By Jeffrey Halley
The bear market rally looks well and truly back on track, thanks to one of the stranger things I have seen in 2022; Netflix losing only 1 million subscribers in Q2 instead of 2 million, and forecasting an additional 1 million subscriber additions in Q3.
Minus one plus one equals um, zero, the last time I looked. But it is not for me to second guess the bullish herd mentality of the equity market, especially as they continue to grapple with the reality that 20-years of central bank monetary puts have come to an end.
The Netflix results were apparently backstopped by ‘Stranger Things 3’ being released.
I’ll not argue with that as I love Stranger Things and remember the 80s and all the music very well. Mrs Halley is less enamoured with season 3, complaining about the slow pace and the convoluted plot threads. That’s what makes a market, I suppose. I have a feeling that omicrons’ rampage across the world, has left many subscribers working or isolating from home, delaying to push the cancel subscription button.
Either way, with the Street hungry for good news to feed the buy-the-dip appetite, Wall Street has a huge day, which saw investors piling back into big tech as well, lifting the Nasdaq by over 3.0%.
Peak inflation is as good a reason to pile into equities and other risk sentiment asset classes as any. We could be near peak inflation, but any hopes that it is suddenly going to fall quickly are naïve, far more likely is that it stays elevated for quite some time to come.
I heard more peak inflation noise being bandied around, with Reuters reporting that Nord Stream 1 natural gas flows from Russia to Germany would resume this week as scheduled.
Additionally, hopes were raised around negotiations to ease Russia’s seaborne blockade of Ukrainian food exports.
The report did mention that the flows, when they resume this week, will not return to previous levels, and by this, we mean its 160 million cubic metre-per-day capacity.
Vladimir Putin, on his return from fellow economic powerhouse, Iran, is already setting the scene for reduced flows resuming, blaming faulty pumping units again, according to Reuters. They also reported that Mr Putin said in Iran that “not all issues had been resolved yet” vis-à-vis Black Sea grain exports.
So, Joe Biden left Saudi Arabia empty-handed on commitments by the Saudis to pump more oil, and Vladimir Putin is saying Nord Stream 1 gas flows will remain low and that Black Sea grain shipments have “issues” to overcome. And markets are pricing in peak inflation with a precipitous drop in H2 2022. I do admire the optimism.
I am yet to be convinced that we are seeing anything more than a bear market rally at the moment. Europe’s day of reckoning may come earlier when Nord Stream 1 is due to come back on stream on Thursday. For the rest of world, that may come at next week’s FOMC policy meeting.
Over in China, the mortgage payment strike by disgruntled apartment buyers is grabbing the headlines.
The government is seemingly moving to push the funding gap to beleaguered developers onto local governments and state policy banks, meaning the fallout so far has been limited on equity markets.
Perhaps more concerning is new Covid-19 cases reached 1,012 in China on Tuesday, according to official data. A flesh wound anywhere else, but in China’s covid-zero world, a cause for concern around potential new lockdowns.
Covid-zero means covid-zero in China, not lock down Shanghai and Beijing once and done.
In the afternoon, German PPI is expected to rise to an eye-watering 33.90% YoY for June, as hints of a 0.50% rate hike by the ECB on Thursday gave the Euro a boost overnight.
The United Kingdom releases inflation for June, expected to climb to 9.30% YoY, with Core Inflation at 5.80%, PPI rising to 23.20% and Retail Prices rising 11.80%.
With UK employment data surprisingly strong on Tuesday, some serious pressure is going to fall on the Bank of England now to accelerate rate hikes.
US Housing Starts for June edged slightly lower overnight, and tonight we receive Existing Home Sales, which are expected to fall slightly to 5.38 million. In this environment, a bigger fall as rate hikes bite, is likely to be interpreted as peak inflation/ less Fed rate hikes equals buy equites and sell US Dollars.
US Dollar correction continues
With risk sentiment soaring in US equity markets overnight, the US Dollar bull market correction continued unabated, with losses versus the DM and EM space overnight. The dollar index closed 0.68% lower at 106.68 overnight, easing another 0.15% to 106.53 in Asia, but traded in a very choppy 115 point range between 106.90 and 108.05.
EUR/USD rallied through 1.0200 on Tuesday, finishing 0.80% higher at 1.0225. Asia edged higher to 1.0245. The technical picture indicates only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0120 and 1.0000.
The single currency faces serious event risk in the latter half of the week, firstly from the ECB policy decision, and secondly, from Russian natural gas flows which are due to resume after pipeline maintenance.
Oil prices explode higher
Brent crude and WTI prices continued higher overnight as sentiment in markets swung to peak inflation once again, and concerns persisted around the resumption of Russian gas supplies. Brent rose 1.50% to $107.25 overnight, before edging lower to $106.40 in Asia. WTI rose by 1.50% to 103.35 a barrel overnight, moving 0.70% lower to $102.65 in Asia.
Brent has nearby resistance at $107.25, followed by $108.00 a barrel. Support is at $103.65 and $99.50. WTI has support at $99.35 and $96.00, with resistance nearby at $104.00 and $105.00.
Gold remains unimpressive
Gold had another unimpressive session overnight, failing ahead of $1720.00 intraday, but closing almost unchanged at $1711.00 an ounce, before edging lower to $1709.00 in Asia.
The yellow metal’s inability to hold onto even modest rallies in prices, even as the US Dollar falls and US bonds trade sideways, is a major concern. Risk remains heavily skewed towards the downside.
Gold has initial support at $1700.00, followed by the more important $1675.00 zone. A sustained failure of $1675.00 will signal a much deeper move lower targeting the $1450.00 to $1500.00 regions in the weeks ahead. Gold has resistance nearby at $1725.00, and then $1745.00.
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.