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The waiting game

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By Jeffrey Halley        

Markets were quiet overnight ahead of a deluge of tier-1 earnings, data, and the US FOMC policy decision over the rest of the week.

Equities, currencies, oil and precious metals were content to range trade, with only Bitcoin showing some life, falling by nearly 6.0%.

Bloomberg reported that Coinbase may be in trouble with the US SEC over what is a security and what isn’t. Draining the crypto-swamp is going to be a drawn-out process.

Oil is rising higher Tuesday morning in Asia as energy markets, once again, get caught out by a Russian whipsaw choke hold.

There have been a couple of developments overnight that appear to be weighing on Asia Tuesday.

Gazprom cut natural gas flows through Nord Stream 1 to around 20% of capacity, citing the usual “technical issues.” That follows the cruise missile attack on Odessa at the weekend, shortly after signing a deal with Ukraine to allow the resumption of grain exports.

Markets continue to place hope on what Russia says, rather than what it does, when they should be approaching it from the opposite direction. Dutch natural gas prices moved 10.0% higher, but European equities were remarkably resilient; despite a weak German IFO number, I can’t see that lasting.

Late in the US session, retail stalwart Walmart produced a very unimpressive set of results alongside a grim outlook for the rest of the year. It blamed food and energy inflation, reducing consumers’ discretionary spending power, and I can’t argue with that.

Tuesday sees Alphabet and Microsoft announcing earnings, and although there are a lot of nerves around the digital advertising space, I suspect it will be Meta’s results in Wednesday that really set the tone.

As Meta found out earlier in the year, stock markets are a harsh mistress now if the pandemic-derived growth fantasies can’t be maintained. The same fate surely awaits all three, and Apple’s this week is that the fairy-tale hits a brick wall. Either way, we are unlikely to see a Wall Street session this week as quiet as the one overnight.

Meanwhile, in China, the announcement of a $44 billion fund by the government to support beleaguered property developers had zero impact on Chinese equity markets on Monday. That could be because China will need to stump up a lot more than $44 billion worth of Yuan to stop the rot.

Evergrande, the big distressed-debt kahuna of the space, is approaching an end of July deadline to progress on restructuring its offshore debts. The CEO has been replaced this week, a victim of creative accounting by the group uncovered earlier this year. It looks like the end of July deadline will be a bit of a sea anchor for China equities this week.

Singapore’s inflation data surprised to the upside on both the core and headline readings. We can safely assume that the MAS will be sharpening their pencils for another tightening of monetary policy at their scheduled October meeting, although it seems like a long way away right now.

One bright spot on Tuesday was South Korean Adv Q2 GDP, which rose by 0.70%, with forecasts expecting a retreat to 0.40%. Strong consumer consumption as Covid restrictions eased, were behind the gain.

Unfortunately, April-June 2022 is also an age away now, and the picture may have darkened since. I expect minimal impact from the data on either the Won or the Kospi.

Europe’s calendar is empty except for the Hungarian Central Bank policy decision; markets expect a 0.75% hike to 10.0%.

The US calendar is rather more substantial, featuring Case-Shiller House Price Index, New Home Sales, CB Consumer Confidence and Richmond Fed Manufacturing and Services Indexes. In the present environment, all that data has downside risks.

The US Government is apparently trying to change the definition of a recession from two consecutive quarters of negative growth. Like governments everywhere, they are in a damage-control mood as inflation soars, making their populaces angry.

In many cases, most of that blame should be laid at the feet of Russia and their respective central banks. Bulging with PhDs in economics, they all missed the transitory versus entrenched inflation trade, and now, here we are.

Governments get the blame, of course, especially in democracies. The White House’s responses of late, as mid-terms loom, are starting to look desperate and are lacking dignity.

Still, US commodity prices have fallen this month, gasoline consumption and pump prices have fallen sharply, and the US-centric WTI complex is looking much more wobbly than Brent crude.

They say the best cure for high prices is high prices; perhaps the Democrats will get some good news before the mid-terms, although if job losses have started in earnest, it may still be for nought.

Reuters reported overnight that authorities in China had ordered 100 large firms in Shenzhen into closed loop systems to counter covid and keep the factories going. Once again, covid-zero means covid-zero, not covid-zero once and done. If push comes to shove, I have no doubt that China will engage in large-scale lockdowns once again if it can’t get on top of its covid outbreaks.

Bottom fish China if you wish, and if you have a long-term view, why not? But be prepared for an exciting ride along the way, as the light at the end of the 2022 tunnel could be the train coming the other way: possibly carrying officials to an Evergrande creditors meeting.

Russia lifts oil prices

Russia further reduced gas flows to Germany overnight, which is threatening to unwind oil’s move lower on Nord Stream 1 reopening. As that reality set in, Brent crude rose 1.20% to 104.85, and WTI gained 1.30% to $96.25 a barrel.

In Asia, the Russian moves spooked local markets, sending prices sharply higher. Brent is 1.85% higher at $106.60, and WTI has leapt 1.80% higher to $98.00.

Despite the price discount by WTI over Brent widening to near three-year highs, both contracts have futures curves that remain in deep backwardation, signalling that prompt physical supplies remain tight, even if US gasoline stocks are now rising sharply and refining margins are falling.

Russia remains the wild card in the energy space, supporting prices, a situation unlikely to change anytime soon. Of the two contracts, WTI looks the more vulnerable, having the greater physical beta to US domestic energy consumption.

Brent is approaching significant technical resistance at $108.80, a sustained break of which signals a larger rally targeting $115.00. Support is at $101.50. WTI has resistance at $100.00, while it once again bounced off its 200-day moving average (DMA) at $94.85 overnight. Until a sustained break of the 200-DMA occurs, significant topside squeezes by WTI remain entirely possible.

Gold trades sideways

Gold finished 0.45% lower at $1720.00 overnight, edging 0.20% higher to $1723.25 an ounce in another aimless Asian session.

The charts continue to suggest that while gold is trying to form a medium-term low, its price action remains underwhelming, and we will have to wait until we get into the meat of the week’s calendar to see if this scenario plays out.

Gold needs to overcome heavy resistance at the $1745.00 an ounce 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.