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Powell’s Hawkish Talons Shred Equities

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By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

Federal Reserve Chairman Powell stopped an intraday equity rally in its tracks overnight, after he signalled a 0.50% rate hike in May and that he was not unamenable to “front-loading” more 0.50% rate hikes. Mr Powel cited a tight labour market and inflation at multi-decade highs. Fellow President Mary Daly also suggested 0.50% hikes, while the bull in the monetary China shop, James Bullard, reiterated his enthusiasm for 0.75% hikes.

The sell-off of the US Dollar the previous day abruptly reversed course in the major currency space. Notably, it never really had downside momentum in the EM space. US yields also finished the day earlier with the 5-year to 30-year tenor moving into inversion. The prospect of even faster more aggressive rate hikes, and whether the Fed can achieve a soft landing, was enough to sharply reverse equity markets, sending them to a sharply lower finish. That is already spilling over into Asian equity markets today.

In China, the Yuan sell-off is threatening to become somewhat of a rout in relative terms as it tumbled again overnight. A neutral USD/CNY fixing by the PBOC this morning will settle the ship for now, but the price action this week suggests that foreign money leaving the China equity and bond markets is in danger of becoming a flood. That isn’t being helped by the PBOC seemingly looking to weaken the Yuan anyway, potentially a poor man’s path to supporting the manufacturing sector whilst allowing it to maintain neutral monetary policy at home.

With the Shanghai lockdown dragging on, and fears ever-mounting that China’s Covid-zero policy will torpedo 2022 growth, President Xi Jinping disappointed markets yesterday by reiterating his support for the policy in a speech at the Baoa Forum. Similarly, the head of the Peoples Bank Of China today, said the bank would concentrate on targeted support for small businesses and those impacted by Covid-19. That continues a recent trend of talking up support intentions from officials but failing to deliver on a scale the market is looking for. All we have is a 0.25% RRR cut, while the 1-year MTR and 1 and 5-year LPRs have been left unchanged. Until markets see the colour of China’s money, China equities will remain challenged and 6.5000 looks set to arrive for USD/CNY much sooner than I expected.

Australian Preliminary Manufacturing and Services PMIs for April held steady in expansion territory today at 56.6 and 56.2. Fears of a slowdown in China have not impacted Australia at all thus far, as the Russia/Ukraine war lifts global demand for everything that is pumps, digs or grows out of the ground. The swing in sentiment to negative overnight has left AUD/USD dangerously close to technical support though, and with an RBA stubbornly pushing back on inflation chasing rate hikes, the US/Australia rate differential may start to weigh on the currency in the weeks ahead.

Japan’s Jibun Bank March Manufacturing and Services PMIs clung to expansionary territory, coming in at 53.4 and 50.5 respectively, a steady result from last month. More attention was focused on Inflation and Core-Inflation for March. Headline Inflation jumped (I say that relatively because it’s Japan) to 1.20% thanks to rising fresh vegetable prices. Core Inflation which has no vegetables, but does include energy, was benign, rising just 0.80%. None of that will sway the Bank of Japan at next week’s policy meeting, which makes sense given its intervention to cap 10-year JGB yields at 0.25% this week. With the US yield curve still marching higher, and the BOJ maintaining multi-decade low rates, 130.00 in USD/JPY is going to arrive sooner, rather than later.

The United Kingdom could well be back in the headlines again in the coming week thanks to a word I hoped I would never have to say again, Brexit. Firstly, I note the UK GFK Consumer Confidence released this morning plummeted to -38, thanks to the war in Eastern Europe and soaring inflation. Add into that mix now, the regional Northern Ireland elections on May 5th. Due to the nightmarish nuances of Northern Irish politics, an increasing number of stories are now circulating that the British Government may unilaterally change the Brexit agreement.

Why you would do that when both it and Europe are fighting a proxy military and economic war in the East, I do not know. Maybe it was one too many wines at the infamous No.10 garden parties. Whichever way you look at it, it won’t be good for Sterling. Notably, GBP/USD’s price action has been underwhelming at best in April, and its recovery rally halted right at its two-month resistance line around 1.3090 overnight. A soft set of UK Retail Sales data this afternoon could see support at 1.2975 aggressively tested.  On a happier note, Happy 96th Birthday Your Majesty.

Turning to Europe, President Macron of France has widened his lead over challenger Marine Le Pen ahead of this weekend’s presidential runoff. That has eased fears of a regime change that would shake Europe’s foundations. Options volatility on Euro for Monday has fallen back sharply. Euro still retreated in the face of a US yield pumped US Dollar overnight, and German, France and Eurozone PMIs all have downside risk when released this afternoon. That combined with an increasing amount of noise that Germany may be nearing a decision to ban Russian natural gas imports should limit any gains by the single currency or European equities, especially with the weekend also upon us. We’ll talk more about the latter next week, but my initial thoughts are that EUR/USD would start with a 0.9, and not a 1.0.

The pre-FOMC Fed speaker blackout starts tomorrow (Saturday), and it looks like they are thin on the ground today. That just leaves US PMIs as the main ppint of interest tonight data-wise. A high print should keep the hiking noise going, while a low print could bring some relief to bond and equity markets into the weekend.

Asian equities tumble on Wall Street rout.

The incipient recovery rally on Wall Street overnight ran into a brick wall of Fed speakers, notably Jerome Powell who was very hawkish. That sent Wall Street tumbling to a negative close as US yields shot higher, notably at the short end. The S&P 500 fell by 1.47%, the Nasdaq slumped by 2.07%, and the Dow Jones fell by 1.02% as concerns mount about whether the Fed will send the US into a hard or soft landing. US futures have continued south in Asia, the S&P 500, Nasdaq and Dow futures are around 0.45% lower.

That has spilt over into Asian markets, already nervous about a deeper slowdown in China. The Nikkei 225 has slumped by 2.0%, with South Korea’s Kospi falling by 1.15%, and Taipei losing 1.0%. Mainland China stocks are lower, but showing some resilience, making me think that China’s “national team” are doing some pre-weekend “smoothing. A lower Yuan may also be supporting exporters. The Shanghai Composite has fallen by 0.45%, while the CSI 300 is down just 0.25%. However, the Hang Seng has lost 1.0% as President Xi emphasised digital security in his speech yesterday.

Across regional markets, Singapore, Jakarta, and Manila are down just 0.20%, while Kuala Lumpur is unchanged, Bangkok has lost 0.55%. Again, weaker currencies may be supporting local markets. Australian markets have taken fright at the losses on Wall Street overnight, falling heavily. The ASX 200 and All Ordinaries have slumped by 1.50%.

The price action in Asia, combined with a low appetite for risk over the weekend, is likely to see European equities fall heavily at the open this afternoon. Political risks in France and Britain will e another headwind and fears of widening European energy sanctions on Russia will limit any gains.

Powell lifts the US Dollar.

A hawkish Jerome Powell overnight lifted US yields higher and saw a flight to safety in the US Dollar, allowing the dollar index to recapture much of its mid-week losses. Another night of Yuan losses also encouraged some pre-weekend defensive flows into the greenback. The dollar index fell below 100.00 earlier in the session, by reversed and rallied to finish 0.30% higher at 100.63 where it remains in Asia today. Support now lies at 99.80 and then between 99.40 and 99.55, while initial resistance remains in the 101.00 area.

Euro and Sterling both staged sharp intra-day recovery rallies overnight, with EUR/USD topping out ahead of 1.0950 resistance. Jerome Powell’s hawkish comments torpedoed the respective rallies and saw both currencies slump to small intraday losses. EUR/USD closed 0.22% lower at 1.0830, and GBP/USD finished 0.33% lower at 1.3025.

Both are steady in Asia. Aside from yield differential risks capping gains, both the Euro and Sterling face political risks now. Widening energy sanctions by Europe, and Brexit agreement challenges by Britain, and should cap any gains into the weekend. EUR/USD still risks a close below 1.0800 on a weekly basis which would be a very negative technical development. Only a close above 1.0950 eases that risk. Likewise, GBP/USD failed ahead of resistance at 1.3100 and could retest support at 1.2975.

USD/JPY rose 0.39% to 128.38 overnight as US yields climbed once again. In Asia, it is holding steady at 128.45. The still-overbought RSI means another correction lower is still not out of the question. But a dovish BOJ, combined with China spill-over effects means USD/JPY remain heavily skewed higher.   Support remains at 127.00 and 126.00, with resistance at 129.50 and 130.00.

The sentiment-sensitive Australian and New Zealand Dollars both tumbled by 1.10% overnight, unwinding all the previous day’s gains. China concerns seem to be weighing heavily today as AUD/USD falls 0.30% to 0.7345, and NZD/USD slumps by 0.45% to 0.6702. AUD/USD trendline support is very close at 0.7335 today, and a daily close below will signal deeper losses to 0.7200 initially.  NZD/USD remains in a technical bear market well below its breakout line at 0.6840. Failure of 0.6700 signals deeper losses below 0.6600 initially.

Onshore and offshore Chinese Yuan fell heavily again overnight, with the offshore CNH coming under particular pressure as international investors used it as a proxy for China’s growth concerns. USD/CNY rose 0.50% to 6.4500 overnight, gaining another 0.30% to 6.4700 in Asia, despite a neutral PBOC fixing. USD/CNH rose 0.53% to 6.4800, testing 6.5000 today before settling 0.20% higher at 6.4930. A rise above 6.5000 seems likely to happen sooner, with the PBOC seemingly happy to let the Yuan fall, boosting China exporters in a backdoor stimulus move.

The sharp fall by the Yuan again overnight heaped more pressure on regional Asian currencies, now facing headwinds from China slowdown fears, a weaker Yuan, and rising US interest rates. USD/KRW rose 0.70% overnight, gaining another 0.10% to 1243.10 today. USD/TWD has risen to resistance at 29.310 again with the price action suggesting the central bank might be around. has risen by 0.30%, USD/SGD and USD/IDR are steady, but USD/THB is edging towards 34.000 once again. The grim week for the Malaysian Ringgit continues as well, having lost over 1.50% this week. USD/MYR has gapped higher in Asia, rising 0.37% to 4.3050. I cannot see any particular reason why the Malaysian Ringgit is being singled out, but the technical picture suggests we will see 4.3500 soon. The travails of Asia FX this week are a theme I expect to continue for months to come.

Oil markets are surprisingly quiet.

Oil markets, by their standards, have been surprisingly quiet for the past few sessions, consolidating after hefty losses earlier in the week. At this stage, fears over China’s growth and overtightening by the Fed capping US growth seem to be balancing out concerns that Europe will soon widen sanctions on Russian energy imports.

Brent and WTI rose by around 1.40% overnight in directionless trading, but have given those gains back today in Asia, making for plenty of noise, but very little substance. Brent crude is 1.35% lower today at $107.25, and WTI is 1.20% lower at 102.75 a barrel. News that Japan will tender 4.5 million barrels out of its reserves in May seems to have been the excuse for Asia to push prices lower intraday. In the bigger picture, the amounts involved are immaterial.

I continue to expect that Brent will remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. Brent crude has further support at $96.00, and WTI at $93.00 a barrel. A potential European oil embargo on Russia next week after this weekend’s French elections, could see a move towards the top of the range.

What is gold telling markets?

Gold continues to confuse me. Overnight it retreated intraday to test support at $1940.00 an ounce, but as US yields and the US Dollar rallied, it also reclaimed its intraday losses, finishing just 0.30% lower at $1951.50 an ounce. It is unchanged in Asia. Either gold markets are walking into a huge bullish trap as the US Dollar and US yields continue to power higher, or gold markets are warning us that inflation is more entrenched than expected, or that the world is much more dangerous than markets are believing. Any of these scenarios could prove correct.

That said, from a technical perspective, gold still looks vulnerable to a failure of the $1940.00 support which could see more speculative long positions getting culled. Gold would potentially target $1915.00 an ounce and then critical support at $1880.00. Those nagging concerns I have expressed mean a decent washout in prices could be an opportunity to load up again at far better levels.

On the topside, gold has resistance at $1980.00 and $2000.00 an ounce. I believe option-related selling at $2000.00 will be a strong barrier. However, if $2000.00 fails, gold could quickly gap higher to $2020.00, and potentially, retest of $2080.00 an ounce.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Another Turbulent Day

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been another turbulent session after stock markets turned sharply lower on Wednesday as investors fret over the outlook for the economy this year.

Results from Walmart and Target this week have brought into sharp focus the plight facing companies and consumers as inflation begins to bite. And that’s in a country that is still performing relatively strongly with a consumer that still has plenty of savings built up over the last couple of years. Others are not in such a fortunate position.

But inflation is catching up and profit margins are taking a hit. Soon enough though, those higher costs will continue to be passed on and consumers will stop dipping into savings and start being more careful with their spending. There’s a feeling of inevitability about the economy, the question is whether we’re going to see a slowdown or a recession.

The language we’re seeing from Fed officials isn’t filling me with confidence either. We’ve gone from them being confident of a soft landing, to a softish landing and even a safe landing, as per Patrick Harker’s comments on Wednesday. I’m not sure who exactly will be comforted by this, especially given the Fed’s recent record on inflation and past record on soft landings.

And it seems investors aren’t buying it either. A combination of these factors and no doubt more has sent equity markets into another tailspin, with Wall Street registering another big day of losses on Wednesday and poised for another day in the red today. Europe, meanwhile, is also seeing substantial losses between 1% and 2%.

Oil slips as economic concerns weigh

Those economic concerns are filtering through to the oil market which is seeing the third day of losses, down a little more than 1% today. We were bound to see some form of demand destruction if households continued to be squeezed from every angle and it seems we may be seeing that expectation weigh a little as we move into the end of the week.

Meanwhile, China is reportedly looking to take advantage of discounted Russian crude to top up its reserves in a move that somewhat undermines Western sanctions. Although frankly, it would have been more surprising if they and others not involved in them didn’t explore such a move at a time of soaring oil prices.

Still, I expect Brent and WTI will remain very high for the foreseeable future, boosted by the inability of OPEC+ to deliver on its targets and the Chinese reopening.

Gold buoyed by recession fears?

Gold appears to be finally seeing some safe-haven flows as markets react strongly to the threat of recession rather than just higher interest rate expectations. The latter has driven yields higher and made the dollar more attractive while the economic woes they contribute to seem more suited to gold inflows, it seems.

It will be interesting to see how markets react in the coming weeks if the investor mindset has turned from fear of higher rates to the expectation of a significant slowdown or recession. And what that would mean for interest rate expectations going forward. Perhaps we could see gold demand return.

Can bitcoin continue to swim against the tide?

Bitcoin is holding up surprisingly well against the backdrop of such pessimism in the markets. Perhaps because it’s fueled by economic concern rather than simply interest rates. Either way, it’s still trading below $30,000 but crucially it’s not currently in freefall as we’re seeing with the Nasdaq. Whether it can continue to swim against the sentiment tide, time will tell.

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Inflation Hits 40-Year High

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European equity markets are a little flat on Wednesday, with inflation data this morning once again offering a reminder of the struggles that lie ahead.

Not that we need reminding given all of the data we’ve seen recently. And then there are the gloomy forecasts from central banks, with even the Fed now targeting a softish landing which feels very much like the stage before a mild recession. It may be time to buckle up and prepare for a very bumpy year.

Will BoE move to super-sized rate hikes?

UK inflation is running at a 40-year high and it’s not peaked yet as the cost-of-living crisis looks set to squeeze the economy into recession. While annual inflation came in slightly below expectations at 9%, pressures are broad-based and as the year progresses, it is expected to hit double figures.

There is still plenty more pain to come for households, most notably when the energy price cap increases again in October. But price increases are broad-based, as evident in the jump in core inflation to 6.2%. This comes as the Bank of England has warned of more pain and a probable recession, as it continues to aggressively raise interest rates in the hope of being able to catch up without inflicting too much harm in the process.

Like many other central banks, it has been heavily criticised for its misjudged faith in pandemic-induced inflation being transient for too long. And in the UK’s case, the problem looks far greater and more widespread, with Brexit effects compounding the problems and driving up prices. Can the BoE afford to continue raising rates so gradually, as markets expect with 25 basis points every meeting or will they be forced to join their US counterparts with super-sized hikes? Pressure is mounting.

Oil higher as China starts reopening

Oil prices are on the rise again as Shanghai takes a big step towards reopening following three days of no new cases in the broader community. Restrictions have been tight in many cities across China which have helped keep a lid on oil prices in this very tight market. But with activity now likely to pick up, crude prices could be on the rise once more.

Efforts toward a Russian oil embargo have failed, with Hungary continuing to stand in the way. That could be slowing the rally in oil still, as could US talks with Venezuela which may eventually lead to additional supply. Although ultimately, this comes at a time when major producers simply aren’t producing as much as they should. Russia saw its output fall by another 9% last month as a result of sanctions, which contributed to OPEC+ producing 2.6 million barrels below target, lifting compliance with cuts from 157% to 220%.

Gold looking shaky once more

Gold is a little lower on Wednesday, as the dollar strengthens once more following a few days of declines. We’ve seen a slight corrective move in the greenback which has eased some of the pressure on the yellow metal but we may be seeing that return already. Gold is currently trading a little over $1,800 and a break of it could trigger another wave lower as investors continue to factor in more interest rate hikes and therefore higher yields.

The path of least resistance

With risk aversion starting to creep back in, bitcoin finds itself back below $30,000 which may make some a little nervous. It was always going to be difficult for risk assets to significantly build on the rally in the current environment. What may be encouraging to some is that we haven’t seen a sharp reaction to the move back below such a key level. Of course, that could quickly change with below appearing to offer the path of least resistance.

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Further Pressure on Central Banks

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a relatively calm start to trading this week, with Europe a mixed bag at the close and the US a little lower.

The weaker Chinese figures overnight will be of some concern at a time of slowing economic activity around the world. Still, as has been the case so often in recent years, the lockdowns will have heavily distorted the data. With lockdowns priced in to an extent, the key will be how quickly restrictions are lifted and then how well the economy bounces back.

Stock markets have come under heavy pressure globally as central banks have been forced to become part of the problem rather than the solution, as has so often been their job in the past. We’ve become very used to easy monetary conditions but now we have a devastating combination of a cost-of-living crisis, looming recession, very high inflation and much higher interest rates.

And as we’re hearing so often now, policymakers understand the pain that households are feeling and will experience going forward but getting inflation back under control is the primary focus. Which means further pain ahead.

The BoE monetary policy report hearing reflected everything we’ve heard in recent weeks as the UK heads for recession and double-digit inflation. Bailey and his colleagues accept how bad the situation in the UK is and the scale of the task at hand but whether they’re doing enough to address it is hard to say. They were among the first to start hiking late last year but have still been criticised for starting too late.

Oil near recent highs after falling on Chinese data

Oil prices have recovered earlier losses that came in the wake of the Chinese figures. While lockdowns have been priced in over the weeks, the numbers were much worse than expected which weighed heavily on crude. While an EU ban on Russian oil suffered another setback as Hungary stood firm against it, the bloc is continuing to work on an agreement while Germany is reportedly planning to phase it out regardless, which could be helping to support prices today.

Oil is trading around $110, towards the upper end of where it’s traded over the last couple of months. China looking to ease restrictions could keep prices more elevated having contributed to them trading at more reasonable levels. A move above $115 in Brent would be interesting, with that having been something of a ceiling for rallies over the last couple of months.

Gold flat but remains under pressure

Gold is flat on the day after slipping this morning below $1,800 for the second time in as many sessions. The yellow metal has been very vulnerable to rising yields and a stronger dollar recently as central banks are forced into much more aggressive action. With the dollar remaining a hot favourite and pressure intensifying on central banks to tackle inflation, gold could remain out of favour for a while yet.

Bitcoin struggles at $30,000

An impressive rebound in bitcoin after breaking $30,000 may already have run its course, with the cryptocurrency giving up earlier gains to trade a little lower on the day. It’s spent a little time over the last couple of days above $30,000 but it is struggling to hang on to them. That doesn’t bode well at a time of risk aversion in the markets and such negative coverage of stablecoins following the Terra collapse. There may be more pain ahead.

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