US Inflation printed at 8.30% YoY overnight, less than the previous month’s 8.50%, but slightly more than the 8.10% median forecast by markets. Equities vacillated after the data as the street tried to make up its mind whether to price in “peak-US-inflation,” or not. In the end, the no’s won the day as the realisation sunk in that the data reinforced the Federal Reserve’s hawkish bias, and that even if US inflation is coming down now, it’s going to do so at a snail’s pace. That reality was reflected in the US yield curve, with 2-year yields firming, while 10 and 30-year yields fell once again. The pivot in the yield curve likely explains why currency markets were left in neutral, while equities indulged in their usual schizophrenic tail-chasing.
Energy prices also ramped higher overnight, with oil climbing by around 6.0%. Trans-Ukraine gas pipeline disruptions are playing their part, as did an improvement in the covid situation in Shanghai, which is rapidly reopening. US crude inventories showed a surprise leap in crude stock by around 8.5 million barrels, but gasoline stocks slumped by over 3.60 million barrels, and distillates were flat. The market remains incredibly tight for refined oil products in the US and if one adds in the 6 million barrels fall in US SPR stocks, crude inventories only rose by around 1.50 million barrels.
The energy picture is further muddied today by the news that President Putin has announced sanctions on European energy companies that were previous JV partners with Gazprom and its ilk. Trans-Ukraine gas flows have slowed as well as Ukraine declares a force-majeure on in if its pipelines from Russia to Western Europe. I’m not sure what impact the Putin sanctions will have on European gas supplies, if any. But if Russia is messing with European gas supplies, and with an EU import ban on Russian oil in the works, you can be fairly certain that oil prices have limited downside. That is another inflationary headwind to the world and with grain disruptions from Ukraine and Russia, markets continue to under-price the Ukraine war’s risks to the global economy this year. Hold off on buying Euros on the dip as well.
That reality is grudgingly starting to permeate Asian markets. In a stagflationary environment, there are no good choices for central bankers and monetary policy. Keep rates low and watch inflation explode and your currency evaporates, hike rates and watch a sharp slowdown develop in economic activity. Singapore and South Korea have already started tightening although I believe the chances of an unscheduled move to tighten by Singapore’s MAS are rising. India has also moved to hike rates and yesterday Bank Negara Malaysia also hiked by 0.25%. Philippine’s GDP today leapt by 8.30% in Q1 YoY and will likely force the BSP to hike next week. Indonesia will not be far behind them in June. Philippine RPI and Indonesian Retail Sales later today could reinforce that premise.
That will leave China and Japan as the last doves standing. Thankfully, both have benign inflation environments. Google Japan, deflation, 30-years for an explanation there. Markets tried to price in more China stimulus yesterday, lifting equities as Shanghai’s reopening accelerates. But it has run out of steam today despite the noise around supporting the economy by the PBOC this morning. China’s covid-zero policy will continue crimping growth, but it won’t be immune from the Ukraine/Russia stagflationary wave either. Nor has China’s property developer debt woes gone away, with news that major developer Sunac has missed a foreign currency bond payment, and statements suggesting it will struggle to meet future ones.
Little surprise then that both the Japanese Yen and the Chinese Renminbi remain under pressure, with growth concerns and a widening US/Asia interest rate differential the key drivers. Interestingly, Asian currencies ex-Japan and China are also under the hammer today as well. It could be that financial markets are testing the resolve of Asia’s central banks now, or it is part of a general de-risking across the globe by investors. Either way, with the US, expected to hike much faster than Asia, I expect the next six months to be torrid for local currencies, exacerbating imported inflation pressures.
The United Kingdom releases the mother of all data dumps early this afternoon Asian time. It features GDP, Business Investment, Industrial Production, Construction, Trade Balance, and Manufacturing. You would have to say that all of that data has downside risks. Along with cost-of-living pressures prompting speculation of an emergency budget, the UK is also making its life even harder by once again making noises about suspending the Brexit Northern Ireland protocol. The EU has quite rightly said that it will suspend the entire agreement if that happens.
You would think that with a war in Eastern Europe the UK government would leave Northern Ireland for another day, but this BoJo is not for turning. Little wonder with that smorgasbord of risk outlined above that Sterling slumped overnight, even as Euro remained relatively calm. Sterling may be oversold on short-term indicators, but data and politics could subsume that. GBP/USD is wobbling at 1.2215 this morning and I would not be surprised to see a 1.1900 handle on it by the end of the week.
This evening, the US releases its PPI data for April and weekly Initial Jobless Claims. The impact should be limited now that inflation data has been released. We will have the usual plethora of Fed speakers to shake up volatility intraday, but I expect to see attempts to reprice inflation/recession/tightening/geopolitics continue to dominate proceedings. Sitting on the sidelines with a bag of cash and some earplugs in is my preferred strategy.
Finally, I am continuing to monitor the crypto-space. Bitcoin closed below $30,000.00 overnight, sinking 6.50% overnight, and falling another 6.30% to $27,150.00 this morning. My chart picture is calling for a fall to the $17,000.00 region and Bitcoin would need to close above $33,000.00 to give pause for thought. Only a close above $38,000.00 would signal the downside danger has passed. The rot has spread from the turmoil in the (un)stable coin space. If the one-to-one pegs on the US Dollar backed instead of algorithmic (un)stable coins crack, things are going to get ugly fast and may lead to cross-margining selling in other asset classes. Off course, the main (un)stable coin issuers could release to the public view, incontrovertible proof that they hold a US Dollar for every coin they’ve issued, in real-time. Just asking for a friend. Otherwise, crypto markets may find themselves at the end of their tether.
Asian equities follow Wall Street lower.
Asian equities markets are mostly lower today after Wall Street tumbled once again after US inflation data reinforced the Fed tightening path. Admittedly, it took Wall Street some time to come to that conclusion, but the day finished with the S7P 500 down 1.65%, the Nasdaq tumbling by 3.18%, and the Dow Jones losing 1.01%. In Asia, some bottom-fishing had pushed futures on all three a little higher initially, but they have since fallen by -0.20% for the session.
In Asia, markets are almost all in the red. The exception, once again, is Mainland China where the Shanghai Composite has edged 0.25% high, while the CSI 300 is just 0.10% higher. Although there has been more noise around the room for more stimulus in China, I suspect that China’s “national team” is “smoothing” again. I suspect they were busy yesterday as well. Take the rally with a huge grain of salt. With Sunac missing a foreign currency bond payment, Hong Kong is probably a more realistic reflection of China’s actual performance today. The Hang Seng is down by 1.90%.
Elsewhere, Japan’s Nikkei 225 has dropped by 1.70%, with South Korea’s Kospi 1.05% lower, and Taipei slumping by 1.80%. Singapore is down 0.75%, with Kuala Lumpur up 0.05% with a BNM rate hike out of the way. Jakarta has tumbled by 2.10%, with Bangkok losing 1.0%, and Manila down 0.45%. Australian markets are also deeply in the red, the All ordinaries retreating by 1.80%, and the ASX 200 falling by 1.80%.
With Ukraine gas pipeline disruptions, Putin sanctions on European energy companies, and the poor performance by the US and Asian markets today, we can reasonably assume that European equity markets will open lower. Once again, I must reiterate, that any threats to European gas flows from Russia are very negative for European equities.
US markets are a complete turkey shoot and at the mercy of swinging intra-day sentiment and Fed-speak hitting the wires. It wouldn’t surprise me if the rear guard buy-the-dippers managed to generate a dead-cat bounce. You can pick and choose your pricing inputs this week in deciding how equities have done what they have done, but I believe that the underlying reason is that the reality of global stagflation and wars is where all roads are leading to.
Asian currencies falter.
The dollar index had another choppy range overnight but ultimately closed nearly unchanged once again as the G-10 currency space was content to watch from the sidelines. Recessions fears being offset by lower US yields. The dollar index closed slightly higher at 104.00. Although the index has support at 103.50, it is struggling to make a material close above 104.00, although it has moved higher to 104.07 in Asia. A daily close above 104.00 will signal rapid gains to 105.00 and in the bigger picture, the technical picture still says a multi-month rally to above 120.00 is possible. Support lies at 103.50 and 102.50.
Most of the activity today in Asia has been in the regional currency space and USD/Asia is sharply higher. With cryptos and equities falling heavily Asian currencies seems to be suffering as part of a generalised risk-aversion wave. USD/KRW has jumped 0.80% to 1289.50, with USD/TWD and USD/PHP rising by 0.55%, and USD/INR, USD/MYR, USD/SGD, and USD/IDR between 0.25% and 0.35% higher.
Asian FX weakness is being exacerbated by the fall of both the onshore and offshore Chinese Yuan today. USD/CNH has risen 0.555 to 6.8000, and USD/CNY by 0.65% to 6.7650. Their next target is the 6.8500 region. Until the PBOC signals that Yuan depreciation has gone far enough, Asian currencies will remain under pressure, and I fully expect to see a few regional central banks in the market selling US Dollars today.
EUR/USD is treading water at 1.0510 this morning having failed ahead of 1.0600 overnight. Any negative developments around Russian natural gas exports today are likely to spur another wave of selling, testing support at 1.0450. Notably, despite ECB officials overnight signalling rate hikes soon, EUR/USD finished lower than its open overnight. GBP/USD has fallen 0.30% to 1.2210 this morning and faces plenty of downside risk on Northern Ireland developments, emergency budgets, or poor data this afternoon. Rallies should be limited to 1.2400 with 1.2000 a real possibility in the next 36 hours.
USD/JPY has finally eased slightly to 129.70 as long-dated US yields fell again overnight. Short-dated US yields are rock solid though, limiting USD/JPY downside. Overall, the US/Japan rate differential and technical picture suggest further USD/JPY appreciation is a matter of when, and not if.
AUD/USD and NZD/USD both gave up intraday gains overnight a sentiment turned sour in New York. The general risk aversion selloff sweeping Asia today has punished both currencies. AUD/USD has fallen through support at 0.7000 on its way to 0.6880, and NZD/USD dropped through 0.6400 on its way to 0.6240 in Asia. The 1.0% losses have left both oversold on short-term technical measures, but unless risk sentiment swings abruptly higher for some reason, both still look like sells on rallies, caught in a US rate hike, China slowdown, pincer move.
Oil markets remain volatile.
Oil prices spiked overnight, led by a combination of Shanghai reopening, potential gas supply disruption through Ukraine, Russian sanctions on EU energy entities and a plunge in gasoline inventories in the US. Brent crude rose 5.90% to $107.50, and WTI leapt 6.60% higher to $105.50 a barrel. In Asia, the risk aversion selling sweeping other asset classes in Asia today has pushed oil prices slightly lower. Brent crude fell 1.20% to $106.25, and WTI fell 1.10% to $104.40 a barrel.
With tensions seemingly ratcheting higher after Russia sanctioned ex-Gazprom JVs in Europe, along with reduced trans-Ukraine pipeline flows, there is limited downside for oil prices in the near term. The continuing squeeze on US gasoline, diesel and other distillates is another supportive factor.
Brent crude has formed a nice trendline support going back to January 2022 at $101.50, while WTI has formed the same pattern at 98.50 a barrel. Resistance remains at $114.75 and $111.50 a barrel respectively. Failure of the respective $101.50 and $98.50 trendline supports is likely to provoke a much stronger test of $100.00 for Brent, and $95.00 for WTI this time around. Eastern European tensions mean this is not my base case, however. I am sticking to my broader calls for the past two months. Brent crude remaining between $100.00 to $120.00, and WTI between $95.00 and $115.00 a barrel.
Gold survives another day.
Gold probed the downside overnight, testing support in the $1835.00 an ounce region, before rallying to a 0.75% gain, closing at $1852.00 an ounce as US yields fell and risk-hedging flows appeared. In Asia gold is relatively quiet compared to the volatility seen in other asset classes today. It has edged 0.17% lower to $1848.20 an ounce.
Gold’s support critical near-term support remains the triangle apex at $1835.00, the breakout of which in early February, signalled the gold rally to $2060.00 an ounce. Its importance is confirmed by the nearby 200-day moving average (DMA), today at $1836.00 an ounce. A daily close under $1835.00 would be an ominous technical development.
Failure of $1835.00 sets up a test of support at $1820.00 and then potentially $1780.00 an ounce. Failure of the latter suggests a deeper correction to $1700.00. Gold has resistance at $1860.00 and $1884.00 an ounce, its 100-day moving average.
If the risk-aversion selloff sweeping other asset classes, notably cryptos, accelerates, gold does stand to benefit. Especially is haven buyers also pile into US bond markets, pushing the US yield curve lower.
