Asian markets were dominated today by the news that US President Biden was apparently considering a material release of oil from its strategic petroleum reserves (SPR), which could total a million barrels a day and potentially total 180 million barrel. That is roughly 1/3rd of the total SPR. WTI immediately dropped by around 5.0%, with Brent crude not far behind.
Depending on who you talked to, the amount of Russian crude sanctioned from international markets now was around 3.5 million barrels. If the US releases a million barrels a day over the next six months, and OPEC+ continues hiking by 400,000 bpd in that time frame, the output gap will have considerably narrowed by the US mid-term elections. How convenient.
Of course, OPEC being OPEC, it may not be that simple. The OPEC+ Joint Technical Committee (JTC) just announced the immediate firing of the International Energy Agency (IEA) as their secondary data source, replacing them with Wood Mackenzie. I’m not sure what to read into that, but I suspected firing the IEA was positive news on the international relations front between OPEC+ and the US.
The ministerial meeting this week should announce the 400,000 bpd increase will go ahead, but if the US measures materially assist in market rebalancing over the coming months, OPEC+ may respond.
The Game of Thrones had nothing on the plot twists of international oil. Another plot twist was emanating from New Zealand of all places, perhaps the world's greatest energy NIMBYs. The energy minister said that the IEA members as a whole could announce a coordinated SPR release at its meeting on Friday. Perhaps that was why they just got fired by OPEC+?
My initial reaction was that the Biden plan, if correct, could put a cap on international oil prices but will likely see the Brent/WTI spread widened. It will not immediately change the structural deficit caused by Russian sanctions. Therefore, although oil prices may have seen their highs since the rent-a-crowd all started calling for $200 oil, we shouldn’t pin our hopes on oil moving to the low 80s.
$100 to $120 for Brent crude still sounded about right. Of course, OPEC+ may yet have something to say on the matter. And although President Putin had allowed energy payments in euros to continue for now instead of rubles, we definitely haven’t seen the last of that story.
With oil politics giving me a headache, it's time to look at this morning's slew of Asian data releases. China’s official Manufacturing PMI eased from 50.2 to 49.5 in March. The Non-Manufacturing PMI for March slumped from 51.2 to 48.8. The headlines made for ugly reading but the impact on China equity markets was minimal. The city lockdowns and mass testing by Chinese officials in March clearly distorted the data and China will get a pass mark this month because of that. Things will get darker if China’s COVID-zero policy sees much wider spread and extended lockdowns. We are not there yet.
South Korean Business Sentiment, unsurprisingly, retreated to 83 in March, but Industrial Production and Manufacturing for February beat expectations handsomely, rising 6.50% and 6.20% YoY respectively. Retail Sales also clung to positive territory. Semiconductors and electronics led the charge and demand remain relatively immune to geopolitical ructions internationally.
Japan’s Industrial Production eased to 0.10% for February, likely impacted by earthquakes. Meanwhile, Singapore Bank Lending in February rose to SGD 829.5 bio. All in all, Asia continued to show resilience despite the Ukraine war, with the data being moved by national events and not international ones, for now. It won’t be enough to set off a bull market in Asian equities, but it certainly isn’t a reason to dump them.
Probably the most concerning data were from Australia. Private Sector Credit rose slightly to 7.90% in March YoY, but preliminary Private House Approvals MoM for Feb soared by 16.50%. Preliminary Building Permits MoM for Feb meanwhile, jumped by a mind-boggling 43.50%. This despite extensive flooding in parts of the country, or perhaps because of it. Either way, Australian interest rates were near record lows, lending was increasing, and a building boom was occurring. The pressure was going to seriously mount on the RBA’s ultra-dovish stance after this data set.
The pan-Europe unemployment data will have minimal impact this afternoon. If the Russian situation bites deeper in the months ahead, it will become more important. US Personal Income and Spending for Feb are expected to rise by 0.50%. The headline and Core PCE Indexes could rise by near 6.0%, probably sending Fed hiking jitters through the market again. US yields fell once again overnight, but that may be a temporary lull.
Tomorrow, we get Japan’s Tankan Survey and China’s Caixin Manufacturing PMI along with Eurozone Inflation. Then follows the week's data highlight, US Non-Farm Payrolls interspersed with ISM Manufacturing. Markets are looking for a jobs gain of 490,000 after last month’s blockbuster 625,000 gain. Trading in the immediate aftermath of the Non-Farm’s is a good way to lose money I’ve found; I shall content myself to watch from the sidelines.
Equities unwinding the "reduced operations" rally
Equity markets spent most of last night unwinding the Russian "reduced operations" knee jerk rally, as even the most ardent FOMO bull came to realize the statement didn’t amount to much. Going forward, we can still expect more of these "peace in our time" knee jerk rallies at the slightest hint of progress in peace talks, no matter how tenuous the reasoning.
The S&P 500 fell by 0.63%, the NASDAQ slumped by 1.21%, while the Dow Jones eased by 0.19%. Some short covering was evident in US futures today, perhaps assisted by lower oil prices. NASDAQ futures were 0.35% higher, with S&P 500 futures gaining 0.10% while Dow futures were flat.
Asian markets ignored lower oil prices today, perhaps, rightly in my opinion, regarding the falls as temporary. Weaker data from Japan and China was weighing slightly, but overall, it appeared Asian markets were following the US and Europe and correcting the knee jerk rally of yesterday.
The Nikkei 225 was down 0.65%, but the KOSPI edged 0.40% higher after its data outperformed. Mainland China was lower with the Shanghai Composite down 0.35% and the CSI 300 falling by 0.65%. Hong Kong retreated by 1.50%.
In regional markets, Singapore was 0.45% lower, Taipei was down 0.25%. Jakarta and Kuala Lumpur were bucking the trend, rising 0.25% despite lower oil prices. The Sensex was unchanged in early trading, while Bangkok was down 0.10%. Australian markets were modestly lower, the ASX 200 and All Ordinaries easing by 0.15%.
Overall, the mixed data picture in Asia was offset to some extent by lower oil prices. European markets will take some heart from lower oil as well and especially the news that Russia will allow gas payments in Euros to continue for now.
US dollar index testing support
The US dollar retreated overnight once again, even as Ukraine hopes faded as quickly as they began. US bond yields moved lower once again, undermining the greenback. For now, the US yield curve seemed to be pricing in the worst of the impact of impending Fed rate hikes, and with no new developments in Eastern Europe, bond buyers appeared to be tentatively returning. Lower oil prices today will assist that, as will confirmation of the Biden SPR plan today. Of course, that could all change if we get a monster US Non-Farm print tomorrow night.
That has left the dollar index to fade once again, falling 0.58% to 97.84 overnight, where it remained in moribund Asian trading. That left the index just above support at 97.70, which it tested overnight. With an imperfect triple bottom traced at that level, a sustained break will signal a deeper US dollar correction lower, possibly extending to 96.50.
EUR/USD continued to benefit from US dollar weakness, rising 0.60% to 1.1160 overnight, edging higher to 1.1165 in Asia. EUR/USD broke through resistance at 1.1140 which could extend into the 1.1200s. Long-term resistance lay at 1.1350 today, and if energy prices head lower, that will be an undoubted tailwind for the single currency.
As ever though, I would warn against excessive bullishness thanks to Eastern Europe. We are one headline away from EUR/USD reversing all its gains. I would also argue that ECB rate hikes will be bought forward in this environment, despite high inflation, as the Eurozone economy was fragile because of the conflict.
USD/JPY continued to retreat as US yields fell 0.86% overnight to 121.85, easing to 121.75 in Asia. With Japan’s financial year-end today, the yen may well have been boosted by year-end repatriation flows. If US yields climb once again into the end of the week, USD/JPY should resume its rally, especially as the BOJ has successfully pushed 10-year JGM yields back from its 0.25% ceiling. USD/JPY had support at 121.25, which held overnight, and resistance at 123.00.
Asian currencies consolidated their recent gains overnight, with oil sensitive currencies such as the Korean won and Thai baht booking notable gains this week. Notably, the tumble in oil prices today, and a lower US dollar overnight, did not translate into an Asian FX rally. That suggested that we saw the best of the gains this week and that ASIAN FX was content to wait for the US Non-Farm Payrolls data tomorrow, and possibly the Biden SPR plan to be confirmed today.
Oil tumbles on Biden SPR hopes
Oil prices moved sideways overnight, Brent crude rising just 1.25% to 112.60, and WTI rising 2.25% to 107.45 a barrel. Both contracts modestly unwound the Ukraine knee jerk trade yesterday.
As I set out above, if the plan is correct, then it could well set a ceiling on oil prices at the panicked March highs. However, until OPEC+ production catches up, the structural deficit will persist, meaning oil prices were unlikely to move materially lower from here. The big variable will be OPEC+’s response and the outcome of this week’s meeting. My feeling was that although key members remained apathetic to the Biden administration, they will not want to openly antagonize it by cutting production increase targets.
Overall, I still expect Brent to trade in a choppy $100.00 to $120.00 range, with WTI bouncing around in a $95.00 to $115.00 a barrel range. An Iran nuclear agreement finally getting over the line, in combination with OPEC+ monthly increases and an extended global SPR release will change that outlook.
Gold trades sideways
Gold prices edged higher overnight to $1932.50 an ounce, gaining some support after the aggressive sell-off from lower US yields and a lower US dollar. The momentum faded in Asia, with gold edging 0.37% lower to $1925.50 an ounce.
Gold markets once again looked like they had gotten themselves long and wrong, this time above $1960.00 an ounce. With gold unable to rally on a softer US dollar or lower US yields, the risks of another downside washout are rising once again.
Gold had resistance at $1940.00, with nearby support at $1915.00. Failure should see gold retest $1900.00. A sustained break of the $1880.00 region will probably trigger a capitulation trade, potentially pushing gold down to $1800.00 an ounce.