China’s COVID-19 lockdown of Shanghai saw oil prices slump overnight, as investors fretted about more sweeping containment measures, which would negatively impact China's energy consumption. Brent crude and WTI plummeted over 8.0% in overnight trading, although the rot had started earlier in the day in Asia.
Oil’s volatility continued to make eye-watering viewing, but increasingly, the moves were being driven by falling liquidity in the futures markets, and the exchanges’ itchy trigger fingers on raising margins.
Also assisting the negative sentiment in energy markets, which was positive for the rest of us, was the first meeting in Turkey today by Ukrainian and Russian representatives. Markets are always keen to price in the prospect of a peace deal, if one could call it that, with what might be hints of concessions by both sides.
Comments out from both sides though late in the day, suggested an agreement will be as elusive as ever. If there was a break though, watch out for sub-$100 Brent, a mad rush into the euro and European equities, and a slump in the US dollar and gold. Asian equities should catch a nice tailwind as well.
US bond markets continued to send negative signals, with swaths of the yield curve fliting with inversion overnight. Unsurprisingly, financial stocks, along with energy producers, were two of the least favorite sectors in New York trading.
For all the talk of the yield curve signaling a recession, equity markets continued their recovery, led by tech overnight, thanks to a Tesla (NASDAQ:TSLA) share split announcement. A cynic could argue that given how far the Fed was behind the "transitory" inflation curve, they would also make a dog’s breakfast of sorting the mess out, accidentally tipping the US economy into a recession.
Analysts seem to be in a race to price in 0.50% hikes by the FOMC now, in stark contrast to the end of December. I’m waiting for the 0.75% predictions to start if this Friday’s US Non-Farm Payrolls is particularly strong. The pressure was mostly being felt in the 3-month to 10-year part of the curve, hence the inversions, but I do believe that there is still plenty of room for the curve as a whole to move higher as the Fed plays catchup. Eventually, that should weigh on equities.
Threats of higher US rates were making themselves felt most noticeably in Japan, where the USD/JPY rose almost 300 points overnight to 125.00 before falling to 123.90. The Bank of Japan didn’t get any bang for its buck yesterday, placing an unlimited bid in the 10-year JGB market to cap yields at the top of the acceptable range at 0.25%.
That bid was extended until tomorrow. Meanwhile, Japanese officials gained some temporary respite by making USD/JPY comments this morning and oil falling overnight. The yen’s woes will likely be reflected elsewhere in Asia this year, where regional central banks appeared happy to accept inflation as the price of growth. They have bulging currency reserves. It was not at all clear though, whether they will spend them to prop up their national currencies.
Australia releases its Federal budget this evening and was likely to hand out plenty of pre-election goodies ahead of an expected May election. Like countries everywhere, Australians were facing a soaring cost of living on multiple fronts, as the Ukraine war and the downstream effects of ham-fisted quantitative easing mean the piper finally had to be paid.
Voters will naturally blame the government now that the party was over. Although the budget will be significant for the embattled Morrison government’s hopes of re-election, its impact on markets will be modest. It may give President Biden a headache though as he ponders mid-terms in November and a lame-duck presidency.
Australian Preliminary Retail Sales rose 1.80% in Feb, better than expected but old news considering events since. South Korean March Consumer Confidence held firm at 103.20, while Japan's Unemployment for February dropped to 2.7%, both a pleasant surprise given the events of February. Whether that trend continues was another thing altogether. German Consumer Confidence for April was likely to slump for obvious reasons this afternoon.
In the US, we have three Fed Presidents speaking, and some closely watched data. The S&P/Case-Schiller Home Price MoM for January will be watched for more signs the housing market was topping out, although it was a lagging indicator.
We also have the February JOLTS Job Openings. A fall below 11 million open positions could give some temporary respite to the bond market, hinting that the US labor crunch was starting to ease. That’s a reach though. President Biden will also make a 2023 budget speech. Preliminary details yesterday targeted rate hikes for the rich and spending increases. I can’t see it moving the needle on the mid-terms and I believe it will remain stuck in Congress for a long time.
Otherwise, we should all be watching our news providers for breaking news on a breakthrough in Ukraine-Russia negotiations, or not.
Lower oil lifts Asian equities
New York had a mixed session overnight. Energy and financial sectors suffered as oil prices fell and the US yield curve inversions continued. Technology did well after Tesla announced a stock split and Apple's (NASDAQ:AAPL) multi-day rally continued, despite the slowing production of some iPhone models. The S&P 500 rose by 0.71%, the NASDAQ jumped by 1.31%, but the Dow Jones struggled, slipping by 0.27%. Futures on all three were steady in Asia.
In Asia, markets were erring to the positive side with some notable exceptions. The slump in oil prices and other commodities overnight was an immediate tailwind to most of Asia ex Malaysia and Indonesia. A weaker yen, and a BOJ capping 10-year JGB yields, has boosted Japan where the Nikkei rose by 0.62% today. South Korea’s KOSPI was up by 0.28%.
Mainland China markets were lower again though, although not nearly as badly as the mauling they suffered yesterday. A tightening Shanghai lockdown was the culprit, sending the Shanghai Composite lower by 0.45%, and the CSI 300 down 0.40%. Hong Kong bucked the trend once again as the government hinted at loosening virus restrictions, and with a good showing by tech overnight. The Hang Seng was 0.50% higher.
In regional markets, Singapore edged 0.25% lower, led by the big banks. Resource-centric Kuala Lumpur and Jakarta were 1.00% lower and 0.10% lower, respectively. Taipei climbed by 0.50%, with Bangkok up 0.45% and Manila easing by 0.50%. In Australia, markets were enjoying a good day as they priced in fuel tax cuts and a budget full of pre-election goodies. The ASX 200 and All Ordinaries were 0.75% higher.
Probably the biggest risk facing European equities today will be if Ukrainian and Russian negotiators make progress on a peace deal. In that scenario, European equities should book some material gains.
US yields support dollar strength
US yields continued underpinning US dollar strength with the dollar index rising by 0.32% to 99.12 overnight, where it remained in Asia today. Weakness in the yen also helped lift the dollar index which traded as high as 99.36 intraday. A rise through 99.45 will signal the next leg higher while only a fall through 98.40 delays.
USD/JPY was having another volatile day, having risen nearly 300 points intraday to around 125.00 overnight, before falling to 124.00 by the end of the session. In Asia, Japanese officials making the usual "watching markets closely" type comments were enough to push USD/JPY 55 points lower to 123.45. At the heart of the yen weakness was the US/Japan ever-widening rate differential.
The Bank of Japan extended its 0.25% bid on the 10-year JGBs through till Thursday. That should put a floor under USD/JPY unless US yields plunge for some reason. That said, JGBs remain stubbornly at 0.25%, raising fears the BOJ may struggle to cap yields with QE. Those opposing inputs likely leaves USD/JPY bouncing between 123.00 and 125.00 for the rest of the week.
EUR/USD recovered from intraday lows around 1.0945 to finish almost unchanged at 1.0985 overnight, where it remained in Asia. A Ukraine-Russia breakthrough at today's talks could spark a relief rally targeting 1.1100. Otherwise, with a very heavy concentration of options expiries between 1.0980 and 1.1000 today, EUR/USD was likely to range between 1.0970 and 1.1000.
AUD/USD fell 0.30% to 0.7490 overnight, but NZD/USD fell by 0.90% to 0.6895 as AUD/NZD buying swept the market after the cross broke higher through major resistance at 1.0800.
AUD/NZD should target 1.1000 now, which will cap NZD/USD gains as markets started to price faster hiking of rates in Australia, with a lot of hiking news already priced into the New Zealand yield curve. In the bigger picture, both antipodeans continued consolidating near the top of their recent ranges versus the greenback. A lift in risk sentiment opens further gains.
Asian currencies were range trading once again overnight and today, with no clear directional inputs after a neutral USD/CNY fixing today. Asian currencies have shown little positivity to oil’s overnight fall and looked like they were in a holding pattern ahead of Friday’s US Non-Farm Payrolls. A breakthrough in Ukraine-Russia talks would be a net positive for regional currencies.
China worries push oil lower
An already nervous oil market saw prices slump overnight as a lack of two-way liquidity in futures markets exacerbated China’s consumption outlook as the lockdown of Shanghai was tightened. Brent crude fell by 8.20% to 109.50, while WTI fell by 8.15% to 103.45 a barrel. In Asia, the fierce fall in prices overnight was an irresistible temptation to regional buyers. They pushed oil prices higher, Brent crude rising 1.80% to $111.40, and WTI climbing 1.65% to $105.20 a barrel.
China’s COVID lockdowns will provide directional volatility to oil this week. More lockdowns equal lower prices and vice versa. However, I believe that oil prices can only fall so far, even if the talks in Turkey today yield some progress.
Part of that reasoning lies with OPEC+, whose monthly meeting this week has been lost in noise elsewhere. Anxious not to upset the + in OPEC+, Russia, the rhetoric from Saudi Arabia and the UAE suggested little to no chance of increased production above the 400,000 bpd monthly increase previously agreed.
Crude stocks globally remained tight and in the bigger picture, I still believe that Brent crude will continue consolidating in a choppy and noisy $100.00 to $120.00 range, with WTI remaining in a broad $95.00 to $115.00 a barrel range.
Gold's party looks over
Gold prices slumped overnight, as persistently high US yields and a strong US dollar took their toll. Gold tumbled by 1.80% to $1922.50 an ounce with gold bugs running for cover after two previous days of sideways price action and falling upward momentum. This very much characterizes gold’s price action of late. A climb via the stairs, a leisurely coffee, and then a jump out the window.
Gold volatility was non-existent today in Asia, adding just one dollar to $1923.50 an ounce. Gold had resistance at $1965.00 and $1975.00 an ounce, followed by $2000.00 where I expected option-related sellers to be lying in wait once again. Support lay at $1917.00 and $1910.00 an ounce. A sustained break of the $1880.00 region will probably trigger a capitulation trade, potentially pushing gold down to $1800.00 an ounce.