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End of a messy week

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By Jeffrey Halley        

Volatility was the winner overnight, with a multitude of data points and events leaving market price action messier than a teenager’s bedroom.

The European Central Bank surprised markets by lifting policy rates by 0.50%, ending over a decade of negative interest rates. The Euro has already been rallying, but its gains were tempered by the collapse of the Italian government, and post the ECB meeting, German/Italian bond spreads started widening noticeably.

The ECB’s Christine Lagarde said policy decisions would be made on a meeting-by-meeting basis going forward, tossing their forward guidance out.

More importantly, Russian gas started flowing back down the Nord Stream 1 gas pipeline on Thursday, albeit at flows of 40% of capacity before it closed for maintenance. Still, when it comes to Europe and energy, any news is good news as fears had risen that Russia would leave it turned off.

EUR/USD had already started rallying on this news, which was likely the major reason that oil prices fell overnight in another 5.0% intra-day range session.

European equities were far more mixed, with some stark winners and losers. For that, we can thank the Italian political situation, widening North/South bond spreads, and the ECB’s 0.50% rate hike.

In the US, a multi-month high for US Initial Jobless Claims and a soft Philly Fed Business Conditions Index spooked bond markets and saw US yields move lower overnight. The US curve now looks bowl-shaped after US 10-years fell by over 15 basis points.

That saw the US Dollar weaken as well, as US recession fears also ramped up. I must say, Initial Jobless Claims rising by 7,000 to 251,000 does seem like clasping at straws.

Wall Street powers up

Wall Street liked what they saw, rallying powerfully once again overnight.

Lower bond yields and some solid earnings results keep sentiment perky during the main session.

That has changed a bit after hours after weak Snap. Inc results saw their stock price plummet by 25%. That dragged down the other social media-esque giants.

As Meta found out earlier in the year, markets will severely punish richly valued tech stocks at the first sign of trouble, and there is now some risk to the broader equity markets from the FAANGS yet to report.

Friday morning, Australian and Japanese Manufacturing and Service PMIs came in on the soft side, along with Japanese Inflation, which edged lower in June YoY to 2.40%.

We have a bunch of S&P Global PMIs still to come for the European heavyweights, the Eurozone, and the US in the day. It looks like they will all have downside risks for obvious reasons, but I am not sure it will be enough to deter the FOMO gnomes of Wall Street.

The FOMC meeting next week will be the defining moment for markets in what has been a tumultuous month. 0.75% or 1.0%, I know not, although my gut says 0.75%.

The statement will be crucial and, depending on how it plays out, could stop what I consider a bear market rally, in its tracks. Inflation remains and will remain stubbornly high, geopolitical risk abounds, growth is slowing around the world, and recession risks are rising. I can’t see how that is a productive environment for equities, and that’s before the rest of big-tech reports quarterly earnings.

One news event that may lift sentiment in Asia on Friday is an announcement by Turkish officials overnight, that an agreement to resume Black Sea grain exports from Ukrainian ports will be signed at some stage in the day. Fingers crossed on that one.

Happy Friday, everybody.

Oil prices fall overnight

Brent crude and WTI had another session of 5.0% intraday ranges overnight, closing lower than their opening levels. Recession fears and the resumption of Russian gas flows to Europe seem to have been the catalyst, although recent trading volatility is reducing liquidity as well, exacerbating movers.

The futures markets remain deeply in backwardation, suggesting that prompt supplies are as tight as ever in the real world.

The Saudi and Russian leaders had a phone call, with Saudi Arabia affirming Russia’s importance to the OPEC+ group and further emphasising which side OPEC’s bread is buttered, regarding US relations.

Along with Saudi Arabia making noises about rapidly approaching production capabilities, that has sent oil prices higher in Asia ahead of the weekend.

Brent closed 2.45% lower at $103.85 overnight, climbing 1.30% to $105.20 a barrel in Asia Friday. WTI closed 3.55% lower at $96.40 overnight, gaining 1.0% to $97.55 in Asia.

Brent has well-denoted resistance at $108.00 on the charts and then 111.00. It has support at $104.00 and $101.00. WTI traced a double bottom at $94.30, its overnight low and 200-day moving average. (DMA). That makes this level quite pivotal, a sustained failure signalling a retest of $90.00. Resistance is at $100.00, followed by 104.00.

Gold on long-term injury list

Gold traded in a wide $40.00 range overnight between $1680.00 and $1720.00, with the price action suggesting that some sell-at-worst long-liquidation occurred as $1700.00 failed. The longer-term support is around $1675.00 an ounce, barely holding but also emphasising its importance.

In the end, a weaker US Dollar and falling US yields allowed the yellow metal to record a decent gain for the day, although on the scale of recent moves in other asset classes, gold remains entrenched in the danger zone.

Gold finished 1,32% higher at $1719.00 overnight, easing 0.26% lower to $1715.00 in Asia as US Dollar strength resumed. ​ It has support at $1680.00, and then the longer-term support around $1675.00. 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, and 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.