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US yields were on the move last night, with the curve from the 5-year to 30-year tenor now all above three per cent. That was enough to crimp the perpetual FOMO bulls of the stock market, with Wall Street finishing just above flat, while the US dollar also booked some gains. Gold fell slightly while oil also gave back early gains, Brent crude finishing almost flat, just shy of $120.00 a barrel.
One notable loser was the Japanese yen, with USD/JPY climbing to two-decade highs around 131.90 overnight, before adding another 0.50% to 132.60 today. With the US/Japan rate differential hollowing out the cross, Japanese authorities resorted to verbal intervention this morning, BOJ officials saying a rapid yen weakening was undesirable.
The US yield curve is starting to look pretty flat now between the 5-year and 30-year tenors, which is making me a little nervous. An 8.50%+ US inflation print could see it start to price in a recession and head to inversion in parts, as the data reinforce Fed tightening. In a stagflationary environment, central banks don’t have a good choice, just least bad ones. That said I don’t think the US is at stagflation yet, but if oil stays above $120.00 a barrel, it might soon be.
Looking at the price action overnight, I am not entirely convinced that the US bond move was driven by inflation and Fed tightening fears. Yes, the US dollar rallied, but stripping out the yen, it wasn’t a currency bonfire. US equities still finished modestly higher, and gold’s retreat was limited. It is still boring everyone to death with range trading.
The move higher in US yields could well be in anticipation of the $96 billion of US government bond sales hitting markets this week in the 3, 10 and 30-year tenors. Time will tell although if most of the US curve is still above 3.0% come Friday, the post-US inflation price action could be frisky indeed.
Turning to the Asia-Pacific, focus is on the Reserve Bank of Australia policy decision today. The market was heavily weighted to a 0.25% rate hike to 0.60%, but the RBA surprised. That could see AUD/USD a lot higher and the battlers on the stock market having a bad day, as well as sending a message that the RBA had entered panic mode. A change in tone to a more hawkish post-rate-decision statement could see some AUD strength though.
Japanese Household Spending also disappointed this morning, improving slightly from March, but falling by 1.70%, it was well below forecasts. That would have been another reason to buy USD/JPY today, with the rhetoric emanating from the Bank of Japan this morning, sounding a bit more nervous than previously.
The rest of the Asian calendar is dead today, although we did get UK BRC Retail Sales YOY for May yesterday, Retail Sales improved ever so slightly, but are still solidly negative at -1.50%. The UK has a post-Jubilee railway strike yesterday, and Boris Johnson survived a no-confidence vote.
In BoJo’s case, TINA came to his rescue, there is no alternative. The railway strike is what I believe will be a summer/autumn/winter of discontent for the UK as the cost of living soars and the Bank of England waves the white flag. War in Eastern Europe and a UK Government still seemingly intent on invalidating the Brexit agreement over Northern Island all add up to me struggling to find a reason for GBP/USD to ever see a 1.3000 handle in 2022.
The data calendar across Europe is similarly second-tier with a few construction PMIs, and the US releases its April Balance of Trade. That is expected to improve to a mere deficit of $89.5 billion, however, this data is not usually market impacting. It looks like we have 24 hours ahead of markets being driven by headlines and sentiment swings once again. Roll on Friday.
Higher US bond yields took the edge of Wall Street overnight, which was happy to tail chase the China reopening trade higher, especially as US-listed China equities performed very well. That left Wall Street closing modestly higher. The S&P 500 rose by 0.31%, the NASDAQ gained 0.40%, and the Dow Jones added just 0.07%. In Asia, US futures have continued falling, and all three major indexes are down 0.40% this morning, although that is not translating into universal negativity with Asian markets.
Asian markets are mixed once again, with the growth-centric North Asia heavyweights doing well, for the most part, whiles the more value-orientated ASEAN markets are once again struggling, perhaps unnerves by $120.00 oil. The slumping yen has seen Japan’s Nikkei 225 rise by 0.60% today, though South Korea’sKOSPI has fallen by 1.35% as it plays catchup to Friday after being on holiday yesterday. Taipei is also struggling, edging 0.40% lower.
In Mainland China, the reopening trade remains at full strength, with US-listed Chinese equities pricing in the worst is over overnight as well. That has been helped along by the belief that China has reached “peak-crackdown” on its tech giants. We shall see. The Shanghai Composite has risen by 0.50% today, with the CSI 300 climbing by 0.65%. Rather surprisingly, Hong Kong’s Hang Seng is almost unchanged, edging 0.10% lower.
In regional markets, the rise of both oil and US yields appears to be weighing on sentiment. Singapore is 0.20% lower, while Kuala Lumpur has fallen by 0.50%. Jakarta has unwound some of yesterday's losses, climbing by 0.50%, with Bangkok dropping by 0.80%, with Manila adding 0.15%. Australian markets are retreating ahead of the RBA policy decision in what appears to be a defensive move against a hawkish surprise. The ASX 200 and All Ordinaries have fallen by 0.90%.
European markets jumped on the China reopening trade overnight, along with the possibility that Russia might “allow” Ukrainian wheat exports. Germany and France’s leaders should probably ask the Ukrainian first though. That rally is unlikely to be repeated today with higher US yields spurring an equity retreat in the US overnight, and US futures mired in the red this morning in Asia.
The spike in US yields across the curve overnight unwound early US dollar selling, sending the dollar index to a modest 0.24% for the day, closing at 102.41. US dollar strength continues in Asia, perhaps helped by BOJ comments that now is not the time to consider an easy monetary policy exit. The Dollar Index has risen by 0.20% to 102.60 today, climbing back above the pivot point at 102.35. Support/resistance lies at 101.30 and 102.70 and remains in a wide and noisy range.
EUR/USD finished slightly lower at 1.0695 overnight, as US yields capped an attempted rally through 1.0750. It has edged lower to 1.0685 in Asia. Resistance between 1.0770 and 1.0830 remains a formidable barrier, with support at 1.0650. With the ECB expected to swing to a tightening bias this week, losses should be limited unless US yields continue to march higher from here.
Sterling finished 0.30% higher at 1.2530 overnight as PM Johnson survived a leadership vote. It has fallen to 1.2505 in Asia though as US dollar strength continues. A rise through resistance at 1.2670 opens a potentially larger rally to 1.2800 and 1.3000, while the failure of support at 1.2460 could see Sterling retest 1.2400.
A widening US/Japan rate differential overnight saw USD/JPY soar higher and has had the Bank of Japan making plenty of comments on the wires today. The BOJ’s comments that they will not change monetary policy are cancelling out any impact of “rapid Yen fall undesirable” comments. USD/JPY rallied by 0.82% to 131.90 overnight, and it has gained another 0.55% to 132.60 this morning. USD/JPY should theoretically be on the way to 135.00 now, but it remains entirely at the mercy of the direction of US yields. If US yields retreat this week, USD/JPY could easily find itself back below 130.00.
AUD/USD has fallen through trendline support at 0.7195 this morning to 0.7175. Although AUD/USD has lost 0.50% over the last 24 hours, the move lower appears like markets trimming long positions ahead of the RBA, rather than a turn in sentiment. AUD/USD has support at 0.7150, with resistance between its 50/100/200-day moving averages (DMAs) between 0.7225 and 0.7255. It could trade both sides of that range post-RBA. A hawkish statement could see AUD/USD closer to 0.7300 by the end of the Asian day.
USD/Asia moved higher on Monday as US yields rose, but overall, there is no sign of panic, merely a technical move in response. That could all change by Friday if US yields are still above 3.0% and US inflation rises above 8.50%, but for now, US dollar strength is mostly playing out versus the Japanese yen. USD/Asia is slightly higher this morning, rising by around 0.20%.
Oil’s intraday gains overnight were pared back in New York as US yields and the US dollar climbed, leaving both Brent crude and WTI slightly lower for the session. Brent crude finished 1.05% lower at $119.95 a barrel, and WTI finished 1.10% lower at $119.00 a barrel. Asian markets are very much in wait-and-see mode, with Brent crude slightly higher at $120.15 a barrel, and WTI edging higher to $119.25 a barrel.
Whichever way you look at it though, both Brent and WTI prices are nearing post-Ukraine highs, stripping at the days of the initial hostilities themselves. Returning Venezuelan and Libyan production to Europe and North America, should it occur, will not be material enough in the shorter term to force prices lower. Refining margins globally suggest that demand for petrol and diesel remain in heavy demand, with the refining logjam in refined products backstopping crude prices.
Additionally, the damp squib OPEC+ meeting outcome, with some production bones thrown to some angry dogs, and a potential recovery in demand from Mainland China is it has got on top of omicron, provides yet more reasons to believe that physical demand will keep prices elevated.
Brent crude has resistance at $122.00, and $124.00, with support distant at $116.00 and $112.50 a barrel. WTI has resistance at $121.00, with distant support at $115.00 and $111.25 a barrel.
Gold continues to bore traders to death as range trading and reversals by a thousand cuts continue. Overnight, a stronger US dollar and firmer US yields pushed gold 0.50% lower to $1842.00 an ounce, where it remains in yet another moribund Asian session.
The chart picture shows gold is now eroding resistance at $1870.00, touching $1874.00 an ounce on Friday. But overall, resistance at $1870.00 remains intact, followed by the 100-DMA at $1889.00, and then $1900.00. Support is at $1844.00 has given way, opening further falls to $1830.00, and then $1780.00 an ounce. I do not discount a disorderly retreat if the latter fails.
Gold remains at the mercy of intraday directional moves by the US dollar and US yields.
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