The Stranger Things Put

The bear market rally looks well and truly back on track this week, thanks to one of the stranger things I have seen in 2022, Netflix losing only one million subscribers in Q2 instead of 2 million and forecasting an additional one million subscriber additions in Q3. Minus one plus one equals um, zero, the last time I looked. But it is not for me the second guess the bullish herd mentality of the equity market, especially as they continue to grapple with the reality that 20-years of central bank monetary puts have come to an end.

The Netflix results were apparently backstopped by Stranger Things 3 being released. I’ll not argue with that as I love Stranger Things and remember the 80’s and all the music very well. Mrs Halley is less enamoured with season 3, complaining about the slow pace and the convoluted plot threads. That’s what makes a market I suppose. I have a feeling that omicrons’ rampage across the world, has left many subscribers working or isolating from home, delaying the pressing of the cancel subscription button.

Either way, with the street hungry for good news to feed the buy-the-dip appetite, Wall Street has a huge day, which saw investors piling back into big tech as well, lifting the Nasdaq by over 3.0%. I heard more peak inflation noise being bandied around, with Reuters reporting that Nord Stream 1 natural gas flows from Russia to Germany would resume this week as scheduled. Additionally, hopes were raised around negotiations to ease Russia’s seaborne blockade of Ukrainian food exports.

Peak inflation is as good a reason to pile into equities and other risk sentiment asset classes as any I suppose. I personally believe we could be near peak inflation, but any hopes that it is suddenly going to fall quickly are naïve, far more likely is that it stays elevated for quite some time to come. The other issue I have from the above paragraph is having to use the words “hope” and “Russia.” I’m not sure how many times investors have to be slapped around the face on this point.

To emphasise this, lets circle back to the Reuters natural gas story. It did mention that its sources said the flows, when they resume this week, will not return previous levels, and by this, I mean its 160 million cubic metre-per-day capacity. Vladimir Putin, on his return from fellow economic powerhouse, Iran, is already setting the scene for reduced flows resuming, blaming faulty pumping units again according to Reuters. They also reported that Mr Putin said in Iran that “not all issues had been resolved yet” vis-à-vis Black Sea grain exports.

So, Joe Biden left Saudi Arabia empty-handed on commitments by the Saudis to pump more oil, and Vladimir Putin is saying Nord Stream 1 gas flows will remain low and that Black Sea grain shipments have “issues” to overcome. And markets are pricing in peak inflation with a precipitous drop in H2 2022. I do admire the optimism. In large directional macro moves of the type we have seen in equities and currency markets the past few months; it is not unusual to see quite aggressive short-term reversals of those trends. I am yet to be convinced that we are seeing anything more than a bear market rally at the moment. Europe’s day of reckoning may come earlier when Nord Stream 1 is due to be switched on tomorrow. For the rest of world, that may come at next weeks FOMC policy meeting.

Over in China, the mortgage payment strike by disgruntled apartment buyers is grabbing the headlines. The government is seemingly moving to push the funding gap to beleaguered developers onto local governments and state policy banks, meaning the fallout so far has been limited on equity markets. Perhaps more concerning is new Covid-19 cases reached 1,012 in China yesterday, according to official data. A flesh wound anywhere else, but in China’s covid-zero world, a cause for concern around potential new lockdowns. Readers should monitor developments here closely. Covid-zero means covid-zero in China, not lock down Shanghai and Beijing once and done. Mainland equities have only rallied modestly today, and your answer probably lies there. In other news China left its one and five-year Loan Prime Rates unchanged, but this was completely expected.

There is no other data of note due out in Asia today, the Reserve Bank of Australia Governor Lowe spoke earlier today. Mr Lowe said he expected CPI to keep heading higher, and that employment was past its theoretical maximum, and that interest rates would have to keep going up. Mostly, t was of no surprise to markets now, and the Australian Dollar and local equities are ignoring it to hitch their reins to the US peak-inflation, we can trust Russia, less-worse earnings, sentiment rally overnight, like everyone else.

This afternoon, German PPI is expected to rise to an eye-watering 33.90% YoY for June, as hints of a 0.50% rate hike by the ECB tomorrow gave the Euro a boost overnight. The United Kingdom releases inflation for June, expected to climb to 9.30% YoY, with Core Inflation at 5.80%, PPI rising to 23.20% and Retail Prices rising 11.80%. With UK employment data yesterday surprisingly strong, some serious pressure is going to fall on the Bank of England now to accelerate rate hikes least material Sterling weakness return.

US Housing Starts for June edged slightly lower overnight, and tonight we receive Existing Home Sales, which are expected to fall slightly to 5.38 million. In this environment, a bigger fall as rate hikes bite, is likely to be interpreted as peak inflation/ less Fed rate hikes equals buy equites and sell US Dollars. Counterintuitive I know, but I don’t make the story up, I just report it and try to make sense of it.

Asian equities follow Wall Street higher.

Asian equity markets are enjoying a very positive session today, content to coattail the impressive rally by Wall Street overnight. Overnight, US stocks booked impressive gains after Netflix had less worse results than expected, and peak inflation hopes abounded on expectations of resumed Black Sea grain exports and Russian gas exports to Europe. All-in all, it looked like Wall Street was looking for any excuse to continue the bear-market rally, and they got it.

Overnight, the S&P 500 jumped an impressive 2.73% higher, while the Nasdaq rallied by 3.09% as the Netflix results inspired investors to pile back into big tech en masse. Not to be outdone, the Dow Jones also booked a health 2.39% gain. In Asia, the party continues for US futures. S&P 500 futures are 0.53% higher, Nasdaq futures are rallied by 0.72%, and Dow futures have added 0.41%.

In Asia, Japan’s Nikkei 225 has jumped 2.40% higher, with South Korea’s Kospi climbing by 1.05%, and Taipei is also 1.05% higher. The rally is less impressive in Mainland China thanks to rising covid-19 cases. The Shanghai Composite is 0.67% higher, the CSI 300 has added just 0.38%, but Hong Kong’s Hang Seng has rallied 1.80% higher.

In regional markets, Singapore is 1.33% higher, with Kuala Lumper gaining 0.55%. Jakarta has rallied by 1.80%. Manila and Bangkok have added 0.40%. Australian markets are having a strong day on the back of the US equity rally. The ASX 200 is 1.50% higher, while the All Ordinaries has rallied by 1.65%.

European markets booked another outsized session of gains overnight, following Wall Street and hitching their wagon on hopes that Putin would return Nord Stream 1 flows to normal from tomorrow. I admire their optimism, but Mr Putin appeared to pour cold water on that this morning, and I suspect it will eventually pour cold water on European equity markets dalliance with the world of fantasy today.

US Dollar correction continues.

With risk sentiment soaring in US equity markets overnight, the US Dollar bull market correction continued unabated, with losses versus the DM and EM space overnight. The dollar index closed 0.68% lower at 106.68 overnight, easing another 0.15% to 106.53 in Asia. but traded in a very choppy 115 point range between 106.90 and 108.05. The index traced out a double bottom at 106.40 overnight, and this marks initial support. Failure allows a test of 105.85 and then 105.00. Above, resistance is at 107.60, the overnight high, and then 108.70. A neutral relative strength index allows the US Dollar correction to continue for some time yet.

EUR/USD rallied through 1.0200 yesterday, finishing 0.80% higher at 1.0225. Asia is has edged higher to 1.0245. ​ The technical picture still suggests only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0120 and 1.0000. The single currency faces serious event risk in the latter half of the week, firstly from the ECB policy decision, and secondly, from Russian natural gas flows which are due to resume after pipeline maintenance.

USD/JPY is holding steady at 138.00, where it remains in Asia. 139.40 is initial resistance, followed by 140.00. Support is at 137.40 and 136.00. The former was tested again overnight, and failure now signals a much deeper correction lower.

AUD/USD and NZD/USD rallied strongly overnight, breaking higher out of their falling wedge formations, implying more gains are likely in the near term. Having broken higher through 0.6850, AUD/USD is trading at 0.6920 today and the technical picture suggest a move through 0.7000 is likely. Similarly, the rise through 0.6150 by NZD/USD suggests that further gains above 0.6300 are possible.

Oil prices explode higher.

Brent crude and WTI prices continued higher overnight as sentiment in markets swung to peak inflation once again, and concerns persisted around the resumption of Russian gas supplies. Brent crude rose 1.50% to $107.25 overnight, before edging lower to $106.40 in Asia. WTI rose by 1.50% to 103.35 a barrel overnight, moving 0.70% lower to $102.65 a barrel in Asia. ​

Brent crude has nearby resistance at $107.25, followed by $108.00 a barrel. Support is at $103.65 and $99.50. WTI has support at $99.35 and $96.00 a barrel, with resistance nearby at $104.00 and $105.00 a barrel.

Gold’s remains unimpressive.

Gold has another unimpressive session overnight, failing ahead of $1720.00 intraday, but closing almost unchanged at $1711.00 an ounce, before edging lower to $1709.00 in Asia.

Gold’s inability to hold onto even modest rallies in prices, even as the US Dollar falls and US bonds trade sideways, is a major concern. Risk remains heavily skewed towards the downside.

Gold has initial support at $1700.00, followed by the more important $1675.00 an ounce zone. A sustained failure of $1675.00 will signal a much deeper move lower targeting the $1450.00 to $1500.00 an ounce regions in the weeks ahead. Gold has resistance nearby at $1725.00, and then $1745.00.