By Jeffrey Halley
After what seems like an interminable wait, we are finally at FOMC day. Markets have baked another 75 basis points into their loaves of bread, but it’s going to be all about what the Fed and Jerome Powell say and not what they do.
The IMF downgraded world growth forecasts Tuesday night, and there are plenty of recessionary signs around the world. What we’re not seeing yet, is easing commodity prices and supply chain pressures flowing through to lower prices.
Markets will be betting heavily that the Federal Reserve may mollify some of its inflationary language.
These were the same markets that recently priced in 100 basis points in a panicked manner, so don’t take their “wisdom” as gospel. Although the Fed may well be pleased that some of their harsh medicine is taking effect by virtue of voice and intent rather than action, it wouldn’t make much sense for them to take their foot off the brakes right now and pivot to being dovishly hawkish.
The Fed already has a credibility issue thanks to being so vehemently in Team Transitory, and although expectations for them are nearly as low as the Reserve Bank of New Zealand, I expect them to “stay on message.”
Some complacency may be shaken out of the US bond market Wednesday evening, and the US Dollar’s downward correction may base, while the FOMO gnomes of Wall Street may have a tough day.
The big loser will probably be the White House as November’s mid-terms loom closer, and the tears flow harder.
Wall Street fell overnight as it continued absorbing the Walmart earnings shocker, but US index futures are bouncing impressively in Asia after Alphabet and Microsoft results. Both tech giants just missed on earnings, but both maintained very upbeat outlooks.
Meta announces after the close of trading overnight, and if we are looking for an online ads selloff, Meta’s results may be that catalyst.
If you’re wondering why, go and look at your Facebook and Instagram feeds, which have become a wasteland of actual content from your “community” but a dumping ground for pointless adverts. They look more desperate than Joe Biden at the moment.
Interestingly with US earnings, McDonalds, Coca Cola and Chipotle all produced decent results. That circles back to this year’s winners being companies making things that people need no matter what the economic climate is, while companies that rely on the discretionary consumer wallet may find the going tough.
Eating and drinking is one of those necessities, although I am not advocating that readers should consume a diet of fizzy drinks, burgers, and Mexican food.
For Asia’s part, South Korea’s SK Hynix and LG Display announce results on Wednesday, and it will be interesting to see if the pandemic boom demand for electronic goodies is finally tailing off.
In Asia, Australian Inflation has just been released.
YoY Q2 Inflation rose to 6.10% from 5.10%, but slightly less than the 6.20% forecast. MoM Inflation was slightly lower than forecast at 1.80% as well.
Australia remains the lucky country, even on inflation, it seems. The slightly softer results have seen RBA hiking expectations pared, sending the Australian Dollar lower for now, while I expect local equity markets did not react.
China Industrial Profits has also been released, climbing by 0.80% in June YoY, a vast improvement on May’s -6.50%.
An easing of lockdowns in China likely accounted for most of the boost, and as readers will know, China’s covid-zero policy remains a key risk for domestic markets, with a likely spillover into regional ones in the event of extended lockdowns. Its impact appears to be muted.
Ahead of the FOMC, the US releases Durable Goods and Existing Home Sales. Both have downside risk, especially existing home sales after Tuesday’s new home sales produced a very soft number.
That data will probably only be a driver for intraday volatility, though, as we await the pronouncements of Powell and the FOMC.
European markets had another soft session overnight, dogged by slumping Russian natural gas exports to the Eurozone. That reality is set to continue hamstringing European equities, and ahead of the US FOMC, European markets look set to continue trading from the soft side.
Russia trades in a choppy range
Oil prices finished almost unchanged overnight, but that belied another large range intraday, with both contracts moving sharply higher before reversing. Russia’s moves on European natural gas continue to underpin prices, while global recession fears continue acting as a headwind.
Brent crude finished almost unchanged at $104.60, easing slightly to $104.45 in muted Asian trading.
Notably, Brent rose above $107.00 once again overnight, only to retreat sharply. The series of daily highs between $107.50 and $107.70 a barrel is a formidable barrier.
A daily close above $108.00 would now be a significant bullish technical development targeting the 100-day moving average (DMA) at $110.00, followed by $115.00. Support is nearby at $104.00 and then 101.50.
WTI finished 0.80% lower at $95.50 overnight, having traded as high as $99.00 intraday. In Asia, it has edged lower to $95.30. It looks the more vulnerable from a technical perspective, and a large gain by official US crude inventories Wednesday night could spark more selling.
WTI has resistance at $99.00, the overnight high, and then $100.00. The 200-day moving average (DMA) at $94.85 is nearby support, followed by 92.50. A daily close under the 200-DMA would be a negative technical development.
Gold trades sideways
Gold was almost unchanged at $1717.50 an ounce overnight, where it remains in Asia, as its flatline price action continues. The charts continue to suggest that the yellow metal is trying to form a medium-term low; however, the 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.
Like everything else, it is on hold for the FOMC now.
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.