The FOMC Minutes released overnight signaled a faster pace of balance sheet runoff than on previous occasions, targeting $95 billion per month from September, easing into the process from next month. The minutes also suggested that some 50 bp Fed Funds hikes were on the cards and expected that to happen from next month. Only the Ukrainian war stayed the FOMC’s hand this month it seemed.
The reaction in the markets was mixed as much of the Minutes' contents had already been telegraphed by Lael Brainard the day before. The US Dollar and US bond yields rose only modestly. Equities, though, took another dive lower.
That makes sense given that equity markets have been steadfastly ignoring the reality of tighter monetary policy and the end of zero percent interest rates and central bank back-stopping of the party. It will be interesting to see in the coming months, the reaction of housing markets to policy normalization, both in the US and abroad.
The International Energy Agency announced a coordinated global release of 120 million barrels of oil overnight to ease tight global supplies. The net release was actually only 60 million barrels as it included 60 million from the US which was part of their 180 million barrel release.
Oil prices eased by around 4.0% on the news, and higher US crude inventories, but that was an average day in oil markets these days. Notably, and despite the Shanghai lockdown and cases soaring to 20,000, Asia walked in the door and bought the dip today. Much like the FOMC Minutes, the news seemed to have been priced in already to some extent.
The US tightened sanctions on Russian banks and prominent citizens overnight as well. But once again, the impact was muted. From the US and European perspective, one got the impression that the sanction low hanging fruit had been picked. Anything from here will require material economic sacrifice, particularly for the Europeans. That reality may go some way to explaining why European equities had such a poor session overnight.
In Asia, Australia’s Trade Balance suffered a serious hiccup. The headline number fell to AUD 7.457 bio versus an expected print of AUD 12 bio. Exports rose by 0.20% (6.0% exp.), but it was imports that shocked, rising by 12.0% (1.0% exp.). Looking through the numbers, processed industrial supplies, fuels and lubricants, and transport equipment were the main culprits.
It seemed like everywhere else; the lucky country can’t entirely dodge the cost-push inflation sweeping the world. The surplus was the smallest since March 2021 and pushed the AUD down 0.30% today after it endured a torrid session overnight as markets priced in a far more rapid hiking cycle from the FOMC than the RBA.
The Asian calendar was quiet today leaving local markets at the mercy of headline-driven volatility, with Eastern Europe and China COVID headlines at the top of the list. German Industrial Production will likely fall to zero percent this afternoon, and Eurozone Retail Sales could suffer the same fate, as the Ukraine malaise deepens. The US calendar was also quiet today, but I counted five Fed speakers this evening which could provide some volatility.
Wall Street retreat spills into Asia
Asian equity markets were lower today as it followed Wall Street south, digesting the implications of a faster tightening Federal Reserve, casting a nervous eye over at China and its virus situation.
Overnight, the FOMC Minutes confirmed the hawkish comments of Lael Brainard the day before, causing more pain on Wall Street. The S&P 500 fell by 0.97%, the NASDAQ tumbled by 2.22%, while the Dow Jones eased 0.42% lower. Index futures continued falling in Asia, with Dow and S&P 500 futures down 0.25%, and NASDAQ futures down 0.15%.
In Asia, Tokyo’s Nikkei 225 slumped by 1.75%, with South Korea’s KOSPI retreating by 1.25%. Mainland China’s Shanghai Composite and CSI 300 lost 0.50%, while rather surprisingly, Hong Kong’s Hang Seng was unchanged. Singapore was down 0.55%, Taipei dropped 0.75%, Kuala Lumpur slid 0.20%, and Jakarta 0.20% higher. Bangkok lost 0.75% and Manilla was 0.45% lower. Australian markets were also lower after the trade balance surprise, the ASX 200 and All Ordinaries lost 0.55%.
European equities had a torrid session overnight, caught in a vice grip of Russian sanctions fallout, a faster tightening Federal Reserve and persistent nerves around the French presidential election. None of that changed overnight and it was notable that Europe did not detail its latest round of sanctions. The somber mood in European equities will not lift today.
Currency markets are ranging
There was not much action on currency markets overnight, with DM and EM currencies ranging with a few exceptions. Overall, it appeared that currency markets had already absorbed the fast quantitative tightening comments from Lael Brainard, with the FOMC Minutes not adding to the narrative. US yields were steady overnight as well. The dollar index crept 0.14% higher to 99.62, easing slightly to 99.55 in Asia.
The dollar index moved through resistance at 99.50 and should extend its rally to the 100.50/101.00 region after some consolidation. With interest rate differentials widening, and the situation darkening in Eastern Europe, dips should be well supported now.
EUR/USD was almost unchanged at 1.0900 overnight, rising slightly in Asia to 1.0910. Long-term support at 1.0800 remained the most important level to monitor. A sustained break would target 1.0600 and 1.0300 initially. Resistance was at 1.1200, with longer-term resistance at 1.1320.
With little movement in US yields overnight, USD/JPY was almost unchanged at 123.70, where it remained today. The late March highs at 125.10 were in sight again, followed by 125.80. USD/JPY should find plenty of support into 122.50.
The AUD, NZD and CAD all fell overnight, providing some volatility in one corner of the market. The fall was led by AUD/USD which retreated 0.90% to 0.7510 overnight. NZD and CAD both fell around 0.40%. Today in Asia, the sell-off continued, led once again by AUD/USD, down 0.45% to 0.7475, with NZD/USD down 0.35% to 0.6895. The demise seemed to be a combination of factors, a rapid reassessment of Fed hiking risks with quite a lot of hiking already baked into the Commonwealth's curves.
Oil’s overnight falls won’t be helping. Failure of 0.7550 by AUD/USD on a closing basis sets up a deeper reversal by all three, likely catching a number of traders out, including the author.
Asian currencies were surprisingly resilient overnight, edging only slightly lower. Even after the Brainard comments, Asian FX remained fairly steadfast with no signs of even an incipient taper tantrum. The high level of Asian foreign currency reserves, still relatively benign inflation and the PBOC only weakening the Yuan slightly kept Asian FX steady.
One exception was the Indian Rupee. USD/INR rose 0.65% to 75.777 overnight. I put that down to US warnings to India overnight not to get too cozy with Russia. India is in a challenging position, being also a member of the QUAD security grouping, containing the United States. Trying to argue that Russia and China were totally separate security issues will be a leaky argument to make and India faces some geopolitical risks now if it wants US support on China while being the buyer of last resort for Russian oil.
Oil prices fall on IEA release
Oil prices dipped overnight after the IEA announced a globally coordinated reserve release of 120 million barrels, which is actually a net 60 million release when the US contribution was stripped out. Brent crude and WTI fell by over 4.0% overnight, assisted by higher than expected US Crude Inventories, to $101.70 and $96.40 respectively.
With the IEA release and the US SPR releases now priced in, Asia bought the dips in both contracts this morning. That was consistent with the usual behavior of buyers from the energy-hungry region, with plenty of Asian interest to buy on any and all pullbacks. Brent crude and WTI rose by around 1.0% to $102.40 and $97.10, respectively.
Short of a serious escalation of virus restrictions in Mainland China, it looked like most of the bearish news for oil prices was out there. I expect Brent to remain in a choppy $100.00 to $120.00 range, with WTI confined to a $95.00 to $115.00 a barrel range.
Gold’s consolidation continues
Gold continued its sideways trading overnight, with the US dollar and US yields barely moving. That meant another sideways day for gold once again, closing just 0.14% higher at $1926.00 an ounce. Further US dollar strength today pushed gold lower in Asia, falling 0.20% to $1922.00 an ounce.
The risks were still skewed to the downside for gold, especially if US yields and the US dollar kept climbing. Only a rally through $1970.00 changes that outlook. Failure of $1915.00 an ounce will signal a retest of important support at $1880.00. Failure of $1880.00 should see a capitulation of long positions, extending losses to the $1800.00 region. At those levels, patient traders might think about dipping their toes in again.