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Recession Meltdown

Recession fears buffeted markets overnight, with the price action across various asset classes looking like a self-sustaining negative feedback loop, triggering more stop losses as prices slumped and dragging in trend-following momentum-hunting fast money.

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

Recession fears buffeted markets overnight, with the price action across various asset classes looking like a self-sustaining negative feedback loop, triggering more stop losses as prices slumped and dragging in trend-following momentum-hunting fast money.

Europe endured a torrid day as the Norwegian oil worker strike proved the last straw for an energy-starved Europe. European equities plummeted and rightly so, as Europe’s energy-from-Russia Achilles heel was cruelly exposed. The Euro also capitulated, EUR/USD taking out 1.0350 on its way to a 1.50% loss to 1.0260. Sterling and UK equities were also hammered by the extra headwind of political instability as three senior ministers resigned overnight with immediate effect. There may be some respite for Europe today though as the Norwegian Government imposed a settlement on both sides effectively ending the strike. It is likely to be temporary.

In the US, equity markets opened much lower, but US bond yields outdid them, slumping on recession nerves overnight and sending the US 10-year down to 2.805%, leaving the 2-year 10-year yield curve teetering on inversion. Perversely, the slump in US bond yields, which might also be due to haven inflows and not just recession fears, saved the bacon of US equity markets. US stocks reversed most of their losses, and ironically, the Nasdaq actually rallied to a 1.75% gain. The still-richly-valued growth stocks of the Nasdaq are the most interest-rate sensitive on US markets, and small moves in the risk-free discount rate have outsized price impacts in these environments. Still, the Nasdaq gains looked like a mechanical rear-guard action and not a brave new dawn. A US and Europe recession won’t do their ambitious valuations any favours either.

The big winner overnight was the US Dollar, which rallied imperiously versus both developed and emerging currencies. A sign of the nerves around US Dollar strength came from China today, which set a much weaker Yuan fixing rate of 6.7346 versus the US Dollar, as it glanced around at the slump in other Asia currencies overnight. The only winner was the Japanese Yen. USD/JPY held steady overnight at 135.90, to my great surprise, as the US/Japan rate differential plummeted lower. However, it has immediately fallen by 0.50% to 135.15 in Asian trading. As I have said previously, the long USD/JPY has become a dangerous one as the primary reason for it occurring in the first place, the US/Japan rate differential narrows sharply.

Oil prices also slumped overnight on recession hype, and I’ll talk about that later. Ironically, one of the night’s outperformers was Bitcoin, which reversed intraday losses to close unchanged at $20,200.00. I can only surmise that the Nasdaq’s rally lifted Bitcoin as well so that’s the short-term correlation to watch now, although it has already fallen 1.80% to $19,800.00 this morning. My line in the sane for Bitcoin remains $17,500.00, everything above that will be noise, failure should trigger another wave of margin stop outs among the geniuses conjuring 20% returns out of thin air.

Commodities also slumped overnight on recession fears, notably copper. But as a grouping, hard and agricultural commodities look to have peaked a few weeks ago except for European natural gas for obvious reasons. Gold finally fell below $1780.00 an ounce overnight, an ominous technical development. But spare a thought for palladium. It is trading at $1909.00 an ounce this morning, it’s hard to believe it traded at $3400.00 an ounce in early March.

Asian markets are starting the day on the back foot for different reasons. The PBOC USD/CNY fix today will have regional central bankers looking over their shoulders, although looking at the price action of pairs such as USD/INR and USD/IDR overnight, it looks like regional central banks are increasing their US Dollar selling. Mostly, though, it is China and covid zero that are weighing on the sentiment in Asia, which was going to be fragile anyway. As I have said till I am blue in the face, covid zero means covid zero in China, not one and down and we all live happily ever after. The City of Xi-an has enacted a series of restrictions overnight, and 9 districts of Shanghai are undergoing mass testing. Chinese authorities will try, initially, a district-by-district approach to restrictions, But nobody should be under any illusion that they won’t go harder and faster if needed. As I’ve said before, China needs to get lucky 100% of the time, omicron has to get lucky once. This remains a key risk factor too often ignored by anybody pondering China markets in 2022.

The Asian data calendar is empty today except for Malaysia’s Bank Negara policy decision. The market is locked and loaded for another 0.25% rate hike to 2.25% and I won’t disagree. With USD/MYR testing 4.4200 this morning, they won’t have a choice. No rate hikes likely see USD/MYR starting with 4.50 in double time. South Korea, the Philippines and Indonesia all face the same unsavoury choice in the weeks ahead at their policy meetings, especially with another Federal Reserve hike looming at the end of the month.

On the subject of the Fed, the noise will increase that Fed will now have to mollify the pace and size of its rate hikes. Unfortunately, inflation in the US, like elsewhere, is showing no signs of abating and the data recently has really been that bad, much like Australia. This is more likely to be a story for Q4. If the US JOLTs Job Openings remain at 11 million or above, and the US Non-Farm Payrolls is comfortably above 250,000, there will be no sensible reason for the Fed to blink. Most of all, it is a credibility issue. Having got transitory inflation so utterly wrong and stubbornly clung to a dogma past its sell-by date, if the FOMC blinks now, they may as well do an Elvis and leave the building. Puppies and kittens don’t need to be trained to chase their tails, we certainly don’t need it from our central banks, who aren’t even cute to boot.

This afternoon we get German Factory Orders and Pan-Europe Retail Sales. The releases won’t make good reading and could heap more pressure on the Euro and European equities, although I don’t discount the Norwegian oil strike settlement giving both a temporary reprieve. US JOLTs Job Openings will cause recession head-scratching above 11 million, but June’s ISM Manufacturing PMI for June and its activity, prices, new orders, and employment sub-indexes will probably decide the direction of travel in the short-term. The FOMC Minutes afterwards will probably be discounted somewhat given market developments over the past two weeks.

Asian equities slump on China lockdown fears.

US equities endured a torrid session overnight, dropping initially, but then rallying hard as US yields fell across the curve. With markets racing to price in a US recession, the US equity performance was somewhat counterintuitive with the rate-sensitive Nasdaq outperforming. If US yields find a floor after the US data released tonight, Wall Street’s recovery could find itself flagging. The S&P 500 finished 0.16% higher, the Nasdaq stormed to a 1.75% gain, while the value-centric Dow Jones closed 0.42% lower. In Asia, US futures are steady, with the S&P 500 and Dow almost unchanged, while the Nasdaq futures have booked a 0.28% gain.

Asian markets are mostly having a bad day at the office as they race to price in both a US recession overnight and also the potential for wider virus restrictions in China following overnight developments. The prospect of more covid zero restrictions in China is an unwelcome dose of reality for Asia and is certainly carrying more weight, although Asian currency weakness is also in play.

Japan’s Nikkei 225 is 1.20% lower, with South Korea’s Kospi dropping by 1.10%. In Mainland China, the Shanghai Composite has slumped by 1.25%, with the CSI 300 close behind, falling by 1.10%. In Hong Kong, the Hang Seng has lost 1.40%.

Across regional Asia, on Manila is defying the odds once again, jumping by 1.40% this morning. Elsewhere, it is a sea of red. Singapore is relatively steady, down just 0.05%, while Kuala Lumpur is 0.50% lower, Jakarta has lost 1.05%, Taipei has slumped by 1.75%, and Bangkok has eased by 0.20%. Australian markets have been spared the worst of the selloff, despite resource prices tumbling overnight, thanks to its Wall Street correlation of late. The ASX 200 and All Ordinaries are down by 0.30%.

European equities had a terrible day yesterday thanks to natural gas supply fears and political instability in the UK’s case as well. With the Norwegian government stepping in to impose a settlement between the striking oil workers and employers, European markets may gain a temporary reprieve this afternoon.

​US Dollar soars on haven demand.

The US Dollar soared versus both developed and emerging market currencies overnight, as recession fears saw a spike in haven demand for US Dollars. Quite a bit of that looks to have been recycled into US bond markets as well, adding to the recessionary downward pressure on yields. The dollar index leapt 1.26% to 106.49, a two0decade high. It remains there in Asia and the next technical target is the 109.00 area. Having broken out of a 5-year triangle at 102.50 in April, its longer-term target remains in the 1.1700 area. Support is at 1.0585, the overnight breakout point, and then 1.0500, followed by 1.0350 and 102.50. ​

The Norwegian oil strike deepened recession fears and broke Euro yesterday, EUR/USD plummeting 1.51% to 1.0265, a multiyear low. In Asia, it has eased another 0.10% to 1.0253. The overnight low at 1.0235 is initial support, followed by 1.0130 ahead of 1.0000. As I have said before, any deeper interruption of Europe’s natural gas supplies will mean a move below parity and a European recession. Since breaking a multi-year support line at 1.0850 in April, Euro has never looked back. Although risks are skewed to the downside now, the Norwegian strike settlement may allow EUR/USD to find some friends this afternoon. It has resistance at 1.0300, and then the 1.0350 breakout, followed by 1.0600.

GBP/USD fell by 1.18% to 1.1960 overnight, easing to 1.1945 in Asia. Recession fears are also complicated by political instability in London now following multiple ministers resigning overnight, with eh Bank of England also sounding a loud economic warning as well. That makes constructing a bullish case for Sterling challenging and a move back towards the March 2020 lows near 1.1400 can’t be discounted. It has immediate support at the overnight low at 1.1900, followed by 1.1800. Resistance is at 1.2000 and 1.2200.

USD/JPY, rather surprisingly, finished almost unchanged at 135.86 overnight but has immediately moved 0.30% lower to 135.45 in Asia today. With the US/Japan rate differential narrowing sharply, long USD/JPY becomes more dangerous by the day and the risks increase of an ugly correction lower to wash out the speculative longs. If US yields find a floor, USD/JPY may cling to its gains for now though. USD/JPY has resistance at 136.65 and 138.00, with support at 134.25 and 132.00.

AUD/USD and NZD/USD have also fallen sharply overnight to 0.6800 and 0.6160, where they remain in Asia. The overnight fall in resource prices will be an additional headwind for the Australian Dollar in particular, but both remain at the mercy of international investors who use them to express risk sentiment. AUD/USD is in danger of testing 0.6700 this week, and NZD/USD 0.6000. Failure will signal a deeper move lower is in progress.

Asian currencies retreated overnight, led by USD/KRW, which gained 1.0% to $1308.00, and USD/PHP, USD/INR, and USD/IDR, which all rose around 0.50%. A weaker Chinese Yuan fixing by the PBOC today has kept the pressure up on Asian currencies, as has fears of more China lockdowns. Notably, USD/IDR has breached 15,000.00 this morning and rates hikes from Seoul, Jakarta, Manila, and New Delhi are now a certainty. The price action overnight and this morning does suggest that Asian central banks are around selling US Dollars, but with Asian currencies gaining no solace from lower US yields, this looks very much like a risk aversion move that will keep the pressure up on local currencies. Bank Negara should hike by 0.25% this afternoon, but if they don’t, look for extended MYR weakness.

Oil plummets overnight on recession fears.

Recession fears saw oil markets plummet overnight, with both Brent crude and WTI taking out their 2022 rising support lines in no uncertain terms. Brent crude slumped by 7.90% to $104.75, having tested $101.00 a barrel intraday. WTI slumped by 8.75% to 100.90, trading as low as $97.50 a barrel intraday. In Asia, both contracts remain under pressure as China lockdown nerves sweep the region. Brent crude has fallen 0.90% to $103.85 a barrel, and WTI is 0.60% lower at $100.00 a barrel.

The price action overnight, with both contracts trading in near fifteen dollar ranges, hints more at panic and forced liquidation, than a structural change in the tight supply/demand situation globally. Although I acknowledge recession risks in the US, and covid zero ones in China, the world’s two largest consumers, the futures markets in both Brent crude and WTI remain in heavy backwardation. That says that in the physical market, supplies remained as constrained as ever, and despite the noise seen overnight, oil prices may be in danger of overshooting to the downside.

Having said that, the failure of the 2022 support lines on both contracts so comprehensively must be respected, as are looming recession risks around the world. But with Russian oil supplies set to drop as the year progresses and it runs out of Western parts to maintain fields, and with the rest of OPEC hopelessly uninvested in maintaining production capacity, I fear the days of $100 oil will be with us for some time yet. That said, Brent crude and WTI are likely moving into a new $95.00 to $110.00 barrel range.

Brent crude has resistance at its 2022 trendline at $108.85 a barrel, followed by the 100-day moving average (DMA) at 110.30. Support is at $101.00, $100.00, and then $96.25 a barrel, it’s 200-DMA. WTI has resistance at its 100-DMA at $106.95, followed by the 2022 trendline at $108.50 a barrel. Support is at $99.60, $97.50, and then its 200-DMA at $93.40 a barrel.

Gold capitulates.

The massive strength of the US Dollar across asset classes overnight was more than gold could withstand, despite lower US yields. It wilted in the face of US Dollar strength and finished the overnight session 2.40% lower at $1765.00 an ounce. In Asia, it has eked out a tiny gain to $1767.40 an ounce.

With gold moving inversely to the US Dollar and no other inputs driving the price, gold’s only salvation from here is entirely reliant on a sudden reversal of course by the greenback. Having finally broken out lower from its multi-month $1780.00 to $1880.00 range, the failure of $1780.00 is an important technical development. Assuming the Dollar rally continues, the technical picture suggests a move lower to $1720.00 an ounce in the days ahead.

Gold has resistance at $1780.00, $1785.00, and $1820.00, its downward trendline. Support is at $1764.00 and then $1720.00, followed by $1675.00. Failure of the latter sets in motion a much deeper correction, potentially reaching $1500.00 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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Stock - Investors King

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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