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Maxed Out

Markets stewed in their own juices overnight leaving equities and currencies and precious metals trading in noisy ranges, but ultimately finishing not too far from where they started.

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

Markets stewed in their own juices overnight leaving equities and currencies and precious metals trading in noisy ranges, but ultimately finishing not too far from where they started. The big mover overnight was oil, which had another impressive rally, this time helped along by a Reuters story where France’s President Macron was overheard telling US President Macron at the G7 meeting, that a call to the UAE had informed him that both they and Saudi Arabia were maxed out on production capacity.

That is probably the last thing the world needs to hear right now, given that Saudi Arabia and the UAE are regarded as the world’s two available swing producers at the moment. The UAE released an official response stating that they were indeed near-maximum capacity, although this was crouched as within the context of its allowable OPEC+ quota. If true, President Biden’s upcoming cap-in-hand trip to Saudi Arabia may have lost one of its raisons d’etre.

The pain doesn’t stop there for energy markets. Along with reduced Russian gas flows to Europe, Libya also announced it may declare a force majeure on over half of its daily production shortly. Ecuador said over the weekend that it may cease production entirely due to domestic cost-of-living protests, something we’re going to see a lot more of frontier/emerging markets this year sadly. By my rough calculations, Ecuador and Libya will add up to around 1.1 million barrels per day. Not a deal-breaker normally, but much more so in these abnormal times. The reality that energy price inflation isn’t going anywhere anytime soon may partially explain the modest retreat by equities in the last 24 hours.

US data was mixed overnight. US Durable Goods surprised to the upside, rising by 0.70% MoM in May, well above the 0.10% rise forecast. Even the numbers ex-defence and transport (read Boeing), exceeded forecasts easily. In contrast, US Pending Home Sales came in worse at -13.60% YoY for May, while the June Dallas Fed Manufacturing Index slumped to -17.70. With US and German yields also rising overnight, the rally in oil prices, and the Durable Goods, in particular, forced the FOMO gnomes of Wall Street to reassess the lower terminal Fed Funds excuse to buy equities.

We could still see the equity bounce continue, though. Markets are in a schizophrenic frame of mind day-to-day, but underlyingly, are still desperately keen to buy this medium-term dip. Additionally, it is the month and quarter-end this week, and that will prompt no small amount of portfolio rebalancing by institutional investors globally. We should expect the back-and-forth chop-fest to continue this week in the equity space, and possibly, the currency space.

In Asia today, the calendar is as empty as I have seen it for a while. Japan’s 2-year JGB auction and Malaysian PPI are unlikely to move the needle. ECB President Lagarde and Chief Economist Lane both speak this afternoon, and we can expect their comments to be dissected for clues on both monetary policy direction and their anti-fragmentation tool to manage bond spreads between members. Fed Chairman Jerome Powell also speaks tomorrow at an ECB event, along with Ms Lagarde, which could up the ante on mid-week volatility.

In the US, most attention is likely to be on Wholesale Inventories and the Case-Shiller House Price Indexes. Markets are becoming nervous that corporate America may end up with lots of inventory they can’t sell, and the nerves around the US housing market are well known. Given the poor Dall Fed Manufacturing Index overnight, the Richmond Fed Manufacturing Index may garner more attention than usual as well, especially if it is week.

Overall, it looks like Asia will settle for a sideways session, with equities content to mirror Wall Streets’ direction, and currencies, precious metals and cryptos staying comatose. A lack of data in Asia today leaves markets vulnerable to headline bombs on the news ticker.

Asian equities ease with Wall Street.

A surprisingly robust US Durable Goods number prompted a few doubts around the lower terminal Fed Funds rate so buy equities strategy overnight. The soft US pending home sales and Dallas Fed manufacturing data may also have sparked recession isn’t good for equity’s thoughts. With sentiment wavering, Wall Street lightened up some recent longs, sending the equity markets to a negative close. The S&P 500 eased 0.30% lower, the Nasdaq fell by 0.83%, and the Dow Jones fell by 0.20%. US futures are holding steady in Asia this morning.

Across Asia itself, markets appear content to follow Wall Street’s lead, as they have done recently, with markets locally moving lower in response, although not markedly so. Japan’s Nikkei 225 is unchanged, with South Korea’s Kospi down just 0.10%. In Mainland China, the Shanghai Composite and CSI 300 are 0.05% lower. In Hong Kong, the Nasdaq-following Hang Seng is down 0.75%, retracing some of yesterday’s rally.

In regional markets, Singapore is 0.20% lower, with Taipei slipping by 0.75%, reacting to an impending 8.40% increase in electricity prices announced yesterday. Kuala Lumpur is 0.10% lower, Jakarta had fallen by 0.60%, Bangkok is 0.15% lower, and Manila has eased just 0.10%.

Australian markets are bucking the trend by rising today. Although most sectors are lower, resources have rallied, perhaps on statements from Shanghai yesterday declaring victory over its latest Covid-19 outbreak. Less restrictive China equals they will buy more resources I suppose, until their next outbreak. The ASX 200 is 0.50% higher, while the All Ordinaries is 0.40% higher.

Europe has a mixed session overnight, modest gains with Scandinavian markets outperforming, Stockholm and Helsinki rising by over 3.0%. I am assuming that is because the leaders of Turkey, Sweden and Finland are meeting to thrash out their differences and open NATO membership for the latter two. With Asia in wait-and-see mode today and oil prices rising sharply overnight, Europe is probably going to start its session on the back foot. Month and quarter-end rebalancing flows will potentially distort the price action in both the US and Europe markets this afternoon and for the next couple of days.

US Dollar mixed.

A rise in US yields overnight boosted the USD/JPY slightly, but elsewhere, the greenback continued its modest retreat versus the G-20 space as currency markets showed very little reaction to the US data. The dollar index eased 0.17% lower to 103.95, where it remains in Asia. The charts do suggest the downward correction still has more to run, with a failure of 103.50 signalling a deeper correction. The dollar index has support at 1.0350 and 102.50, with resistance at 105.00 and 1.0570.

Elsewhere, currency markets are comatose in Asia, with both DM and Asian currencies almost unchanged from their overnight closes.

EUR/USD rose by 0.25% to 1.0580 overnight, where it remains in Asia. It continues showing resilience as the Russian natural gas exports to Europe situation deteriorates, but initial resistance at 1.0600 and 1.0650 remains challenging. Support is at 1.0450 and 1.0400. Sterling was unchanged at 1.2275 overnight once again, unmoved in Asia. GBP/USD has initial resistance at 1.2360 and 1.2400, with support at 1.2200, 1.2160, and then 1.1950.

USD/JPY edged 0.25% higher to 135.45 overnight as US yields moved slightly higher. It has fallen slightly to 135.30 in Asia. USD/JPY has support at 134.25 and 132.00, with resistance at 136.65 and 138.00. The short-term direction remains at the mercy of US yields, although a fall by the US 10-year through 3.0% could provoke an unwinding of USD/JPY longs.

Asian currencies continued to trade sideways overnight, mostly booking some small gains, but overall, remaining near recent lows versus the US Dollar. That suggests that the rise in investor sentiment in equity markets is yet to spill out into the broader EM complex. The Chinese Yuan has had zero reaction once again to another large liquidity injection by the PBOC this morning. Markets are clearly anticipating the PBOC draining all the liquidity via the repo next week after the quarter-end has passed. Reserves data suggests that Asian central banks have been busy selling US Dollars recently to smooth out currency volatility, but it looks like any consistent rally is going to need a big US Dollar move lower.

Oil prices rally on supply concerns.

Oil prices rallied once again overnight, as the Reuters story outlined above over Saudi Arabia and UAE capacity constraints, as well as disruption of supplies from Libya and Ecuador, overrode US recession concerns. Another lesson is that markets ignore crude futures backwardation at their peril when trying to pick a top in oil prices. Brents’s backwardation actually widened during the sell-off early last week.

Brent crude rose by 2.60% to $115.40 overnight, gaining another 0.90% to $116.300 a barrel in Asia today. WTI rose by 2.30% to $110.00 overnight, rallying another 0.80% higher to $110.70 a barrel in Asia. The rhetoric around declaring victory in Shanghai over omicron seems to be prompting Asian traders to continue buying this morning.

Notably, Brent crude tested and held its rising longer-term support line, today at $108.00, in the early part of last week. Nor was its 100-day moving average (DMA) tested either. That is a technical development that should be respected. Brent crude has support at 111.35, its 100-DMA at $109.40, and the six-month support line at $108.00. It is testing resistance here at $116.50, and a daily close above here would clear the way for a retest of $120.00 a barrel.

WTI’s technical picture has improved markedly overnight, regaining its rising 2022 support line, today at $107.50 a barrel and initial support. A close above $111.25 this evening clears the way for a larger rally to $116.00 a barrel.

Gold fades overnight.

Gold attempted to rally overnight as the G-7 announced a ban on Russian gold imports. That was a rubber stamp exercise though, and although gold climbed intraday, it faded ahead of $1840.00 an ounce. It then proceeded to give back all those gains, finishing 0.25% lower at $1823.00 an ounce. Although US yields rose slightly, the US Dollar was generally slightly weaker overnight, making the price action by gold even more disappointing. It appears that the downside is increasingly gold’s path of least resistance.

Gold has resistance at $1840.00, $1860.00, and $1880.00, the latter appearing an insurmountable obstacle for now. Support is at $1805.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, potentially reaching $1700.00 an ounce. On the topside, I would need to see a couple of daily closes above $1900.00 to get excited about a reinvigorated rally.

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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Markets

Steady After Fed Minutes

The European session is off to a mixed start after both the US and Asia posted small losses overnight.

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

The European session is off to a mixed start after both the US and Asia posted small losses overnight.

The Fed minutes on Wednesday didn’t really offer anything we didn’t already know. Even those that leapt at the opportunity to buy the supposed “dovish pivot” are aware that this isn’t quite the case and the minutes really back that up. Not that they needed to as the Fed commentary that has followed has made that perfectly clear.

The central bank did stress the need to slow the pace of rate increases as monetary policy tightened further which most expected would be the case anyway. Of course, that is ultimately dependent on the inflation data allowing for such a move and the July reading was certainly the first step towards that.

It also referenced the risk of monetary policy being tightened more than necessary to restore price stability which could be read a couple of different ways. While it doesn’t suggest it will over tighten intentionally, the Fed is clearly determined to get inflation back to target and ensure the public believes it will.

The statement could therefore suggest it will act in a more aggressive manner than markets expect in order to deliver on that. Alternatively, it could indicate that the central bank is aware of the risks and may therefore ease off the break as soon as the opportunity arises in order to avoid tightening too much. ​

It also raises the possibility of a swift u-turn from hiking rates to cutting them as markets have indicated recently and policymakers have pushed back against. Needless to say, there are many more twists and turns to come.

A cause for concern or merely a blip?

The Australian jobs data looked pretty shocking on the face of it. Not only did employment fall by 40,900 – against an expectation of a 26,500 gain – but the drop in full-time employment was considerably worse at 86,900 which was then partially offset by a rise in part-time workers. All told, it looks pretty grim but as is so often the case, there’s a caveat.

This data was not in keeping with the trend that we’ve seen in the labour market data in recent months and there are numerous possible explanations for why the dip has happened. With the labour market still very tight and unemployment at a record low – helped there last month by a drop in participation – this report will probably be viewed as an anomaly albeit one that will draw more attention to the data in the coming months. Ultimately, it’s unlikely to deter the RBA from raising rates at the next meeting, with markets currently favouring a 25 basis point hike.

Oil steady after inventory boost

Oil prices are treading water following Wednesday’s rally which came on the back of the EIA inventory data. The surprising and substantial drawdown alongside record crude exports provided a boost just as the price was testing multi-month lows. There are numerous factors at play right now and we may be seeing traders taking a more cautious approach considering how close a decision on the Iran nuclear deal appears to be.

There remains plenty of doubt that it will get over the line but if it does, that could be the catalyst for another move lower and perhaps even take the price to levels not seen since before the invasion.

Gold struggling amid resurgent dollar

Gold is a little higher after slipping once more on Wednesday. It failed to get a sustained lift from the Fed minutes with the dollar quickly recovering its initial losses and wiping out any gains for the yellow metal. The US 2-year is not too far from its recent highs and the 10-year has also made moves higher over the last couple of days which could continue to pressure gold.

The inversion very much remains in play though which means there’s still seemingly a disconnect between what bond traders expect and what equity traders do. If the recession narrative starts to weigh more heavily on financial markets, gold could make another run at $1,800 and maybe even have more success this time.

Steady post-Fed minutes

Bitcoin is relatively flat on the day after losing more ground on Wednesday. It’s now suffered four consecutive days of losses and has fallen around 7% from its peak at the start of the week. By its standards, that’s not really anything to write home about and the trend of the last couple of months still looks positive. The difficulty is that the rally that brought it back to $25,000 has lost considerable momentum and that could begin to weigh more heavily on the price. A move below $22,500 may suggest the rally has run its course for now.

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Markets

Mixed Ahead of Fed Minutes

A mixed start to trade in Europe after a more promising session in Asia overnight where stocks may have been boosted by talk of more pro-growth policies in China.

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

A mixed start to trade in Europe after a more promising session in Asia overnight where stocks may have been boosted by talk of more pro-growth policies in China.

That followed disappointing data late last week and early this from the world’s second-largest economy so the comments came at a good time. Still, we’re not seeing investors getting too carried away by comments alone, action needs to follow and small rate cuts from the PBOC don’t really fall into that category.

More misery for the UK as prices rise by the most since the early 80s

UK inflation hit its highest level in 40 years last month, with the annual CPI jumping 10.1% and the core reading 6.2%, both faster than expected. Double-digit inflation was inevitable but it has come earlier than expected which will leave households and businesses worrying about what that ultimately means for peak inflation later this year and how sustained it will be.

The data today has probably locked in a 50 basis point hike from the Bank of England as a minimum, especially when combined with yesterday’s wage growth numbers. Real incomes are still falling at a rapid rate but the central bank will have little choice but to persevere regardless and the economy will suffer the consequences.

RBNZ committed to tackling price rises as it raises the cash rate peak

The New Zealand dollar is trading a little lower on the day but the session has been quite volatile. We’ve seen some big swings in response to the RBNZ announcement despite the rate decision itself falling in line with expectations. The central bank now expects the cash rate to peak higher and earlier than previously anticipated, hitting 4.1% in the second quarter of next year, compared with 3.95% in Q3.

The RBNZ still firmly believes though that the actions it’s taken will both return inflation to the midpoint of its 1-3% target range in 2024 and not trigger a recession, although it did caution that the country will likely experience sub-par growth. That all sounds very hopeful but BoE aside, that appears to be the view of central banks still.

Fed minutes eyed as traders seek dovish pivot clues

There’s plenty more to look forward to today but the FOMC minutes naturally stand out. What’s interesting about them is that despite the supposed “dovish pivot” from the Fed, the commentary since has been anything but. Rather than talking up the prospect of falling inflation allowing for slower tightening, the message remains hawkish. What’s more, policymakers are continually pushing back against the policy u-turn next year that markets have been flirting with the idea of.

I expect any hawkish components of the minutes will be overlooked today and instead traders will dissect them for any additional dovish concessions that could further fuel the stock market recovery. That’s very much what we’ve seen in recent weeks and the decline in CPI last week only encouraged it.

Oil rebounds off support as JCPOA talks continue

Oil prices are edging higher on Wednesday, bouncing off technical support over the last 24 hours as Chinese Premier Li pushed for more pro-growth measures from local officials. There are growing downside risks as a result of the growth outlook and ongoing uncertainty around Chinese Covid restrictions.

What’s more, talks between the US and Iran are continuing around the nuclear deal which, if it gets over the line, could be a big positive for oil supply and therefore a negative for prices. There is no shortage of scepticism around the prospects for the JCPOA to be revived though but we may be reaching a point where that will become clear. For now, Brent appears to have decent support around $92.

Gold flat after a pullback

Gold is marginally lower on the day with focus fully on the Fed minutes later in the day. The yellow metal has been knocked back in recent days after briefly breaking through $1,800 resistance. It’s remained quite resilient though against the backdrop of a strengthening dollar and the FOMC minutes later could potentially reward that.

Could Fed minutes be the catalyst bitcoin needs?

Bitcoin rallies have struggled to generate much momentum of late, with $25,000 proving to be a strong barrier to the upside. What’s interesting is how shallow the pullback has so far been from that level which could be a bullish signal. Traders may be struggling to get on board with a break higher but they’re perhaps not keen to cash out either. The FOMC minutes later may be the catalyst it needs, one way or another.

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Crude Oil

Weak Chinese Data Drags on Crude Oil Prices

Oil prices extended their declines on Monday as weak Chinese data suggested possible slow demand

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Oil prices extended their declines on Monday as weak Chinese data suggested possible slow demand for the commodity in the world’s largest importer of crude oil.

Brent crude, against which Nigerian oil is priced, declined by $1.14, or 1.2%, to $97.01 a barrel after shedding 1.5% on Friday. The U.S. West Texas Intermediate crude oil depreciated by $1.06, or 1.2% to $91.03 a barrel, after a 2.4% decline in the previous session.

The unexpected slowdown in the Chinese economy in the month of July weighed on refinery output. Refinery output slipped to 12.53 million barrels per day, the lowest since March 2020.

“The official data suggests that oil demand is weakening as domestic logistics and consumer demand are deterred by the record high oil pump prices,” said Heron Lin, an economist at Moody’s Analytics.

Oil demand could stay on the downtrend for the rest of the year as the threat of COVID-19 restrictions encourages precautionary savings and reduces oil consumption, he added.

Saudi Aramco stands ready to raise crude oil output to its maximum capacity of 12 million bpd if requested to do so by the Saudi Arabian government, Chief Executive Amin Nasser told reporters on Sunday.

“We are confident of our ability to ramp up to 12 million bpd any time there is a need or a call from the government or from the ministry of energy to increase our production,” Nasser said. He added that China’s easing of COVID-19 restrictions and a pickup in the aviation industry could add to demand.

Oil prices rebounded more than 3% last week after a damaged oil pipeline component disrupted output at several offshore Gulf of Mexico platforms and as investors pared back expectations for interest rate increases in the United States.

Producers had moved to reactivate some of the halted production after repairs were completed late Friday, a Louisiana official said.

Energy services firm Baker Hughes Co (BKR.O) reported on Friday that U.S. oil rig count rose by 3 to 601 last week. The rig count, an early indicator of future output, has been slow to grow with oil production only seen recovering from pandemic-related cuts next year.

Global oil markets remained supported by tight supplies in the run-up to EU sanctions on Russian crude oil and refined product supplies this winter. read more

More supplies could come if Iran and the United States accept an offer from the European Union to revive the 2015 nuclear deal, which would will lift sanctions on Iranian oil exports, analysts said.

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