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Knot-Tying Masterclass Continues

One of the more pleasing aspects of being aboard a slow boat into the rainforests of Borneo these past few days was the complete loss of mobile telephony signals.

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

One of the more pleasing aspects of being aboard a slow boat into the rainforests of Borneo these past few days was the complete loss of mobile telephony signals. The temptation to look at emails, chats, social media, or news from the markets was compulsorily removed, thanks to the national park being bigger than all of Bali. Phones (sorry; devices) become mere cameras to capture orangutans and others, or scenery for posterity. Experiences are experienced instead of captured for the “Gram, books are read, conversations are had. I could have done without the leeches and insect bites, but that’s all part of nature’s plan, and if I’m honest, in my long career in the great game we call the financial markets, I’ve noticed they attract plenty of leeches and biting insects of their own.

I certainly haven’t missed much in my short absence. Yes, volatility remains elevated across every asset class to be sure, although a US holiday overnight meant a 12-hour break from the noise. (New Yorkers don’t do 8-hour days, lunch is for wimps) What is clear is that the strategy of watching the rooster fight from the sidelines instead of getting involved remains the sensible one. The financial markets continue to tie themselves in knots so complicated, that they would give even the saltiest mariner a headache, as they try to price in a recession no recession and its impact on asset prices. Nobody is saying it, but really, it is a cover for looking for an excuse to pick the low in the stock market, which is struggling still to cope with the transition back to the real world after being back-stopped by the world’s central bank for the past 20 years.

Other asset classes are trying to price in a recession as well. US 10-year yields are now back to near 3.0% and I must say I got this one completely wrong, I thought it would be nearing 4.0% by now. That said, the US yield curve from 2-year to 30-year continues to flatten dramatically, with only a 24 bps difference as of Friday. We seem to be on the way to an inversion sooner than later, signalling a recession. Not much of a reason to bottom-fish equities I’d have thought.

Oil fell by over 5.0% on Friday for much the same reason, but frankly, with Russian sanctions and OPEC’s production targets merely a fantasy on paper, we’re going to have to see things get a lot worse in the world economy to see Brent crude under $100 a barrel. That ties in nicely with my outlook that inflation may be nearing a peak, but the risk is that it stays elevated for longer than the market is pricing, even if it peaks in the US. Don’t consign stagflation to the cupboard just yet. Elsewhere inflation in the world is still on its way up, as evidenced by European data last week and yesterday’s Indonesian inflation numbers.

The crypto space is also in the Accident and Emergency department still, waiting to be seen by a doctor. Bitcoin flirted with $18,000.00 while I was away but held the crucial $17,500.00 region. The dead cat bounce to $20,000.00 isn’t inspiring confidence with another crypto lender halting withdrawals, deposits, and trading on its platform yesterday. This one, I believe, was conjuring up to 40% potential returns through the magic of Defi. Cryptos have proven to be neither a hedge for deflation, stagflation, or inflation, even gold has done a better job and that’s saying something. Nor have they usurped the US Dollar or other fiat currencies. All I can say about the crypto space is a saying I heard before the global financial crisis and used a lot during it when a bank CEO would proclaim “we have plenty of capital.” That is “there is never just one cockroach.”

Perhaps the biggest surprise is that despite US yields tanking last week on recession fears, USD/JPY remains near 136.00. That is becoming a dangerous trade in my opinion, especially if US 10 years fall below 3.0%. Still, the US Dollar remains firm across the board, with the modest recovery in risk sentiment recently not translating into material strength in Asia currencies or major currencies versus the greenback. In fact, looking at the likes of the Euro, Yen, Aussie or Won, you might argue the opposite. The price action in the currency markets is perhaps a less-than-subtle warning to temper those bullish animal spirits in other asset classes.

That said, it looks like the bottom-fishers of the equity, bond and crypto-space may hold the reins in the first past of the week. US Treasury Yellen and China Vice-Premier Liu have held a construction phone call this morning and the market is alive with speculation that US President Biden will cut tariffs on a swath of Chinese goods this week to lower inflation. ​ Following on from an impressive recovery by US manufacturing PMIs last week, China’s Caixin Services PMI leapt massively to 54.5 this morning for June, a giant recovery from May’s 41.4.

Japan’s Jibun Bank Services PMI for June also rose to 54.0 from 52.3 in May. Both China and Japan are emerging from varying degrees of virus restrictions, but the strength of the China’s PMI recovery is a surprise. Whether it can last is another matter and once again I’ll focus on China once again and beat the drum of warning. China’s covid-zero policy is NOT one and done and President Xi said as much last week. Already, a flare-up of virus cases elsewhere has led to some restrictions being reimposed. Readers should be under no illusion that flare-ups in Beijing and Shanghai will not lead to a reimposition of movement restrictions. Tread carefully on bottom-fishing in China asset markets. And I have even mentioned the still ongoing implosion in the private property developer sector there.

Elsewhere in Asia, inflation warning signs continue to make some noise. Having started the post-covid recovery later than the United States and Europe, Asia is starting to see the inflation pass-through happening. South Korean Inflation YoY for June rose to 6.0% today from 5.40% in May, you can lock and load a Bank of Korea rate hike at the next meeting, it’s just by how much. Philippine Inflation YoY for June has risen to 6.10% from 5.90% in May as well. On Friday, Indonesian inflation jumped to 4.40%, led by food inflation. An ominous development for a country of 270 million, mostly poor, citizens. Although core inflation remained benign, two of the most reluctant rate hikers, the Philippines and Indonesia, are going to be forced to act, or see pressure mounting on their currencies, causing a negative feedback loop of involuntary tightening via a lower currency. Likewise, India may need to accelerate hikes as well as soaring energy prices torpedoed the current account yesterday, which slumped to $-25.64 billion. And that’s with cheap Russian oil. This might partially explain why lower US yields are producing no peace dividend for Asian currencies against the US Dollar.

Another central bank facing the music in a couple of hours is the Reserve Bank of Australia. Home Loan and Building Permits soared yesterday, as did ANZ Job Advertisements. S&P Global Services PMI for June edged only slightly lower to 52.6, with the Composite PMI also printing at 52.6 from 52.9 last month. The lucky country remains far too lucky it seems, and despite a 50bps hike last month, the battlers aren’t going down without a fight. Another 50bps is priced in for the RBA today, and if they stay on the fence and do just 25bps, the Australian Dollar is going to have a very bad day. It will probably only book modest gains anyway with 50bps unless the RBA statement is very hawkish. There is an outside chance the RBA could look at the data and go 75bps and surprise markets, I’m not betting my remaining hair on it though.

Although I said the stock market bulls may have the momentum in the first half of the week, the first challenge to that will loom in the dark hours of tomorrow evening Singapore time. Wednesday sees the release of May JOLTs Job-Opening data, expected to still be just above 11.0 million jobs. JOLTs Job Quits should come in around 4.4 million. That is hardly consistent with a US economy on the verge of a recession although some may argue that May is now history. Junes ISM Non-Manufacturing PMI, Activity, Employment, New Orders and Non-Manufacturing sub-indexes might take the heat out of a high JOLTs number unless they surprise to the upside.

Later that evening, the FOMC Minutes are due to be released, although I would be surprised if the committee is blinking on its inflation fight yet. That would create an intolerable credibility gap that already has a few holes below the waterline after the past 12 months. Before we know it, Friday is here and another US Non-Farm Payrolls release for June. Time flies when you’re getting whipsawed every day. Jobs are expected to fall from last month’s monster 390,000 print to a still-healthy 270,000. Maybe there is some risk of downward back-month revisions, but that forecast is still not consistent with a US economy on the verge of a big slump. The scope for bond market volatility is high is “peak-Fed” has to be revised higher again. The US Dollar will lap it up like a cat with a plate of high-fat milk, but equity markets are unlikely to feel the same love.

It looks like another week to be patient and observe from the sidelines. Otherwise, strap in everybody, and keep practising those complicating sailing knots, they will be used this week.

Asian equities China tariff rally fades.

US OTC equity markets were closed overnight for the July 4th holiday, but US futures posted consistent gains as markets pinned their hopes on a reduction of US tariffs on Chinese goods this week. S&P 500 futures are 0.40% higher, Nasdaq futures have rallied by 0.85%, and Dow futures have gained 0.55%.

That theme saw Asian markets open higher this morning, but that rally seems to have faded as the session marched on. Concerns around the latest China virus flare-up and the prospect of restrictions seem to be weighing on Asian markets and rightly so. Lower tariffed goods to the US will mean little if supply chain disruptions from China occur again. That has led to a mixed day across Asia.

Japan’s Nikkei 225 is 0.55% higher today, well of the intraday highs, while South Korea’s Kospi has rallied by 1.20%. Mainland China has moved into the red, the Shanghai Composite falling by 0.25%, with the CSI 300 falling by 0.60% despite an impressive recovery by the Caixin Services PMI data. Hong Kong’s Hang Seng has now fallen into negative territory, down by 0.05%.

Singapore is 0.30% lower, with Taipei easing by 0.25%, Kuala Lumpur clinging to a 0.05% gain, while Jakarta is outperforming, rising by 0.90%. Manila has also surprised, rallying by 1.20%, with Bangkok adding 0.25%. Australia is clinging onto some of its earlier gains ahead of the RBA policy decision, with 0.50% priced in. Still, its high beta to China means it is well off earlier highs in the day. The ASX 200 and All Ordinaries are 0.30% higher.

Europe had a mixed session overnight, and with a US holiday and a slow news day, there will be little to inspire a strong direction move this afternoon. I expect a neutral opening. With US futures gaining during the US holiday, and China tariff cuts expected this week, I expect US markets to focus their efforts on this direction and open higher tonight, potentially lifting European markets later in the day.

US Dollar remains firm.

A US holiday overnight torpedoed volatility in currency markets, but overall, the US Dollar continues to maintain its gains versus the DM and EM currency space, despite insipient bullish sentiment in other asset classes and falling US yields. It seems that while markets tie themselves in knots in other asset classes, the US Dollar remains the favoured seats to watch the fun and games from in the stadium. The dollar index was almost unchanged at 1.0516 overnight, where it remains in Asia. ​ Support remains at 1.0350 and 102.50. ​ With resistance at 105.00 now eroded, the index’s next resistance is at 1.0585.

EUR/USD is steady at 1.0430 in Asia. Resistance is well and truly in place at 1.0600, followed by 1.0650. It remains uncomfortably close to the critical 1.0350 support region. Failure signals further losses to 1.0200 initially and potentially to parity in the weeks ahead.

Sterling has edged 0.10% higher to 1.2110 in Asia. A probe of the 1.2200 upside came to nought overnight and it remains initial resistance, followed by 1.2300. Support at 1.2080 and then Friday’s low at 1.1975. More important support at 1.1950 held and failure now signals a test of the 1.1400 pandemic low.

USD/JPY climbed by 0.35% to 135.70 overnight, adding another 0.35% to 136.20 in Asia. The resilience of USD/JPY continues to surprise, given the moves lower by US yields. Perhaps markets are pricing in an imminent inversion of the US yield curve and sharply higher short-term rates, but the excessive bullishness of USD/JPY is, in my opinion, becoming a dangerous trade if the US/Japan yield differential narrows. Perhaps US data this week will show a healthier US economy and put inflation-fighting back on track, perhaps not. Additionally, far too many “experts” are now calling for 140+, always a dangerous sign in my books. USD/JPY has resistance at 136.65 and 138.00, and support at 134.25 and 132.00.

Asian currencies are steady today, with a US holiday overnight giving Asian currency markets a reason to sit this session out. The US Dollar is maintaining its gains across the Asian FX space, with USD/PHP now at 55.000, while USD/IDR is approaching 15,000, and USD/KRW trading on each side of 1300.00. The India trade data did the INR no favours and USD/INR remains near record highs at 78.930 this morning. The Chinese Yuan remains a paragon of managed currency stability, thanks to components in its index slumping. USD/CNY is at 6.6935 today, comfortably in the middle of its two-month 6.6400 to 6.8100 range. If US data and/or the FOMC minutes, come in on the firmer side this week, receding recession fears and higher rate expectations will leave Asian FX vulnerable to another bout of downside pressure.

Oil is steady in Asia.

Oil price continued their recovery from Thursday’s recession-fear sell-off as the supply-demand balance in the real world continues to underpin prices in the futures market. Brent crude rose by 2.15% overnight, easing 0.35% to $113.40 a barrel in subdued Asian trading. WTI rose by 1.90% to $100.55 overnight, easing by 0.30% to $110.10 a barrel in Asia.

Notably, Brent crudes retreat last week saw its ascending 2022 trendline support at $108.50 a barrel tested and held in textbook fashion. The support line is at $109.00 today and we can reasonably assume that Brent crude’s downside is limited unless we get a couple of daily closes below it. That would open a deeper test lower, potentially extending to $100.00. On the topside, the $120.00 region looks unlikely to break thanks to global recession nerves, unless we get more negative developments related to Russia.

WTI looks the more vulnerable of the two, as recession nerves rachet up in the United States. Again, US data this week has upside risks in this respect. WTI is ranging each side of its 2022 ascending trendline support, today at $108.50 a barrel. A close below the 100-day moving average at $106.95 likely signals a test of $104.00 and potentially $100.00 a barrel. Resistance lies at $112.00 and $114.00 a barrel for now.

Gold underwhelms again.

Gold fell to $1784.00 an ounce last Thursday in what looked like a series of stop-losses going through the market after $1800.00 failed. It immediately recouped those losses and has been trading sideways around $1810.00 an ounce since then. Gold has risen slightly to $1811.00 in Asian trading today.

Overall, gold bugs will have taken a modicum of comfort that the fall below $1800.00 an ounce was short-lived, but the ensuing rally is uninspiring, to say the least. It suggests that any further US Dollar strength this week could see the downside tested once again as it refuses to react positively to the flattening and move lower by the US yield curve. The series of lower daily highs traced out over the last month continue to warn of the path of least resistance for gold.

Gold has resistance layered at $1820.00, its sloping downtrend line, then $1840.00, $1860.00, and $1880.00, the latter appearing an insurmountable obstacle. Support is at $1784.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, potentially reaching $1700.00 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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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-rig

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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