00 an ounce in Asia Wednesday. A series of lower daily highs suggests that downside risks are increasing for gold prices, although it still lacks momentum to break out of the $1800 to $1900.00 range.
Gold has resistance at $1840.00, $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.