Markets got a case of inflation nerves overnight, with long-dated US yields shooting higher ahead of US inflation data this evening. The US 2-year 10-year curve now has nearly 30 points of positive daylight in it, thankfully removing the “inverse yield curve, we’re all doomed” headlines off the front page for now.
US 30-year yields hit a three year high of 2.80% in what seems like a begrudging acceptance of reality by markets, ahead of the start of quantitative tightening and some juicy 0.50% rate hikes from the Fed starting next month.
US headline inflation could well hit 8.50% YoY this evening and equity markets didn’t like that story, staging a retreat overnight with the tech-heavy NASDAQ coming in for particularly negative attention. EM currencies also started giving ground, despite oil prices moving sharply lower overnight.
Asia itself was potentially caught in a pincer movement of higher US interest rates and slowing China growth which slightly lower oil prices were not offsetting. We can expect more Asian currency weakness ahead as the region's central banks tinker with tightening monetary policy. Those pressures may well magnify in May as the FOMC rolls up its sleeves and gets to work.
Although some Ukraine fatigue seemed to be settling into the market, others like myself would have called it complacency, the war in Eastern Europe will continue complicating the inflation picture globally.
Austria’s Chancellor visited Moscow yesterday, but in his own words, came away with “no optimistic impression.” OPEC also rebuffed quite firmly European accusations that it could pump more oil if needed. The bottom line was that Russian sanctions, low to non-existent grain exports from Ukraine and a war set to escalate, not deescalate, will continue playing havoc with commodity prices and therefore, inflation.
China markets had a tough day at the office yesterday but saw a few glimmers of lights overnight and today. The Chinese Government gave out its first online game approvals in months, lifting tech China ADRs overnight.
In Shanghai, restrictions have been loosened for about half the population. If an apartment complex has had no cases for two weeks, residents can start moving around. The caveat being that is one case is found in the complex, it will be locked down again in its entirety.
China markets attempted to rally this morning but quickly reversed into the red once again as the potential for widening COVID-zero restrictions on the mainland continued slamming sentiment. A few online computer games and Shanghai olive branches weren’t enough to structurally change sentiment.
Of course, one part of the world continued to defy the doom and gloom: Australia. NAB Business Confidence rose to 16 this morning but wasn’t enough to turn the tide for the Australian Dollar or local equities. The picture was less impressive in New Zealand. NZIER Business Confidence wilted to -40% in Q1 in the face of Omicron and then soaring inflation and supply shortages. Meanwhile, NZIER Capacity Utilization for Q1 climbed to 97.10%. Overheating anyone?
The RBNZ tomorrow has a difficult decision at its policy meeting. A 0.25% rate hike is priced in by most pundits, but a 0.50% is required. More than one, certainly as the New Zealand yield curve already told the RBNZ as much. Another 0.25% hike tomorrow and another possum in the headlights statement are likely to see the New Zealand Dollar get a beating. The farmers will be happy, but not many others.
Germany also releases its March inflation this afternoon and could well touch 7.50% YoY. That will increase the pressure on the ECB to do “something” on Thursday, even if it is to more strongly suggest that monetary expansion will be reigned in faster. The ZEW Economic Sentiment Index is likely to make grim reading as well for obvious reasons. Neither data point will make a case for a bounce in the euro.
United Kingdom Unemployment and Average Earnings for February will be closely watched as well. Although slightly backwards-looking now in the context of the Russian invasion of Ukraine, a strong set of data will increase the pressure on the Bank of England to get more proactive on rate hikes as well. Sterling had yet to have a daily close below 1.3000, signaling the next technical down move. But it was looking wobbly at 1.3025 today, and today could be the day.
Another big mover was Bitcoin overnight, showing a high correlation with the NASDAQ of late. After consolidating last week, it broke support at $42,000.00 overnight and plunged 6.20% to $39,700.00 as of this morning. In the bigger picture, it was still consolidating in a triangle pattern stretching back to mid-January. The lower and upper boundaries today were $36,500.00 and $47,500.00. A break above or below those support/resistant levels signaling an $18,000.00 move either way.
Asia equities remain under pressure
Overnight, US markets took fright as US long-dated yields shot higher as inflation nerves grew on Wall Street. The S&P 500 fell 1.68%, the NASDAQ slumped by 2.18%, and the Dow Jones retreated by 1.17%. In Asia, the sell-off continued, with US futures on all three indexes down over 0.40%.
Asian markets responded in kind, mostly moving lower despite oil concerns easing. Fears around China's growth and a more hawkish Fed continued to give regional markets a strong headwind. Japan’s Nikkei 225 fell by 1.60%, with South Korea’s KOSPI1.10% lower, with Taipei easing by 0.30%.
Chinese markets attempted to follow the ADR rally overnight as Shanghai restrictions were partially eased and the government approved new online games, boosting local tech. Momentum quickly waned as the small print of Shanghai’s apparent easing was digested, and US futures continued to fall. China markets fell into the red with the Shanghai Composite down 0.65%, and the CSI 300 down by 0.35%. Hong Kong fell by 0.55%.
Singapore was 0.90% lower ahead of an expected MAS tightening on Thursday. Kuala Lumpur was down 0.20%, and Jakarta was 0.10% lower. Bangkok fell 0.35% and PSEi Composite lost 0.95%. Falling oil prices and soft US markets saw resources lead Australia lower. The ASX 200 and All Ordinaries fell by 0.55%.
European equity markets will find little solace in the overnight price action and will likely head lower at the open. Sky-high German inflation data will also erode sentiment as ECB tightening fears rise.
Perhaps the most important thing to watch for is unconfirmed allegations that Russia has used a chemical weapon in Mariupol. This story was circulating widely in Asia today across multiple international news outlets. If confirmed as true, European equities will surely come under pressure again as the EU will be forced to ratchet sanctions, potentially oil this time, as a response.
US yields lift the Dollar
The rise in long-dated US yields overnight reversed intraday losses and lifted the greenback. The dollar index rose 0.14% to 99.98, where it remained in Asia. The index's next target remained the 100.50 region, with support at 99.50.
EUR/USD duly made an attempt to recover overnight, climbing to 1.0935 at one stage. However, with the Austrian Chancellor's trip to Moscow being a failure, and with US yields soaring, EUR/USD retreated. It finished the day just 0.07% higher at 1.0883, where it remained in Asia.
Multiyear support at 1.0800 remained close by with risks skewed to the downside. A dovish ECB will compound the negative outlook for the euro. Failure signals more losses to 1.0600 and 1.0300 initially. Resistance was at 1.1200, with longer-term resistance at 1.1300.
Sterling tested support at 1.3000 once again overnight but managed to close just above it at 1.3030. Positive UK data may give sterling a temporary respite, but a daily close under 1.3000 signals another round of losses targeting 1.2850 and 1.2700.
The Japanese yen was buffeted by another round of weakness overnight as the US/Japan rate differential continued widening. USD/JPY rose 0.89% to 125.40. Some official “watching markets closely” speak from Japan only pushed it 20 points lower to 125.20. USD/JPY remained on track to test its multi-year high at 125.80 this week. Any drop to 124.00 and 123.50 should find plenty of keen dip buyers.
Asian currencies weakened overnight as US yields rose, pressuring EM currencies where central banks were reluctant to tighten to match the Fed. That weakness continued in Asia with USD/KRW, USD/PHP, USD/INR, and USD/TWD rising once again. USD/CNY was steady at 6.3700 after a neutral PBOC USD/CNY fixing. Fears around China’s growth outlook hadn't abated and will be another headwind regional currencies will have to deal with. Asian currencies will be sensitive to increased lockdown headlines from China.
China growth fears continue to weigh on oil
Oil prices finished sharply lower overnight, despite OPEC telling Europe they wouldn’t be pumping any more oil. Recession fears around US monetary policy and mostly, fears surrounding China’s growth outlook and its COVID zero policy, pushed oil prices down in overnight trading.
Brent crude fell 2.90% to $99.25 overnight, while WTI fell 2.65% to 95.20 a barrel. The easing of Shanghai lockdowns today prompted dip-buying by Asian buyers, hopeful the worst was past now for China. Brent crude rose by 0.75% to $100.10, and WTI 0.90% to $96.05 a barrel. China headlines were clearly having a greater impact than Eastern Europe on short-term movements for now.
With the latest scheduled OPEC+ increase, and US and IEA SPR release out there and priced in, it seemed that China continued to drive the bearish price action. Brent and WTI had fallen to the bottom of my ranges, but I expected Brent to remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. Brent crude had further support at $96.00, and WTI at $93.00 a barrel.
Gold’s inflation hedging bid continues
With US yields charging higher, and the US dollar remaining flat, gold had room to state its inflation hedging credentials overnight. Gold staged a sharp rally intra-day, rising $22 at one stage to $1970.00 an ounce, before easing to finish 0.34% higher at $1954.25 an ounce.
In Asia, gold added another 0.25% to $1958 an ounce and if the greenback continued to trade sideways, potentially had room to extend gains. Once the US dollar rally resumes though, gold's recent gains may be tested. Therein lays gold’s biggest challenge, with a habit of retreating as fast as it gains at the first sign of trouble.
Gold was capped at my second resistance level at $1970.00 an ounce overnight and needed to close above there on a daily basis to challenge $2000.00 an ounce. A fall back through $1940.00 likely sets up another whipsaw move lower, chopping out the short-term money. Failure of $1915.00 will signal a retest of important support at $1880.00 and possibly $1800.00 an ounce.