Markets
Asia looked to open higher after US equities found some early footing on Tuesday, despite the widespread weakness overseas, which helped fuel a broad rebound ahead of Wednesday's FOMC announcement.
Volumes were understandably light, along with a low appetite to outlay new risk into today's main event. The SPX buy the dip thesis could be in for a stern test and if the risk market does not cross that rate hike bridge well, watch out below.Chinese ADRs finally saw a bit of a bid after the recent brutal drawdown. There have been a lot of questions on the moves, though there appeared to be no apparent catalyst. Oversold conditions were among the terms being thrown around, which was fair to say given KWEB was -30% in three sessions.There was not much in the way of updated news—the lack of any further negative communication was being taken as a positive.
Oil
Oil was trading a bit higher after press reports China will relax some COVID restrictions. And with all the attention given to headline oil and gasoline prices, the dire diesel supply situation was going unnoticed.
Before Russia/Ukraine, diesel inventories had fallen to shallow levels as global diesel hit an all-time high in Q4 '21. Indeed, this has been an acute situation in the US and Europe, where inventories fell to the lowest levels in roughly 15 years. China, a significant diesel exporter, was cutting its overseas sales to save fuel at home. Saudi Arabia, a considerable diesel supplier to Europe, was buying rather than selling. So, a gnarly hurricane season could make a horrible distillate situation much worse.
Gold
Oil prices were beaten down overnight as the market broadly de-risked correlated war hedges with the drop in crude oil influencing the broader commodity space lower. In this interest rate hike environment, gold prices were only benefiting from safe-haven flows that have come on the back of the Russia/Ukraine war.Once that support completely evaporates, gold loses a significant anchor. That said, I still see gold hanging around the $1850-$1950 range on residual higher commodity inflation effects before falling below $1800 towards the end of the year as the Fed will keep the pedal to the metal on rate hikes this year.Over the short term, however, precious metals seemed to have had the bulk of the correction for now, so it might be worth buying some dips pre and post FOMC on a short-term reversion trade. But keep stops tight as a break below $1893 could trigger a broader capitulation.
Forex
JPY
I expect USD/JPY to consolidate ahead of the FOMC meeting. That said, and consistent with my policy tempered view on JPY weakness, Japanese Finance Minister Suzuki indicated he would continue to closely monitor the weak JPY's impact on the economy and that stability in FX markets was important. These comments were in the tradition of Japanese officials not wanting significant short-term volatility in JPY. However, for the BoJ, the watch level was higher than 120.There was not much room to maneuver with seven Fed rate hikes baked in this year. But the key will be the shift higher in the Fed terminal rate, which could drive market rate hike expectation further out along the curve and support USD/JPY higher.Still, the yen's sensitivity to US rate hikes cannot last much longer; oil effects are linear but partial; local investors are showing little interest in new overseas asset allocations. If anything, there may even be political support for FX hedging existing assets. Overall, anything above 120, it becomes easier to make the case that the yen is fundamentally too weak.