By Jeffrey Halley
US equities struggled for direction overnight, with the S&P 500 and Nasdaq almost unchanged, while the Dow Jones eked out a small gain.
The outcome is hardly surprising with Wall Street tying itself up in knots and whipsawing itself over the last week under the deluge of inputs from the geopolitical, central bank and data space.
The emerging theme seems to be that higher-for-longer inflation will see central banks continuing to tighten economies into a recession, before having to reverse course again into 2023. Something seemingly hinted at by both Jerome Powell and Christine Lagarde at the ECB forum overnight.
US Bond markets are seeing it that way, with short-dated yields holding steady while yields in the longer part of the curve headed downwards once again. It might also be that longer-duration bonds are seeing haven inflows as investors give up on the histrionics of the equity market and lock in semi-decent long-duration yields.
Amongst all of this, the US Dollar rallied overnight, a somewhat counterintuitive move given that longer-dated rate expectations are being tempered on recession fears.
The greenback rallied versus the G-20 space, as well as Asian currencies ex-China, and even USD/JPY continued its rally. That suggests that we are seeing a broader move to safety, benefiting both the US Dollar and depressing US yields.
Having said that, it does look like a few regional central banks are selling a few more US Dollars into the market on Thursday to smooth the Asian FX selloff.
With Wall Street sitting on the fence, Asia was left to its own devices Thursday with local data dominating price moves, especially in the equity space.
China equities had a negative start to the day, but have since bounced. China’s President Xi reiterated the government’s commitment to covid-zero on Wednesday, a risk I have been telegraphing constantly.
However, both the official Manufacturing and Services PMIs have staged a handsome reopening bounce on Thursday. June Manufacturing PMI climbed to 50.5, while the Non-Manufacturing PMI leapt to 54.7 from 47.8 in May. The climb above 50 into expansionary territory has put a floor under Mainland equity markets for now.
South Korean data has also been pretty impressive.
Construction YoY for May jumped 8.20%, Industrial Production rose 7.30%, and Manufacturing also rose 7.30%. All were well above forecast.
Business Confidence slipped to 83.0, suggesting clouds ahead, while Retail Sales YoY for May rose only 0.70%, with the MoM slipping by -0.10%.
Overall, demand remains robust for South Korean products internationally with the sub-sectors also broadly recovering, but the South Korean consumer continues to grapple with cost-of-living increases. A reopening by China should boost this data in the coming months and partly explains the Korean Won unwinding some of its overnight losses on Thursday.
In contrast, Japanese data was a mixed bag.
Industrial Production MoM in June slumped 7.20%, but the YoY number fell -2.80%, still better than May’s -4.90% tumble. Once again, China’s restrictions continued to impact the numbers but assuming they stay covid-zero, could provide a positive tailwind for Japan’s exporters and manufacturers in the quarter ahead.
If the pattern in US bond markets continues, i.e., a rotation to an inverse yield curve as a US recession and Fed rate cute in 2023 are priced in, and Japan’s modest recovery continues, the end is in sight for the USD/JPY rally. The 140.00 to 145.00 zone should remain intact.
Equities lower down under
Australian equity markets were lower on Thursday, with the Australian and New Zealand Dollars pummelled by negative sentiment overnight. The Euro also had a torrid night after high German and Spanish inflation and a hawkish Lagarde.
Although the Chinese PMI data should be a positive for Australian markets, Singapore’s iron ore futures on China contracts have gapped lower by 6.0%. That could be a knock-on impact from President Xi’s covid-zero affirmation, but resource-heavy Australian markets don’t seem to like it.
In the crypto space, Bitcoin is flirting with the $20,000.00 level once again as small exchange delays reopening to withdrawals, and credit concerns in the sector rise once again.
Although the $20,000.00 level may have some psychological impact, the June 18 lows just ahead of $17.500.00 is the real level now. The charts have resistance at $22,000.00, but it really needs to regain $28,000.00 to move out of the danger zone.
Failure of $17,500.00 signals another move lower to around $12,500.00.
In an industry that conjures up 17.0% returns out of nothing, this weekend’s trading session looms as potentially emotional.
German Retail Sales are released Thursday afternoon, as well as Import Prices. Retail Sales are expected to rebound with Import Prices remaining above 31.0% YoY.
Wednesday’s lower inflation numbers were distorted lower by the government’s temporary energy subsidy so don’t be fooled, currency markets weren’t. The Retail Sales data has downside risks and could keep the pressure up on the Euro. French inflation data and UK GDP Growth on Thursday could keep the bad news flowing.
The evening’s most closely watched data point will be May’s US Personal Spending and Personal Income, along with the Core PCE Price Index.
May data almost seems like old news at the moment, but it is closely watched by the Fed. Income growth is expected to hold steady, while spending is expected to fall. That would give the lower Fed terminal rate club a reason to buy equities, but there are plenty of combinations of the three data points that could drive direction either way.
Wall Street is unlikely to have another inconclusive close like the one overnight. And don’t forget the month and quarter-end rebalancing flows.
Oil retreats on delayed EIA data
Oil prices reversed course overnight as the delayed US official EIA crude inventory data was released. With two weeks of data released at once, net crude inventories fell by 3.15 million barrels, but gasoline inventories rose by 4.13 million barrels for the fortnight.
Brent crude had tested $120.00 intraday, but fell back to finish 2.15% lower at $115.60 a barrel. WTI tested $114.00 intraday, but also slumped to finish 2.15% lower at $109.55. In Asia. Both contracts have added 0.40% to $116.05 and $110.00.
Although OPEC+ meets on Thursday, the meeting is likely going to be just a rubber stamp exercise.
Looking under the bonnet of the two-week EIA release, some of the headline numbers flatter to deceive. The net drop in crude oil inventories was flattered by SPR releases, while the gasoline stock jump is because US refineries are running at over 95.0% capacity. This is an unsustainable run rate in the medium-term and the underlying numbers suggest the supply situation is as challenging as ever.
With Ecuadorian and Libya production plummeting and no progress in Europe/Iran nuclear talks, any downside in oil prices should be limited.
Brent crude has support at 116.00, followed by 111.30, the 100-day moving average (DMA) at 109.80 and then the rising 2022 support line, at 108.30. It has resistance at $120.00 and $121.25.
WTI has support at $109.25, then its rising 2022 support line at $108.00, followed by the 100-DMA at 106.50. It has resistance at $112.50, $114.00, and then $116.00.
Gold underwhelms again
Gold staged an intraday rally towards $1833.00 overnight, but it once again ran out of steam as US Dollar strength swept the markets on haven inflows. That reversed the weak rally and sent gold to a weak close, falling 0.12% to $1818.00 an ounce.
Gold continues to trace out lower highs which suggests that risks are increasing of a large downside move. The yellow metal has seen no haven inflows, which seem to all be heading into US Dollars and the US bond market.
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.