By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA
Asian markets have begun the day in an altogether positive mode after Wall Street outperformed overnight. Driving the equity rally were good results from department store retailers, notably high-end ones.
The only blotch was Gap, which fell down a Gap with its stock price punished accordingly. That allowed the perpetually circling and no desperate buy-the-dip mafia to load up on risk positioning again with the US Dollar also falling. It also allowed markets to ignore a downward revision of US Q1 GDP QoQ to -1.50%, Kansas Fed Manufacturing Index for May falling to 19, and Pending New Home Sales for April slumping deeper into negative territory at -9.1%. The latter is particularly ironic as recent soft housing data had been responsible for some previously ugly sessions on Wall Street recently. Still, why let the facts get in the way of the desperation to buy the dip.
Notable once again, are that US 10-year yields are once again retesting the four-decade downtrend line, which by my estimates comes in around 2.75%. Fears of gasoline and diesel shortages during the US driving season also pushed oil prices over 3.0% higher overnight. Some unofficial gossip ahead of next week’s monthly OPEC+ JTC meeting suggests that the grouping will stick to its scheduled 432,000 bpd incremental increase. Brent crude could test the top of my $120.00 a barrel medium-term range next week. I can’t see US yields and oil moving higher being constructive for equities next week.
In data out of Asia today, Tokyo’s Core CPI in May remained at 1.90%, although with the Bank of Japan saying inflation is driven by external factors, and not the Japanese consumer, we shouldn’t expect any change in their ultra-low forever stance. Australian Preliminary Retail Sales eased, as expected, to 0.90% with no serious cost-of-living cracks appearing as yet in the Lucky Country. China’s Industrial Profits (YTD) YoY for April fell to 3.50% from 8.50% in March. The Shanghai shutdowns and covid-zero policies account for the slowdown, but market impact was minimal as the number was right on market expectations. China will have bigger fish to fry going forward as it tries to keep growth and the property market on track, while enacting sweeping lockdowns across parts of the country thanks to its covid-zero policy.
The rest of Asia’s calendar is light with Singapore PPI likely to be ignored after yesterday’s firmer Industrial Production data eased slowdown fears. Europe’s calendar is similarly second tier. US Personal Income and Personal Spending for April, along with the PCE Price Index and Michigan Consumer Sentiment round out the week. Personal Income and Expenditure and the PCE Index could settle nerves on inflation and Fed tightening if they print on the low side, ditto for Michigan Consumer Sentiment. That would set Wall Street up for another positive season to round out the week and weigh on the US Dollar.
Apart from oil, most of this week has been one of frantic range trading, as the herd runs this way and that on swings in risk sentiment. Lots of noise, little substance, although reading the financial press swinging from doom to bloom day-to-day has been mentally tiring.
Next week sees the arrival of June and its “business time.” Asia sees the release of China and India PMIs and Australian GDP and Trade Balances. Europe has German, French and Eurozone Inflation, as well as the ongoing saga of an EU oil ban on Russia. Russia has kindly offered to allow exports of wheat from Ukraine and Russia, in return for sanctions relief.
I believe June will be a watershed month for Europe, the UK, and America as to the depth of their commitment to a war economy and Russia. Perversely, if they blink for short-term national gains, it would be quite a tailwind for global equities and bonds. The financial markets are a harsh mistress.
June also brings us a bevvy of US data and a Bank of Canada policy decision next week. US data releases include the house price index, JOLTS Job Openings and ADP Employment, and ISM Manufacturing before the one ring to rule them all, Friday’s Non-Farm Payrolls. Oddly enough, the most important event of them all is being largely ignored by markets to their peril.
In the Dark Tower of the Fed, they have $8.5 trillion of debt instruments they need to get rid of. Quantitative tightening starts next week, scaling up to $95 bio a month by September. I’d hate to see the mark-to-market P&L on that position, but I guess when you can print money, it doesn’t matter. It may well matter to markets though with the Fed also set to tighten by 0.50% per month over the coming months (including June). I am yet to be convinced that the Fed can pull this off without causing another taper tantrum or sending the US 10-years well North of 3.0%, or both. They, like everyone else, will be hoping inflation indicators flatten in the months ahead, to keep the bids out there in the bond market. All I’ll say is don’t mistake short-term noise in the equity market as a structural turn in direction higher.
Asian equities shrug off weaker China Industrial Profits.
Wall Street staged a powerful rally overnight thanks to mostly impressive results from US retailers. The S&P 500 rallied by 1.99%, the Nasdaq leapt 2.68%, and the Dow Jones climbed by 1.62%. Although the rallies were impressive, the price action was very much in line with the schizophrenic behaviour of Wall Street these past few weeks, and I have no doubt that one piece of bad news will send the FOMO gnomes scurrying for the exit. In Asia, US futures have eased by around 0.15% as profit-taking from the overnight session makes its way through the market.
The impressive overnight rally has allowed Asian markets to ignore weakening China Industrial Profits this morning, and with a slow news day this far, Asia looks set to end the week on a positive note. Japan’s Nikkei 225 is 0.50% higher, with South Korea’s Kospi rallying by 0.90%. Taipei, meanwhile, has jumped by 1.65%, coat-tailing the Nasdaq.
Mainland China equities are also higher, the Shanghai Composite rising by 0.50%, with the CSI 300 gaining 0.62%. Meanwhile, the market always looking for a reason to buy, Hong Kong, has leapt 2.93% higher. Singapore has risen by 0.45% today, with Kuala Lumpur underperforming, losing 0.10%. Jakarta has posted a 1.50% gain, Bangkok is up by 0.80%, and Manila is 0.70% higher. Australian markets are also enjoying a friendly Friday, the ASX 200 and All Ordinaries climbing by 1.0%.
Except for UK markets, which posted only modest gains after the energy company windfall tax announcements, Europe performed well yesterday. Asia’s strong session should give Europe another positive start today, although, weekend risk will likely cap any rallies. US markets are a coin-toss these days and if PCE data is on the high side tonight, so will Fed tightening sentiment be. That could easily reverse yesterday’s outperformance.
Improved risk sentiment sends US Dollar lower.
The choppy range trading of the past few session continued overnight as the US Dollar swung on day-to-day moves in risk sentiment. A powerful session by Wall Street, along with almost unchanged closes in US bond markets saw improved risk sentiment send the greenback lower overnight. The dollar index fell 0.31% to 101.76 overnight. Strangely for Asia of late, the directional move has continued today, pushing the index down 0.24% to test support at 101.50. Failure of 101.50 opens a potential test of major support at 101.00. Resistance is distant at 102.50.
Not unexpectedly, EUR/USD was a major beneficiary as risk sentiment swung higher. The single currency rose 0.47% to 1.0730 and this morning has pushed through resistance at 1.0750, rising 0.25% to 1.0755. That brings the multi-decade trendline resistance, today at 1.0830, back into view. I would require a weekly close above 1.0830 to waver in my negative outlook and I remain convinced we are just one negative Russia energy headline away from the whole rally evaporating. Support remains at 1.0650.
GBP/USD added just 0.20% to 1.2610 overnight, gains tempered by the Government’s energy company windfall tax and energy subsidy announcements. Today, Sterling has outperformed, rising 0.35% to 1.2655, taking out resistance at 1.2640. It has resistance at 1.2700 now, with support at 1.2600 and 1.2470.
USD/JPY eased slightly overnight, losing another 0.20% to 126.85 on US Dollar weakness this morning. The cross remains at the mercy of move in US bond yields, and with those being benign this week, USD/JPY has continued to grind out long positioning. The chart suggests USD/JPY has further downside potential that could target 125.00. Only a move through trendline resistance at 127.80 changes the picture.
AUD/USD and NZD/USD moved sideways overnight but have posted decent gains in Asia as risk sentiment finishes Asia’s week on a high note. AUD/USD has 0.62% to 0.7140 and is eyeing resistance at 0.7150. It could potentially extend gins above 0.7200, while support is at 0.7050. NZD/USD had risen by 0.65% to 0.6520 today, taking out 0.6500 and leaving its next target as 0.6570. Support is at 0.6450.
Asian FX is moving higher today but is not reflecting the US Dollar weakness seen versus the G-10. USD/CNY, USD/CNH, USD/SGD, USD/INR, and USD/THB have fallen around 0.15% today, with the region’s ugly ducklings of late, KRW, IDR and MYR all rising by around 0.40%. That suggests that the positioning we are seeing today is being driven by fast-money flows. Unfortunately, fast-money leaves as fast as it arrives and thus, I am taking today’s gains with a grain of salt.
Oil rallies sharply.
Oil prices rallied sharply overnight as markets continued to fret over tight US galena and diesel supplies ahead of the summer driving season. News that President Biden is investigating restarting mothballed US refineries had zero impact on markets. That is not surprising as refineries, like aircraft parked in the desert, don’t have a simple on/off switch. News is also emerging that suggests OPEC+ will only raise production next week by the previously agreed 432,000 bpd, providing another supportive factor in a tight market. The street may also be pricing in peak virus in China with Shanghai’s port back to 95% of normal operations.
Brent crude jumped 2.55% to $117.30 a barrel overnight, adding just 0.20% to $117.50 in quiet Asian trading. WTI leapt by 3.11% to $114.10 a barrel, where it remains in Asia today. The firm price action this week leaves both contracts poised to potentially test the upper end of my medium-term ranges, at $120.00 and $115.00 respectively, today, or early next week. That will be a severe test of resolve around Russian sanctions as rather surprisingly, it has resulted in no material movement on easing restrictions on Iran and Venezuela, which would go a long way to changing the global supply picture. WTI’s relative outperformance is due to US gasoline and diesel supplies. The US though doesn’t have an oil problem, it has a pipeline and refining bottleneck problem.
Brent crude should find some resistance at $118.00 initially. After that, the chart shows nothing until $124.00 a barrel. Support is at $114.00 and $112.00 a barrel. The 2022 support line lies at $104.00, and only a weekly close below that signals the end of the bull market. WTI still has resistance at $115.50 and $116.60, but after that, that chart is empty until the $128.00 region, the top of the Ukraine/Russia spike. Support is at $110.35 and then $108.00 a barrel. Its long-term, 2022 support line lies at $101.50.
Gold trades sideways.
Gold seems determined to bore traders to death after another inconclusive overnight range-trading session. It finished 0.13% lower at $1851.00 an ounce. In Asia, some pre-weekend risk hedging has lifted it slightly higher to $1854.00 an ounce. Most concerning about the overnight price action by gold, was that despite a broadly weaker US Dollar seen elsewhere, and the rally in risk asset positioning overnight, gold actually finished the session lower. Its inability to rally on US Dollar weakness is an ominous sign and risks are increasing for a serious downside washout of long positions.
Gold has nearby support at $1840.00, followed by $1836.00 an ounce. Failure sees the possibility of a mini-capitulation by longs that could reach as far as $1780.00 an ounce. Gold has resistance at $1860.00, $1870.00, and $1886.00 an ounce, its 100-day moving average.
Oil Prices Slide on Soft Demand and Pending Fed Interest Rate Decision
Oil prices saw a slight decrease on Wednesday following indications of weak demand and the anticipation of a crucial interest rate decision by the U.S. Federal Reserve.
Brent crude oil, which had risen almost 3% earlier in the week, fell by 0.40% to $75.02 a barrel, while U.S. West Texas Intermediate (WTI) crude oil was down 0.42% at $69.38.
Data from the American Petroleum Institute released on Tuesday put the demand for oil into question after revealing an unexpected increase in U.S. crude inventories, contradicting analyst predictions of a decline.
Oil prices were also impacted by an unexpected rise in UK inflation in February, raising concerns of more interest rate hikes a day before the Bank of England’s latest interest rate decision.
The global market is waiting to assess the decision of the U.S. Federal Open Market Committee (FOMC) on interest rates later today to decipher the future direction of price action.
While the expected 25 basis point rate hike was a turnaround from the previously anticipated 50 basis point rate rise, analysts predict that it won’t have a significant impact on oil prices.
Craig Erlam, senior market analyst at OANDA, said, “It would be a big shock if the Fed reverted back to larger rate hikes now considering everything that’s happened this past couple of weeks.”
Last week, Brent prices hit their lowest levels since 2021 on concerns that the drop in bank shares could lead to a global recession and reduced fuel demand.
Nigeria Generates Only 5000MW, Depends on Generators for 75% Electricity –Report
Nigeria circulates about 5000 megawatts for its over 200 million population leaving generator sets to supply 75 percent of electricity needed by its people, reports have shown.
Investors King gathered that generators supply about 25,000 megawatts of power compared to the 5000 megawatts supplied by the national grid.
The recent reports from the Society for Planet and Prosperity, GCA Capital Partners and Climate Advisers Network stated that Nigeria depends largely on diesel and petrol-powered generators for electricity.
The research firms revealed their findings on power supply and consumption on Monday during a press briefing in Abuja.
They harped on measures to ensure solution to the current power supply shortage in Nigeria, calling for action on the issued recommendations.
President, Society for Planet and Prosperity, Prof. Chukwumerije Okereke, said part of the 11 suggested measures is centered on improving the generation of electricity by the national grid.
“Number one measure is to increase the generation of electricity, both on-grid and off-grid. Nigeria currently generates about 5,000MW for a population of over 200 million people.
“5,000MW is about the amount of electricity that powers Heathrow Airport (London). South Africa generates 40 gigawatts (40,000MW). India, which we should be competing with, generates over 80GW (80,000MW),” he said.
According to him, lack of constant power supply cripples the economy as it discourages local and foreign investors from investing in the country. This in turn leads to an increase in the unemployment rate.
Okereke stated that enhancing on-grid and off-grid power will significantly solve the issue of climate change and improve the economy.
Another measure mentioned was the extinction of generator sets of any kind as this will shift attention to the rapid growth of the national grid.
“So we get nearly 75 percent of our electricity in this country through generators, which is one of the most polluting sources of electricity generation. Therefore, the elimination of diesel and petrol-powered generators is the second on the list that we have identified,” he said.
Speaking on how the use of generators can be halted, the Chief Executive, GCA Capital Partners, Obi Ugochukwu, noted that it could be done by massively increasing the power generation from renewable energy sources like solar, hydro, among others.
Investor Confidence Boosted by UBS-Credit Suisse Deal, Oil Prices Show Resilience
The deal eased investors confidence ahead of Federal Reserve meeting scheduled for tomorrow and boosted oil prices.
Global oil prices rebounded slightly in the early hours of Tuesday as concerns over banking section issues subside following UBS-Credit Suisse successful deal.
The deal eased investors confidence ahead of Federal Reserve meeting scheduled for tomorrow and boosted oil prices.
Brent crude oil, against which Nigerian oil is priced, traded rose to $73.84 per barrel while the U.S. West Texas Intermediate (WTI) crude oil gained 9 cents to $67.73 a barrel. A rebound from $3 decline recorded in the previous session.
The announcement of the UBS-Credit Suisse deal was followed by major central banks, including the U.S. Federal Reserve and European Central Bank, indicating that they would enhance market liquidity and support other banks.
Furthermore, officials with the G7 stated that they were unlikely to revise a $60-per-barrel price cap on Russian oil as planned. The officials said EU countries’ ambassadors were told by the European Commission over the weekend there was no pressing desire among the group for an immediate review.
Looking ahead, OPEC+, which includes the world’s top oil exporting countries and allies including Russia, is set for a meeting on April 3. The group agreed in October to cut oil production targets by 2 million barrels per day until the end of 2023.
Overall, the UBS-Credit Suisse deal and central bank support has helped ease investor concerns and stabilize oil prices. However, the upcoming OPEC+ meeting will be closely watched for any potential changes to oil production targets.
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