By Edward Moya
Crude prices are drifting lower as most energy traders are still on the sidelines until we get a clearer picture on the global growth outlook. There have been a lot of headlines, but nothing is moving oil as prices appear content hovering above the $80 given all the supply challenges.
Rising tensions between China and the US are not unnerving investors.
Over the weekend, China launched military drills around Taiwan. The US also deployed a guided-missile submarine to the Middle East. It seems Iran nuclear deal talks have completely stalled and now the US is trying to stabilise that region as they have accused Iran of targeting drone strikes on oil tankers.
The short-term crude demand outlook will soon be clearer. This week, we will find if the US economy is taking the steps into the recession pool or if it is going to do a cannonball into it.
Wall Street should have a strong handle on the trajectory of the economy after it gets a pivotal inflation report, the latest retail sales numbers, and bank earnings along with their respective outlooks for the American consumer.
U.S. stocks lower
US stocks are weakening as investors anticipate the next inflation report will seal the deal for another quarter-point rate hike by the Fed. This is the week that could tell us that the US consumer is no longer showing resilience and in fact is rather weak; core inflation is making things more expensive, retail sales might show the consumer is tapped out, and the banks might paint a picture that American savings accounts are down and credit card debt is skyrocketing.
The key takeaway from Friday’s NFP report is the labour market is slowly softening, but not quickly enough for the Fed to keep rates on hold. The outlook for the economy is going to get very ugly in Q3 and Q4 as small business is about to get crushed as lending dries up.
Commercial bank lending is already starting to show signs it’s falling apart, in the two weeks ended March 29, lending dropped by $105 billion, the most since the series started in 1973.
The bond market appears confident that the Fed will be cutting rates by the fall, which is probably why stocks aren’t selling off as much as they should.
BOJ Gov Ueda sinks yen
With Europe mostly on holiday, many traders were eagerly awaiting BOJ governor Ueda’s inaugural press conference that followed his meeting with Prime Minister Kishida.
BOJ Governor Ueda noted that signaling any significant changes to its monetary policy framework may be unlikely for the time being. Ueda said there is no need to review the 2013 joint statement for now.
He added, “given the current economic, price and financial conditions, I think it’s appropriate to keep up the current yield curve control.”
The Japanese yen tumbled as investors are growing even less confident of any abrupt shifts away from the bank’s ultra-loose monetary policy stance. Swap markets are showing high confidence that the BOJ will not only keep rates on hold at the April 28 meeting, but also the June 16 meeting.
Gold is declining as Wall Street becomes more confident that the Fed will go ahead and continue raising rates. With much of Europe on holiday, it seems demand for bullion has completely stalled.
The dollar was ripe for a short-term bounce and that is also helping drag down gold. Gold should continue to hover around the $2000 level, but if dollar strength remains, key support might come from the $1970 region.
Despite broad weakness across most risky assets, Bitcoin continues to hover above $28,000. It seems Bitcoin Hodlers remain unfazed that the Fed will likely deliver one more rate hike and that the US economy is headed towards a recession this year.
It seems many traders are convinced the dollar’s days are numbered as it will slowly lose some of that preferred reserve currency status and that crypto will be one of the beneficiaries.
It is somewhat impressive that Bitcoin is slightly higher on a day that has stocks, oil, gold, and high-beta currencies all down around a half a percentage point.
Bitcoin’s ceiling remains the $30,000 level and how it behaves once it trades north of it will determine if the next major bull phase is upon us.
Edward Moya is Senior Market Analyst, The Americas 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.