This month has dragged on and seems to be lasting forever. One reason could be that it is my last full month as a keyboard warrior, toiling as the voice of reason as I try to make sense of the nonsense in the financial markets. The second, and more likely, is that the US FOMC policy meetings falls at the end of the month, instead of its usual mid-month slot. But as the last week of July arrives, so does the FOMC policy meeting, with the results due out in the early hours of Thursday morning Singapore time. For what its worth, I am in Team Taylor, and going for 75 basis points, with 100 being a bridge to far.
Last Friday’s price action may have softened the ardour of the 100 basis point hikes on the committee as well. Equity markets finished sharply lower, ostensibly because of soft social media earnings, but given Wall Street’s schizophrenic nature of late, it was just as likely to be recession fears, booking some short-term profits, and cutting exposure ahead of the weekend and any potential risks that emerged over it. Currency markets had a noisy day but finished not far from unchanged across the DM and EM space, so I don’t think Friday’s equity sell-off was a structural move.
Friday’s S&P Global Manufacturing and Services PMIs for Europe and the US were disappointing to say the least, coming in softer across the board. Eurozone bond yields moved sharply lower as the market falls over itself to price in a recession there. Even Italian BTPs rallied. That seems to have flowed into the US bond market as well, with the US yield also moving sharply lower across the 5 to 30-year tenors, and even 2-years closed under 3.0%. The R-word remains on everyone’s lips. Even gold managed to string two consecutive positive days together, while oil markets were broadly unchanged.
Agricultural commodities fell on Friday after Russia and Ukraine signed a Turkey-brokered deal to allow Ukrainian grain exports to resume from Black Sea ports such as Odessa. Naturally, Russia decided to rain cruise missiles down on Odessa over the weekend, including one that hit a grain silo. That has seen wheat futures rise by 2.0% this morning and has led to some US Dollar strength and extended the risk-off tone to equity markets. Various news outlets are also running a story about China’s increasingly strident warnings behind the scenes to US officials around Nancy Pelosi’s intended visit to Taiwan sometime in the next few weeks.
This week features a raft of heavyweight US second-quarter earnings from tech heavyweights, which could drive volatility on stock markets in addition to the FOMC. Alphabet and Microsoft announce tomorrow, Meta on Wednesday, perhaps the highest risk one looking at the ad-strewn content-light wasteland of my Facebook and Instagram feed. Apple announces after the bell on Thursday evening NYT. Falling across the FOMC, we could be in for some tasty volatility around the mid-week hump.
Alongside the FOMC, we have the German Ifo this afternoon, US Durable Goods Wednesday, German Inflation and US GDP on Thursday, and German, French, Italian, Spanish and Eurozone GDPs Thursday, and then Eurozone Inflation prints and US Personal Consumption and Expenditure data and the Chicago PMI on Friday. Slap in some China property and Taiwan risk, Eastern Europe risk, and the US President who has covid, and good luck picking the bones out of this week. It’s the show with everything but Yul Brunner. I’ll be in Bali next week for four days, and mightily glad I am, watching the dust settle from the distance.
Closer to home, we see Singapore Core Inflation for June (4.20% exp. YoY), and Headline Inflation (6.20% exp YoY), released at 1300 SGT today. Having already made an unscheduled monetary tightening this month, higher than expected inflation data this afternoon will lock-and-load the Monetary Authority of Singapore to tighten again at their scheduled October meeting. I am in Singapore this week, and although COE’s have hit record high prices in July, I am still seeing a lot of brand new Mercedes and Range Rovers being driven around. I also paid just over seven dollars for a quite small, but pleasing, hipster latte in Singapore this morning. My feeling is that inflation will come in on the high side this afternoon, which may give local equities some headwinds this week, while supporting the Singapore Dollar.
On a similar note, Australia releases its Q2 CPI on Wednesday, and we can expect volatility over the number as the street uses it to reprice the trajectory of the Reserve Bank of Australia tightening cycle. The Australian Dollar’s value is a function of international investors macro outlook for the world economy, risk-on/risk-off for those of us in pilot fish part of the financial markets. A high CPI print could also be a headwind for Australian equities though, although they have been mostly content to follow Wall Street like a doting puppy of late.
It is a slow week for China data, with just Industrial Profits on Wednesday. However, we do see official PMIs released this weekend on Sunday, and the Caixin PMI next Monday. The focus is likely to remain on China’s covid-19 trajectory and the China property market woes. Evergrande is approaching an end-of-month deadline around debt restructuring, and if no progress is made, this could start grabbing more headlines as the week advances.
The bear market rally in equities faces more than a few hurdles this week as outlined above. Currency markets technical picture look a bit clearer and the US Dollar correction lower would appear to still have legs. There are rising and falling wedge breakouts everywhere. The dollar index is testing the base of its rising wedge, USD/JPY has broken lower out of its, GBP/USD, AUD/USD and NZD/USD have all broken higher out of falling wedges. USD/JPY has the potential to be the most emotional, especially if the evolution of the week sees US yields move sharply lower again. Long USD/JPY is a very crowded trade, and a thinning of the herd is long overdue.
One could also argue that both Bitcoin and gold are trying to form bases as well, but let’s not get too far ahead of ourselves, they remain the ugliest horses in the glue factory. However this week plays out, I suspect today will be the most sedate day of the week to come, enjoy the peace and quiet while you can.
Asian equity markets mostly softer.
Wall Street unwound some of its gains on Friday, as investors lightened positions ahead of the weekend ahead of heavyweight US earnings this week, and recession nerves. The S&P 500 finished 0.93% lower, the Nasdaq slumped by 1.87%, and the Dow Jones eased by 0.43%. In Asia, US futures are mixed, S&P 500 and Dow futures edging 0.15% lower, with Nasdaq futures gaining 0.15%.
Asian markets have been mostly content to follow Wall Street once again, although without the tail-chasing volatility, and are cautiously lower today. The exception is South Korea’s Kospi, which has moved 0.40% higher today. Elsewhere, Japan’s Nikkei 225 is down 0.80%. News that China is setting up an investment fund to prop up embattled China property developers has had little to no impact on markets today. The Shanghai Composite is down 0.55%, the CSI 300 is 0.65% lower, while the Hang Seng has fallen by 0.85%.
In regional markets, Singapore has gained 0.40%, while Taipei has fallen by 0.20%. Jakarta and Kuala Lumpur unchanged, with Bangkok down 0.25%, and Manila drooping by a hefty 1.30%. Australian markets are slightly softer, the All Ordinaries and ASX 200 have eased 0.10% lower.
European markets finished modestly higher on Friday, but the move lower by Wall Street, and the cruise missile attack on Odessa over the weekend just after the grain export deal was signed, is likely to spook European markets once again. Wall Street has so many variables this week, I am not even going to hazard a guess as to what mode the FOMO gnomes will show up in today.
US Dollar moves higher in Asia.
The US Dollar has moved slightly higher in Asia today versus both the DM and Asia FX space, most likely due to the Russian attack on Odessa over the weekend. Friday saw a noisy session, with large intra-day trading ranges versus the major currencies. As the dust settled though, the US Dollar finished only modestly lower.
The dollar index was almost unchanged at 106.55 on Friday, edging higher to 108.65 in sedate Asian trading. The bottom of its rising wedge is at 106.30 today, and a sustained failure suggests a much deeper correction to 104.00, and potentially to its 102.50 long-term breakout point. Resistance remains at 107.40 and 108.00.
EUR/USD traded another wide range on Friday, but closed just 0.15% lower at 1.0215, easing to 1.0205 in Asia. It has resistance at 1.0275, which allows for a test of the 1.0360/1.0400 resistance zone. Only a sustained rise above would suggest a longer-term low is in place. EUR/USD has support at 1.0130 and 1.0100.
GBP/USD closed almost unchanged overnight at 1.2010 on Friday, falling to 1.1990 in Asia. GBP/USD has broken out of its falling wedge but need to take our heavyweight resistance around 1.2060 to confirm a low is in place. It has support at 1.1900 and 1.1800, with resistance at 1.2060 and 1.2200.
Lower US yields across the curve saw the Japanese Yen emerge a winner overnight as the US/Japan rate differential narrowed, with the street still long to the eyeballs of USD/JPY. USD/JPY finished 0.92% lower at 136.10 overnight, rising slightly to 136.20 in Asia. Its has broken out of its rising wedge support at 135.50 initially. Initial resistance is distance at 139.00, followed by 139.40. The US/Japan rate differential continues to hold USD/JPY in its thrall, and if US yields move sharply lower this week, the technical picture suggests USD/JPY could fall back to 132.00.
AUD/USD and NZD/USD fell slightly overnight to 0.6925 and 0.6250, easing to 0.6905 and 0.6235 in Asia, likely due to the Russia missile attack on Odessa. Both currencies remain well above their upside breakout points and only a move back below either 0.6700 or 0.6100 changes the bullish technical outlook.
USD/Asia finished almost unchanged on Friday, with the USD between 0.10% and 0.20% versus the THB, TWD, MYR, and CNY today. Both the INR and KRW have strengthened slightly and in USD/IDRs case, it looks like Bank Indonesia is on top at 15,000.00 today. I expect volatility in Asian currencies to increase as the week goes on and we get more inputs from tier-1 data, the US FOMC, and US earnings. Overall, Asian currencies remain under pressure versus the greenback, and I believe we will need to see a sustained move lower by the US 2-year yield to change that dynamic. A hawkish FOMC likely sees selling pressure return to Asia FX.
Oil prices ease in Asia.
Brent crude and WTI had another choppy intra-day session on Friday, but like currency markets, closed almost unchanged as the dust settled on the day. Futures markets remain deeply in backwardation, suggesting that in the real world, prompt supplies are as tight as ever, however rising recession fears globally do suggest that gains are likely to be limited in the shorter-term, geopolitics aside. Oil futures biggest problem is that the mind-boggling intra-day volatility seen of late, is likely to reduce risk positioning, and thus, trading liquidity. A negative feedback loop likely to exacerbate prices moves.
Brent crude closed 0.25% lower at $103.60 on Friday, falling by 1.10% to $102.50 a barrel in Asia today. WTI closed 1.45% lower at $95.00 on Friday, losing another 1.0% to $94.05 a barrel in Asia today. Brent crude has well-denoted resistance at $108.00 a barrel on the charts, and then 111.00. It has support at $101.75 and $101.00 a barrel.
WTI looks the more vulnerable, moving below its 200-day moving average (DMA) at $94.75 today, and taking out support at $94.30 a barrel. traced a double bottom $94.30, its overnight low and its 200-day moving average. (DMA). That now opens a retest of the July lows at $90.60 a barrel. Resistance is distant at $100.00 a barrel.
Brent’s outperformance likely reflects its use as the international benchmark for global trade in oil, where physical supplies remain tight. WTI, on the other hand, is a domestic benchmark meaning that US recession nerves seem to be more heavily weighing on its price. Brent crude continues to hold comfortably above its 200-DMA at $97.65 a barrel, and until that comprehensively breaks, I am not yet pencilling in the demise of high oil prices, although I have long said I believe a medium-term high is in place. The more analysts there were calling for $200 and $300 a barrel crude, the more confident I became.
Gold’s is trying to form a base.
Gold closed higher for the second session in a row on Friday, quite the achievement given its woeful performance of late. Gold closed 0.50% higher at $1727.50 an ounce on Friday, edging slightly lower in moribund Asian trading to $1728.75. Two positive sessions do not mean gold is out of the woods, but the technical picture does suggest it is trying to form a base, having bounced of long-term support near $1680.00 an ounce last week. It faces a myriad of data and event risk this week, but the chart does suggest buying the dips toward $1700.00 with a tight stop wouldn’t be the dumbest call of your career.
Gold needs to overcome heavy resistance at the $1745.00 an ounce triple top before the gold bugs can really start to get excited. It has support at $1680.00, and then the longer-term support around $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.
