With the US on holiday yesterday, activity was muted overnight. Currency, precious metal, and crypto markets traded sideways, while equities used a slow news night to stage a modest recovery, led by European equities. The modest equity market recovery continues in Asia, thanks to US index futures grinding higher since the early morning opening yesterday in Asia.
Energy markets have continued unwinding the Friday capitulation at a steady pace this week. Reduced Russian natural gas flows are supporting European prices, with a number of countries looking to reactivate coal-fired power plants to make up potential energy shortfalls. Chinese energy demand is hitting record highs in the North of the country thanks to a heat wave. Reuters is reporting that Iran is preparing to step up uranium enrichment, and US Treasury Secretary Yellen is circulating a plan to put a price cap on Russian oil to deprive them of revenues.
Taken in totality, the physical market is as tight as ever, and thus, the speculative capitulation in futures markets probably shouldn’t be taken as a picture of the reality on the ground in the real world. Iran’s measures, if correct, likely mean we won’t be seeing a return of Iranian crude to greater world markets anytime soon either. The bottom line seems to be that until we see physical demand destruction, oil and other energy markets are, as tight as ever.
In Asia today, South Korean 20-day exports for June fell unexpectedly by 3.40% YoY. Most of that though will be down to the trucker's strike this month, and a recovery should occur in July. The Bank of Korea put out a statement saying that “CPI would likely remain over 5.0% for the time being.” The BoK seems to be priming markets for a 50bps hike in July and a couple more hikes shortly thereafter. Some concern around the currency is clearly evident as they warned they would take action over “herd-like” behaviour. Translating as “if you all keep buying USD/KRW, we’ll intervene.” They won’t be the only Asian central bank with that problem this year.
The Reserve Bank of Australia Minutes were released this morning. The minutes signaled potentially another 50bps hike next month followed by a series of 25bps hikes for the rest of the year. They also mentioned that the RBA had lost some credibility in how it exited its yield control policy. They shouldn’t feel too bad about this. There are plenty of other central banks with egg on their faces, and their trans-Tasman neighbors, the Reserve Bank of New Zealand, have put on a veritable Muppet Show with monetary policy and will make the RBA look good, no matter what.
That is about it for data releases today in both Asia and Europe, leaving markets to continue quietly reversing Friday’s price moves until the US walks in the door, or we get a headline bomb. The Fed’s Barkin speaks later today, but most eyes will be on US Existing Home Sales for May. There is downside risk to the 5.40 million forecasts with stresses in the US housing market evident for some time now as mortgage rates rose precipitously. I’m not sure what the reaction will be to a bad number. Theoretically, the gnomes of Wall Street will price in less Fed tightening and send US yields lower and equities higher and buy risk sentiment currencies. But I can’t see how a slowing US housing market is a positive environment for equities going forward either. I think I’ll sit this one out and watch from the sidelines.
Asian equities move higher
US futures moved higher in Asia yesterday and continued gaining through European time as a lack of really negative headlines allowed the buy-the-dippers to dip their toes in the market. That also helped European equities stage a decent recovery as well, with markets ignoring the shock result in the French parliamentary elections. S&P, NASDAQ and Dow futures rose around 1.0% overnight, and all three have added another 0.55% this morning.
With US index futures maintaining their gains into today’s session, some confidence has returned to Asian markets, which are mostly higher today. The speculative FOMO herd has sent the Nikkei 225 1.90% higher, with South Korea’s KOSPI adding 0.45%. In Mainland China, both the Shanghai Composite and CSI 300 lost ground early doors, after suspiciously artificial gains yesterday. Those losses have once again reversed, with the Shanghai Composite now 0.05% higher, and the CSI 300 edging 0.15% higher. Hong Kong’s Hang Seng has jumped by 1.30%, helped perhaps by signals from Evergrande of a timetable for debt repayments and relisting of its shares.
In other markets, Singapore has climbed by 0.75%, with Taipei jumping 1.85% higher, Kuala Lumpur and Jakarta have gained 0.45%, Bangkok 0.25%, but Manila has fallen by 0.45%. Australian markets have wasted no time in reversing yesterday’s losses, thanks to firm US futures. The ASX 200 and All Ordinaries are 1.45% higher today.
Assuming the news ticker stays quiet, and with little data out this afternoon, European markets should continue recouping some recent losses, and as long as the US housing data holds steady, I can see Wall Street maintaining its recent gains as well.
Currency markets trade sideways over the US holiday
Not a lot has changed in currency markets overnight despite some decent intraday ranges. The US holiday and a slow news reel ensured that currency traders took the option of easing into the week, awaiting the US return this evening. The Dollar Index edged 0.16% to 104.48 overnight, easing another 0.14% to 104.34 in Asia, thanks mostly to a weak yen. The dollar index has support at 1.0350 with resistance now distant at 1.0570.
EUR/USD rose just 0.17% to 1.0511 overnight, adding another 10 pips to 1.0525 in Asia. It has initial resistance at 1.0600, with challenging resistance at 1.0650. Support is at 1.0450 and 1.0400 now although I note that EUR/USD has based twice at 1.0350. That leaves the door open slightly to a corrective recovery this week. Sterling rose just 0.27% to 1.2248 overnight, edging 0.20% higher to 1.2270 in Asia. GBP/USD has initial resistance at 1.2360 and 1.2400, with support at 1.2200 and then 1.1950.
USD/JPY is holding steady at 135.00 today, almost unchanged for the past 24 hours. It is likely awaiting the reopening of the OTC US bond market this evening. It once again failed ahead of 135.45 overnight and the 135.45/60 region is shaping up as decent resistance now. Unless US yields move higher again this week, the odds of a USD/JPY correction lower are rising. USD/JPY has support at 134.50 and then 132.20.
AUD/USD and NZD/USD have booked modest gains to 0.6975 and 0.6345 over the last 24 hours, with trading volumes muted, but a tentative rise in sentiment proving supportive to both. A US holiday is dampened volumes but both Australasians have traced out bottoming patterns on the charts. As long as 0.6850 and 0.6200 hold respectively, further gains to 0.7150 and 0.6450 cannot be ruled out.
Asian currencies are barely changed overnight as regional markets await the return of the US later today. Noises from officials in Seoul and Tokyo about currency speculation are probably limiting US dollar gains for now. Two notable exceptions are the Indonesian rupiah and Philippine peso, with weakened sharply by around 0.65% to $14,825.00 and $54.10 overnight. It is no coincidence that both have monetary policy meetings this week and both are reluctant rate hikers, as they prioritize the pandemic recovery. More selling pressure this week could force their hand on Thursday, but if both hold policy unchanged, could see more waves of selling into the end of the week.
Oil prices start reversing the Friday slump
As I outlined above, oil futures have started reversing the Friday price slump as speculative capitulation collides with the reality of tight energy markets in the real world. Brent crude held $112.00 overnight, finishing 0.92% higher at $114.05 a barrel. It has added another 0.85% to $115.15 a barrel in Asian trading today. WTI held $108.50 overnight, finishing 0.20% higher at $110.05 a barrel. It has jumped 1.20% higher to $111.50 a barrel in Asian trading.
Friday’s falls have bought my six-month support lines back into focus. On Brent crude, that is at $107.00 a barrel today, just below its 100-day moving average (DMA) at $107.95. Ahead of this, it has support at $112.00, with resistance at $116.00 a barrel. WTIs six-month support line is at $106.25 a barrel, just ahead of its 100-DMA at 105.25. It has interim support at $108.50, and resistance at $112.50 a barrel.
Of the two, WTI looks the more vulnerable, having fallen further and closed closer to its multi-month support zone. If the US cuts federal fuel taxes this week, or US housing data is very soft, that could be enough to tip the scales lower. It is hard to see either contract moving lower than $100.00 a barrel given the state of the physical market. From a technical perspective, I would like to see one of either contract tracing out a couple of daily closes below the longer-term support lines and the 100-DMAs, before reassessing my longer-term bullish outlook.
Gold range continues
It was another wax-on, wax-off day for gold overnight thanks to US markets being closed. It edged 0.11% lower to $1839.00 an ounce. In Asia, it has gained slightly by 0.12% to $1840.60 an ounce as comatose trading conditions continue.
Despite the noise of the past week, it remains anchored in the middle of its one-month range. The overnight price action shows that the inverse correlation to the US dollar is as strong as ever
Gold has resistance at $1860.00 and $1880.00, the latter appearing an insurmountable obstacle for now. Support is at $1805.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, while I would need to see a couple of daily closes above $1900.00 to get excited about the upside.