By Jeffrey Halley
Thursday is shaping up to be a frisky day for financial markets, but nothing was more important than the 6am news in Berlin that the official Nord Stream 1 maintenance period finished, and the natural gas from Russia resumed.
Nord Stream accounts for more than a third of Russian gas exports to the EU, which at full capacity transported 55 billion cubic metres (bcm) a year of gas under the Baltic Sea and has been offline since July 11.
President Putin has already signalled that flows will remain below capacity, and if they resume at 40%, the rate before the shutdown, that is probably the best Europe can expect.
The European Union has already told member states that they will need to cut gas usage by 15% until March next year, and if flows are even lighter than 40%, the economic picture for Europe, and the UK, darken considerably.
European markets have piggybacked the bear market US equity rally this week.
However, they ran into a brick wall on Wednesday as Euro-reality set in. Notably, EUR/USD failed ahead of 1.0300 and has fallen back to 1.0200.
It isn’t just natural gas that is capping Eurozone risk; Italy’s government looks to be in imminent danger of collapsing after Mario Draghi won a non-confidence vote late Wednesday. It was a trojan horse, though, as the three largest members of the coalition boycotted the vote.
PM Draghi is expected to resign again, triggering new elections. It also imperils disbursement of further multi-billion tranches of the covid-recovery fund and threatens Italy’s reform path, and by extension, will probably push BTP yields higher.
The European Central Bank is scheduled to announce its latest monetary policy decision in the afternoon. It will be a ‘damned if you do, damned if you don’t’ sort of meeting as they look across Europe’s wartime stagflationary economy and the ability of the Italians to shoot themselves in the foot so regularly since 1945.
We can expect a token 0.25% hike to an inflation-slaying 0.25%, with the deposit rising to an equally frightening um, -0.25%. I have always said that something has been rotten in the state of Denmark with the EU since the global financial crisis of 2007-2009.
While the rest of the world has many to squeeze in two or three economic cycles, Europe has basically sat at zero to negative interest rates since 2008 and has been quantitatively easing in some shape or form since then.
While the rate hike is a Hobson’s Choice for the ECB, more attention is likely to be focused on the ECB’s anti-fragmentation tool to maintain government bond spreads between member states.
With Rome pulling an Italian Job on the Eurozone at the worst possible time, it may be needed sooner rather than later. If markets are underwhelmed with the toolbox and Christine Lagarde’s press conference and rate outlook, European equities and the Euro may also be underwhelmed.
The US equity rally continued overnight, thanks to the zero-sum game in the Netflix results and even large American airlines reporting profits; who would have thought?
Tesla’s results were also OK, although they’ve taken a bath selling their Bitcoin, but who hasn’t?
Interestingly, Existing Home Sales slumped by -5.40% MoM for June as rate hikes bite. Equity markets ignored this as they are want to do, but it speaks volumes that although US yields were nearly unchanged, the US Dollar rallied quite impressively.
And not just versus a running-on-empty Euro either. Sterling was Trussed-up and beaten down, as was AUD and NZD etc, and Asian currencies also retreated.
News that both Alphabet and Microsoft are “assessing hiring requirements” has sent US futures lower in Asia, while the Asian Development Bank downgraded its growth forecasts yet again while raising its inflation outlooks.
The Bank of Japan announces its policy decision Thursday. The BOJ is expected to temper its growth and inflation forecasts into 2023, and we can rightly assume there will be no change to its current ultra-easy settings. With US yields having settled down this week, the long USD/JPY trade has lost some momentum for now as well, likely easing some internal bureaucratic pressures.
The Turkish central bank will also announce its latest policy decision in the afternoon. That’s always worth buying some popcorn and taking a comfortable seat as we watch Erdogan-omics Part 10. More fun than a John Wick sequel and with a higher economic body count. Expect no change.
South Africa also announces, and there I expect a far-more-sensible 0.50% hike to 5.25% to occur, with upside risk. That probably won’t be enough to relieve the pressure on the Rand, and I expect this story to play out more in H2 across the EM and Asia FX space as the Fed keeps on hiking.
Oil prices steady
Brent crude and WTI were steady once again overnight, with US official crude inventory data having little impact on prices, although the rise in gasoline inventories by 3.5 million barrels may have capped prices intraday.
European gas concerns look to be supporting the downside for now. Another factor behind the lack of volatility could be that volatility in July has bordered on the absurd at times, and that may have prompted traders to move to the sidelines.
Brent has edged 0.40% lower to $106.05 a barrel in Asia, with WTI moving 0.90% lower to $98.90 on futures markets. Brent has well-denoted resistance at $108.00 on the charts and then 111.00. It has support at $104.00 and $101.00, and then 97.50, the 200-DMA. WTI has support at $98.25 and $96.00, followed by $94.30, its 200 DMA. Resistance is at $100.00, followed by 104.00.
Gold’s moment of truth draws near
If any asset class yells that the risk sentiment rally could be a very false dawn, it is gold. Having completely failed to rally on material US Dollar weakness this week, it has edged even lower to longer-term support overnight and Thursday morning.
To say that gold’s price action is underwhelming is an understatement, and it appears to be facing imminent material downside risks if the technical picture is to be believed.
The yellow metal fell by 0.86% to $1697.00 overnight, easing by another 0.30% to $1691.00 an ounce in Asia Thursday morning. It is now just above longer-term support around the $1675.00 zone. A sustained failure of $1675.00 will signal a much deeper move, targeting the $1450.00 to $1500.00 regions. Gold has resistance nearby at $1720.00, then $1745.00, now a triple top.
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.
