By Jeffrey Halley
Volatility remains elevated across every asset class, although a US holiday overnight meant a 12-hour break from the noise. The strategy of watching the rooster fight from the sidelines instead of getting involved remains the sensible one.
Financial markets continue to tie themselves in knots so complicated, that they would give even the saltiest mariner a headache, as they try to price in a recession-no-recession and its impact on asset prices.
It is a cover for an excuse to pick the low in the stock market, which is still struggling to cope with the transition back to the real world after being back-stopped by the world’s central bank for the past 20 years.
Other asset classes are trying to price in a recession as well.
US 10-year yields are now back to near 3.0% and I got this one completely wrong, I thought it would be nearing 4.0% by now. That said, the US yield curve from 2-year to 30-year continues to flatten dramatically, with only a 24 bps difference as of Friday.
We seem to be on the way to an inversion sooner than later, signalling a recession.
Oil fell by over 5.0% on Friday for much the same reason, but frankly, with Russian sanctions and OPEC’s production targets merely a fantasy on paper, we’re going to have to see things get a lot worse in the world economy to see Brent crude under $100 a barrel.
The crypto space is still in the Accident & Emergency department, waiting to be seen by a doctor. Bitcoin flirted with $18,000.00 over the weekend but held the crucial $17,500.00. The dead cat bounce to $20,000.00 isn’t inspiring confidence with another crypto lender halting withdrawals, deposits, and trading on its platform on Monday.
Cryptos have proven to be neither a hedge for deflation, stagflation, or inflation, even gold has done a better job and that’s saying something.
Perhaps the biggest surprise is that despite US yields tanking last week on recession fears, USD/JPY remains near 136.00. That is becoming a dangerous trade, especially if US 10-years fall below 3.0%.
Still, the US Dollar remains firm across the board, with the modest recovery in risk sentiment recently not translating into material strength in Asia currencies or major currencies versus the greenback.
In fact, looking at the likes of the Euro, Yen, Aussie or Won, you might argue the opposite. The price action in the currency markets is perhaps a less-than-subtle warning to temper those bullish animal spirits in other asset classes.
US Treasury Yellen and China Vice-Premier Liu held a construction phone call Tuesday morning and the market is alive with speculation that US President Biden will cut tariffs on a swath of Chinese goods this week to lower inflation.
Following on from an impressive recovery by US manufacturing PMIs last week, China’s Caixin Services PMI leapt massively to 54.5 Tuesday morning for June, a giant recovery from May’s 41.4.
Japan’s Jibun Bank Services PMI for June also rose to 54.0 from 52.3 in May. Both China and Japan are emerging from varying degrees of virus restrictions, but the strength of the China’s PMI recovery is a surprise. Whether it can last is another matter.
China’s covid-zero policy is not one and done and President Xi said as much last week. Already, a flare-up of virus cases elsewhere has led to some restrictions being reimposed.
Another central bank facing the music Tuesday is the Reserve Bank of Australia.
Home Loan and Building Permits soared Monday, as did ANZ Job Advertisements.
S&P Global Services PMI for June edged only slightly lower to 52.6, with the Composite PMI also printing at 52.6 from 52.9 last month. The lucky country remains far too lucky it seems, and despite a 50bps hike last month, the battlers aren’t going down without a fight.
Another 50bps is priced in for the RBA Tuesday, and if they stay on the fence and do just 25bps, the Australian Dollar is going to have a very bad day.
Wednesday sees the release of May JOLTs Job-Opening data, expected to still be just above 11.0 million jobs. JOLTs Job Quits should come in around 4.4 million. That is hardly consistent with a US economy on the verge of a recession although some may argue that May is now history.
Junes ISM Non-Manufacturing PMI, Activity, Employment, New Orders and Non-Manufacturing sub-indexes might take the heat out of a high JOLTs number unless they surprise to the upside.
Later that evening, the FOMC Minutes are due to be released, although I would be surprised if the committee is blinking on its inflation fight yet. That would create an intolerable credibility gap that already has a few holes below the waterline after the past 12 months.
Before we know it, Friday is here and another US Non-Farm Payrolls release for June. Time flies when you’re getting whipsawed every day.
Jobs are expected to fall from last month’s monster 390,000 print to a still-healthy 270,000. Maybe there is some risk of downward back-month revisions, but that forecast is still not consistent with a US economy on the verge of a big slump.
Oil steady in Asia
Oil continued to recover from Thursday’s recession-fear sell-off as the supply-demand balance in the real world continues to underpin prices in the futures market. Brent crude rose by 2.15% overnight, easing 0.35% to $113.40 a barrel in subdued Asian trading. WTI rose by 1.90% to $100.55 overnight, easing by 0.30% to $110.10 in Asia.
Notably, Brent’s retreat last week saw its ascending 2022 trendline support at $108.50 tested and held in textbook fashion. The support line is at $109.00 Tuesday and we can reasonably assume that Brent crude’s downside is limited unless we get a couple of daily closes below it. That would open a deeper test lower, potentially extending to $100.00.
On the topside, $120.00 looks unlikely to break thanks to global recession nerves, unless we get more negative developments related to Russia.
WTI looks the more vulnerable of the two, as recession nerves rachet up in the United States. Again, US data this week has upside risks in this respect.
WTI is ranging each side of its 2022 ascending trendline support, Tuesday at $108.50 a barrel. A close below the 100-day moving average at $106.95 likely signals a test of $104.00 and potentially $100.00. Resistance lies at $112.00 and $114.00 for now.
Gold underwhelms again
Gold fell to $1784.00 an ounce last Thursday in what looked like a series of stop-losses going through the market after $1800.00 failed. It immediately recouped those losses and has been trading sideways around $1810.00 since then. Gold has risen slightly to $1811.00 in Asian trading Tuesday.
Overall, gold bugs will have taken a modicum of comfort that the fall below $1800.00 was short-lived, but the ensuing rally is uninspiring, to say the least. It suggests that any further US Dollar strength this week could see the downside tested once again as it refuses to react positively to the flattening and move lower by the US yield curve. The series of lower daily highs traced out over the last month continue to warn of the path of least resistance for gold.
Gold has resistance layered at $1820.00, its sloping downtrend line, then $1840.00, $1860.00, and $1880.00, the latter appearing an insurmountable obstacle. Support is at $1784.00 and then $1780.00. Failure of the latter sets in motion a much deeper correction, potentially reaching $1700.00.
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.