Opposing inputs have sent asset classes in different directions, each choosing, it seems, the information that supported their respective paths of least resistance.
Former Fed Governor Ben Bernanke warned about stagflation overnight, quite the statement from a former heavyweight. Present Chairman, Jerome Powell, was also hawkish, saying the Fed Funds may have to move well above the market's preferred terminal rate (around 3.50%), for a while, to bring inflation back down.
On the more positive side, the European Union clarified advice on what constituted meeting sanctions restricted payments for Russian natural gas for EU importers.
Basically, the advice allows the importers to pay in euro or US dollars into Gazprombank, and then have it converted via a ruble account. Secondly, the US moved to ease restrictions on Venezuelan oil exports, allowing Chevron (NYSE:CVX) to have narrow conversations with Venezuela’s PDVSA.
Restrictions could be eased on exports if talks between the government and opposition parties make progress. Those headlines sent oil tumbling, offsetting a surprise drop in API crude inventories, and soaring diesel prices in parts of the US.
Finally, despite the doom and gloom and predictions of recessions, US Retail Sales, Manufacturing and Industrial Production all posted excellent numbers last night.
Helping the soft landing theory I suppose, although you could also say it meant harder and faster Fed rate hikes. Walmart's (NYSE:WMT) downgraded outlook for 2022 was subsumed in that noise.
All-in-all it was a bottom pickers heaven. Equities chose to look at the US data, and the Venezuela headlines and sent stocks sharply higher. Oil markets had toughed multiweek highs yesterday, but staged a huge reversal and slid on the Venezuela headlines, ignoring the fact that political progress is required for any unlocking of sanctions.
Bond markets ignored everything else and concentrated on the Bernanke and Powell headlines, sending the yield curve sharply higher. Currency markets used the strong US data, EU gas capitulation, and lower oil prices to sell the US dollar and load up on sentiment currencies like the euro and Australian dollar, with Asian FX having a decent session as well. Gold did nothing, but we’re all used to that.
To be fair, the overnight session did have something for everyone if you applied blinkered vision and ignored what didn’t suit your view. The FOMO gnomes of the stock market remain desperate to buy the dip, although I suspect they’re going to discover it will be a bear market rally.
The US dollar had come a long way in a short time, and as mentioned yesterday, was overdue for a downward correction anyway. Oil was a surprise, but I believe an unfreezing of Venezuelan oil will be a game-changer for energy markets, should it occur.
Notably, WTI prices are now higher than Brent crude prices, and I can’t remember when that last happened. I do believe the downside will be limited because of that as gasoline and diesel prices in the US soar.
Bond yields rightfully moved higher and get my vote for the only market overnight to cover itself in some sort of intellectual glory. That doesn’t mean we can’t see equities extend gains, helped along perhaps by soothing technology company noises from China and a Shanghai reopening.
Similarly, the US dollar correction lower has plenty of room still and remains in a structural bull market. The Fed will hike by 0.50% next month and start reducing its balance sheet.
That reality will return to markets the closer we get to the June meeting, but for now, we will let the remnants of the 2020/21 buy-everything rally have their day in the kiddie’s playground.
In Asia today, markets were buoyed by supportive comments around China tech companies from a senior government official. Additionally, Shanghai authorities announced that 864 financial institutions will be allowed to resume operations, and officials say a full mid-June reopening remains on track.
The light at the end of the Shanghai tunnel will be a welcome lift to the somber COVID-zero mode afflicting China and other regional markets. However, we may not have heard the end of COVID-zero.
Japan’s GDP data showed the economy contracting in Q1, but not by as much as expected as the weaker yen and rising imported costs weakened economic activity.
Preliminary QoQ GDP Growth for Q1 fell just -0.20% versus -0.40% expected. Consumer spending for the same period held at 0.00% versus -0.50% expected. A pretty decent win in Japan terms.
Additionally, the $21 billion supplementary budget was passed to assist with cost-of-living increases and the government's Upper House elections in July. Expect another one if the expected rebound in Q2 GDP and consumer spending doesn’t materialize.
Australian wage growth by 0.70% QoQ for Q1, and by 2.40% YoY, both slightly less than expected. The still-benign wage environment should take the heat of the RBA to hike by 40bps in August, with 0.25% likely penciled in.
On the negative side, China’s House Price Index rose only 0.70% in April YoY, far below the 1.50% expected. The COVID-zero lockdowns are to blame, but it will be interesting to see if housing market confidence returns after the lockdowns finish, with private developer leverage still a slow-moving train wreck.
The UK releases inflation data this afternoon although its impact is likely to be muted given the brutally honest raising of the inflation white flag by the Bank of England Governor this week.
More pressing is the UK sorting out the Brexit mess around the Northern Island protocol and avoiding a trade war with the EU. I will probably be saying that 10-years from now.
Eurozone inflation is also due with the final YoY April number expected to be around 7.50%. That will keep the pressure on the ECB to start hiking, likely as early as next month, but that is mostly built into the euro now.
US Housing Starts and the Official Crude Inventory series dominate the calendar in US markets. If the overnight session is anything to go by though, markets' direction will be dominated by Fed talking heads and whichever data they wish to selectively choose, or ignore, to support the narrative.
That narrative being the worst is over for stocks because markets have priced all the bad news from the Fed in and a recession will slow inflation. Oh dear….
Asian equities are mostly higher
US equities rallied strongly overnight as US retail sales, industrial production, and manufacturing outperformed, while hawkish comments from Powell and former Chair Bernanke were ignored.
The S&P 500 shot higher by 2.02%, the NASDAQ leapt 2.76%, and the Dow Jones gained 1.35%. In Asia, US futures eased as short-term specs cashed out. NASDAQ futures were down by 0.40%, with S&P 500 and Dow futures easing by 0.20%.
The overnight rally saw most of the Asia-Pacific trading in the green today, although the retreat lower by US futures this morning limited the gains. Another headwind has been China, which has been unable to shake off the weak house price data this morning, leaving it in the red.
The Shanghai Composite has fallen by -0.37%, the CSI 300 was down by 0.65%, while Hong Kong’s Hang Seng edged 0.35% lower. That comes despite an easing of Shanghai restrictions and very supportive tech comments by the vice-premier.
My days are filled with people asking me was this the low of China stocks (especially tech), it's so cheap, should I buy? The price action today suggested that more patience was required.
Elsewhere though, Asia was recording modest gains. Japan’s Nikkei 225 was 0.75% higher, with South Korea’s KOSPI up just 0.10%. Taipei jumped 1.40% higher, while Singapore gained 0.75%.
Kuala Lumpur rose by 0.40%, with Jakarta adding 0.65%, Manila by 1.25%, with Bangkok unchanged. Australian markets also followed Wall Street higher, the ASX 200 rising by 0.90%, and the All Ordinaries by 0.80%.
European markets were likely to take heart over the EU’s advice on natural gas payments to Russia, lessening the odds of interrupted supplies, for now, having booked large gains yesterday.
Falling oil prices should also soothe nerves. New York markets will depend on whether the street wants to continue with the bear market rally, or not.
US Dollar falls as risk sentiment rises
The US dollar weakened overnight despite US yields moving higher and hawkish Fed officials. Like equity markets, currency markets concentrated on positive US data, and a fall in oil prices which lifted risk-seeking sentiment, although I believe this was all part of a bull market correction.
The dollar index slumped by 0.85% to 103.30, edging higher to 103.40 in Asia as US index futures fell. Resistance remained at 105.00, and the daily close below 104.00 suggested support at 102.50 could be tested. Failure suggested a deeper correction still.
EUR/USD was one of the main beneficiaries of the swing in risk sentiment, jumping 1.15% to 1.0555 before edging lower to 1.0535 in Asia. Having based at 1.0350 on Friday, EUR/USD rallied through 1.0500 overnight and could test 1.0650 and possibly even the 1.0800 37-year breakout line.
I continued to believe that any rally above 1.0700 will be hard to sustain in the medium term. In a similar vein, GBP/USD traced out a low at 1.2155 last week and leapt 1.40% higher to 1.2490 overnight, where it remained in Asia.
The next resistance was at 1.2650, however, like Europe, the United Kingdoms' structural headwinds leave the longer-term picture still bearish.
The rise in US yields overnight left USD/JPY trading sideways at 129.20 in Asia, barely changed over the past few days. If US yields remain at these levels, a deeper correction to 127.00 becomes unlikely. In the bigger picture, USD/JPY remains at the mercy of the US/Japan rate differential.
The rally in global sentiment allowed AUD/USD and NZD/USD to book 0.85% gains once again overnight, rising to 0.7030 and 0.6360, respectively, where they remained in Asia.
Any rally to 0.7200 or 0.6500 was likely to see sellers lining up though as both will continue to be buffeted by swings in investor sentiment, especially in China.
Likewise, Asian currencies had a good night overnight, with CNY, CNH, KRW, and SGD the standout performers. USD/CNY at 6.8000 and USD/CNH at 6.8500 proved formidable barriers, and if both USD/Yuan’s remain below these levels, more Asia FX strength is possible.
Lower oil prices will also help, but if US yields continue to track higher from here, then the US dollar correction versus Asia was likely to quickly run out of steam.
Venezuela/Europe send oil lower
Overnight, oil prices touched multi-week highs until the US announced it was starting a process, potentially leading to an easing of sanctions on Venezuela.
We immediately saw oil reverse all its impressive intraday gains and both Brent crude and WTI finished slightly lower on the day. The EU effectively allowing European importers to pay for Russian gas via rubles should take the edge off European gas prices and flow through to oil prices.
Brent crude finished 1.05% lower at $112.70 a barrel, having tested $116.00 intraday. WTI, by contrast, finished just 0.10% lower at $113.60 a barrel, having also tested $116.00 intraday.
Prices were unmoved in Asia. Tight API inventory data and soaring diesel prices in the US combined to send WTI to a premium over Brent and was likely to limit the downside for both contracts, Venezuela, or not.
Tonight’s official crude inventory data dump will now be closely watched, and sharp falls in gasoline and distillates inventories could increase the WTI premium over Brent crude.
Brent crude had resistance at $116.00 and support at $111.50 a barrel. WTI took resistance at $116.00 a barrel as well, with support at $111.50. Any progress on Venezuela's supply returning to international markets was potentially a game-changer and should mean the top of my longer-term range, at $120.00 a barrel, remains intact.
Gold’s price action doesn’t inspire confidence
Despite the US dollar falling heavily overnight, and risk sentiment rising generally, gold prices fell 0.53% to $1815.00 an ounce overnight, easing to $1814.50 in Asia.
US yields climbing higher may have played a part, but the direction of the US dollar has been more important of late. When gold falls as the US dollar falls heavily, we should all take that as a warning sign, suggesting lower prices are the path of least resistance. As such, I believe gold’s downside risks have ratcheted higher.
Support lay at $1789.00, followed by $1780.00 an ounce. Failure of the latter suggested a deeper correction to $1700.00. That move could occur quite quickly if $1780.00 fails. Gold had resistance at $1836.00, followed by the 200-DMA at $1836.80, and then $1850.00 an ounce.