By Jeffrey Halley
This month has dragged on and seems to be lasting forever, with the US FOMC policy meeting falling at the end of the month, instead of its usual mid-month slot.
But as the last week of July arrives, so does the FOMC policy meeting, with the results due out late Wednesday evening. For what it’s worth, I am in Team Taylor, and going for 75 basis points, with 100 being a bridge to far.
Last Friday’s price action may have softened the ardour of the 100 basis point hikes on the committee as well.
Equity markets finished sharply lower, ostensibly because of soft social media earnings, but given Wall Street’s schizophrenic nature of late, it was just as likely to be recession fears, booking some short-term profits, and cutting exposure ahead of the weekend and any potential risks that emerged over it.
Friday’s S&P Global Manufacturing and Services PMIs for Europe and the US were disappointing to say the least, coming in softer across the board.
Eurozone bond yields moved sharply lower as the market falls over itself to price in a recession there. Even Italian BTPs rallied. That seems to have flowed into the US bond market as well, with the US yield also moving sharply lower across the 5 to 30-year tenors, and even 2-years closed under 3.0%.
The R-word remains on everyone’s lips. Even gold managed to string two consecutive positive days together, while oil markets were broadly unchanged.
Agricultural commodities fell on Friday after Russia and Ukraine signed a deal to allow Ukrainian grain exports to resume from Black Sea ports such as Odessa.
Naturally, Russia decided to rain cruise missiles down on Odessa over the weekend, including one that hit a grain silo. That has seen wheat futures rise by 2.0% Monday morning and has led to some US Dollar strength and extended the risk-off tone to equity markets.
Various news outlets are also running a story about China’s increasingly strident warnings behind the scenes to US officials around Nancy Pelosi’s intended visit to Taiwan over the next few weeks.
This week features a raft of heavyweight US second-quarter earnings from tech giants, which could drive volatility on stock markets in addition to the FOMC.
Alphabet and Microsoft announce on Tuesday, Meta on Wednesday, perhaps the one with the highest risk looking at the ad-strewn content-light wasteland of my Facebook and Instagram feed.
Apple announces after the bell on Thursday evening NYT. Falling across the FOMC, we could be in for some tasty volatility around the mid-week hump.
Alongside the FOMC, we have the German Ifo Monday afternoon, US Durable Goods Wednesday, German Inflation and US GDP on Thursday, and German, French, Italian, Spanish and Eurozone GDPs Thursday.
And then Eurozone Inflation prints and US Personal Consumption and Expenditure data and the Chicago PMI on Friday. Slap in some China property and Taiwan risk, Eastern Europe risk, and the US President who has covid, and good luck picking the bones out of this week.
Australia releases its Q2 CPI on Wednesday, and we can expect volatility over the number as the Street uses it to reprice the trajectory of the Reserve Bank of Australia tightening cycle. The Australian Dollar’s value is a function of international investors’ macro outlook for the world economy, risk-on/risk-off for those of us in pilot fish part of the financial markets.
A high CPI print could also be a headwind for Australian equities though, although they have been mostly content to follow Wall Street like a doting puppy of late.
It is a slow week for China data, with just Industrial Profits on Wednesday. However, we see official PMIs released this weekend on Sunday, and the Caixin PMI next Monday.
The focus is likely to remain on China’s covid-19 trajectory and the China property market woes. Evergrande is approaching an end-of-month deadline around debt restructuring, and if no progress is made, this could start grabbing more headlines as the week advances.
Oil prices ease in Asia
Brent crude and WTI had another choppy intra-day session on Friday, but like currency markets, closed almost unchanged as the dust settled.
Futures markets remain deeply in backwardation, suggesting that in the real world, prompt supplies are as tight as ever, however rising recession fears globally do suggest that gains are likely to be limited in the shorter-term, geopolitics aside.
Oil futures’ biggest problem is that the mind-boggling intra-day volatility seen of late, is likely to reduce risk positioning, and thus, trading liquidity. A negative feedback loop likely to exacerbate prices moves.
Brent closed 0.25% lower at $103.60 on Friday, falling by 1.10% to $102.50 a barrel in Asia on Monday. WTI closed 1.45% lower at $95.00 on Friday, losing another 1.0% to $94.05 in Asia Monday.
Brent has well-denoted resistance at $108.00 on the charts, and then 111.00. It has support at $101.75 and $101.00.
WTI looks the more vulnerable, moving below its 200-day moving average (DMA) at $94.75 Monday, and taking out support at $94.30, traced a double bottom $94.30, its overnight low and its 200-day moving average (DMA). That now opens a retest of the July lows at $90.60. Resistance is distant at $100.00 a barrel.
Brent’s outperformance likely reflects its use as the international benchmark for global trade in oil, where physical supplies remain tight. WTI, on the other hand, is a domestic benchmark meaning that US recession nerves seem to be more heavily weighing on its price.
Brent continues to hold comfortably above its 200-DMA at $97.65 a barrel, and until that comprehensively breaks, I am not yet pencilling in the demise of high oil prices, although I have long said a medium-term high is in place. The more analysts there were calling for $200 and $300 a barrel crude, the more confident I became.
Gold trying to form a base
Gold closed higher for the second session in a row on Friday, quite the achievement given its woeful performance of late.
The yellow metal closed 0.50% higher at $1727.50 an ounce on Friday, edging slightly lower in moribund Asian trading to $1728.75. Two positive sessions do not mean gold is out of the woods, but the technical picture suggests it is trying to form a base, having bounced of long-term support near $1680.00 an ounce last week.
It faces a myriad of data and event risk this week, but the chart suggests buying the dips toward $1700.00 with a tight stop wouldn’t be the dumbest call of your career.
Gold needs to overcome heavy resistance at the $1745.00 triple top before the gold bugs can really start to get excited. 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 lower targeting the $1450.00 to $1500.00 regions.
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.