And today’s theme is….once again, Inflation. The chop-fest range trading beguiling currency, bond, and equities markets in the US this month continued overnight. Overnight, New York decided that it was in fact worried about inflation, having dismissed it the day before. Tomorrow, perhaps, they won’t be once again. That saw equities retreat, US yields firm, with the US 10-year back above 3.0% once again, while the US dollar also booked some modest gains.
Ignoring the noise elsewhere, oil continued its march higher, Brent crude jumping 2.40% to 123.95 a barrel overnight. An unexpected rise by official US Crude Inventories of 2.0 million barrels, and distillates by 2.5 million barrels provided no solace to oil markets, as gasoline stocks remained flat. Most of the price rise can probably be attributed to fighting talk by the UAE Oil Minister at a conference yesterday.
According to Reuters, Minister Suhail al-Mazrouei said the OPEC+ shortfall to target was 2.6 million barrels, with OPEC+ compliance at 200%. He also warned that a reopening of China would place further stress on supplies. He also said that we were nowhere near peak oil prices. Gulp. In other news, difficulties monitoring Iran’s nuclear compliance puts a new nuclear deal, and more Iranian crude on international markets, as far away as ever.
That leads nicely into China, where markets were awaiting this morning’s May Balance of Trade release. The trade balance has exploded higher to $78.76 billion, led by exports increasing by 16.90%, while imports climbed by 4.10%. I suspect port re-openings have flattered the data. However, from my point of view, the trade data is irrelevant to a much more important development that has occurred today. This morning, Shanghai residents awoke to the news that the Shanghai district of Minhang, home to two million people, has been placed under strict lockdown with mass testing scheduled for Saturday. Markets have been naively pricing in that the easing of restrictions in Beijing and Shanghai was the final victory over omicron, and thus, peak COVID-zero.
As I have said repeatedly with regards to COVID-zero country’s experiences, the country has to get lucky 100% of the time, the virus has to only get lucky once. China is no different from anywhere else in this respect and buying the dip for a China bounce is a perilous activity. COVID-zero is going nowhere in China, and nor is the virus. Thus, the chances of extended restrictions returning, with the ensuing drop in China's economic activity, remain as high as ever. They could repeat over and over again. About the only good news from this development is that it might take the edge off the oil rally.
Still, the news isn’t all bad on the inflation front. The US Treasury Secretary indicated overnight that the US was looking to “reconfigure” tariffs on Chinese imports. Translation: we’ll drop a lot of them to try and slow inflation down ahead of November’s mid-term elections. Indonesia today, has also announced an export acceleration scheme to ship at least one million tonnes of palm oil and derivatives to international markets according to Channel News Asia. And yesterday from Reuters, India indicated it would soon allow 1.2 million tonnes of wheat exports after banning exports previously.
Neither development will materially move the dial on food inflation thanks to the Russia/Ukraine conflict, but it does show both an understanding and willingness by exporting countries, of the downstream impacts globally and the need to assist in mollifying them. Like China’s COVID-zero policy though, nobody should be naïve enough to expect them not to return and bite the global economy again. Food nationalism will continue to be a real issue throughout 2022 and into 2023.
China’s trade data was the only tier-1 Asia data release today. Philippine’s trade balance held steady at $-4.8 billion for April, barely changing from March. Imports rose 22.80% YoY, likely reflecting skyrocketing food and energy prices. Indonesia’s May Consumer Confidence leapt higher to 128.90, and the rising cost of living or not, it's hard to see any recessionary signs here in Jakarta. Pak President’s removal of the mask mandate seems to have magically restored activity of pre-pandemic levels, and the traffic is well and truly back to normal here. So much so, that Jakarta’s local government has expanded the odd/even car restrictions to a larger part of the Big Durian.
This afternoon's undoubted highlight will be the European Central Bank policy meeting, perhaps the most anticipated one of the year. Given her recent guidance, ECB President Lagarde has primed markets for an ending to their quantitative easing but don’t call it quantitative easing program, this month or next, as well as two 0.25% rate hikes in July and September. The rates curve has fully priced this in, with 130bps of hikes expected by year-end. I think that’s punchy myself, given that Europe is moving into a war economy, with a lot of inflation imported and beyond its control thanks to the conflict in the East.
By default, one would expect that much of the euro’s recent recovery is down to those rate hiking expectations as well. So, this afternoon will be all about the press conference as it would be a huge surprise if they hiked by 0.25% today as well. (note: I have already used huge surprise and central bank this week and I was wrong) A rate hike today could shake EUR/USD out of its 1.0700/1.0800 malaise and open gains to 1.1000. On the other hand, If Ms. Lagarde has blinked and become dovish again, the adjustment lower by the ECB rates curve and EUR/USD could get quite emotional.
The US calendar is dead ahead of tomorrow's Inflation main event. US Jobless Claims may see traders grasping at straws on a slow news day. Otherwise, I suspect we will see another mood-swing session from the FOMO gnomes of Wall Street, with any excuse to buy, the genetically pre-programmed default option.
Shanghai restrictions weigh on Asian equities
The moody range-trading that has typified US equity markets in June continued overnight as Wall Street decided that inflation was a concern, after all, sending equity markets lower. The S&P 500 fell by 1.08%, the NASDAQ finished 0.73% lower, while the Dow Jones lost 0.82%. Futures on all three remain negative today, easing by around 0.15%.
Asian markets were never likely to have a good start after a weaker New York session, but the lockdown of the Minhang district of Shanghai has delivered a much-needed wake-up call around the reality of China’s COVID-zero policy to regional markets. Asia has started today in the red on renewed China slowdown fears, ignoring mighty Chinese trade numbers. The only exceptions are Japan, where a plummeting yen has lifted the Nikkei 225 0.30% higher, and Jakarta, where the palm oil export scheme has lifted the JCI 0.50% higher.
Elsewhere, it is a sea of red today. South Korea’s KOSPI has fallen by 0.60%, Mainland China’s Shanghai Composite eased by 0.45%, with the CSI 300 losing 0.55%. Hong Kong’s Hang Seng has also fallen by 0.50%, with the positive sentiment of the overnight China tech ADR rally evaporating in a sea of mass testing stations.
Regionally, Singapore has fallen by 0.50%, with Taipei losing 0.45%, and Kuala Lumpur falling by 0.70% as the government faces ever-higher fuel subsidy bills with oil's rally. An ironic outcome for an oil predicting nation. Bangkok has managed a 0.20% gain today, with Manila tumbling by 0.90%. Australian markets aren’t liking the Shanghai news either, the All Ordinaries have lost 0.95%, while the ASX 200 has fallen by 0.90%.
With the ECB meeting today, and nerves around China’s COVID-zero policy and its impact on growth, along with a surge in oil prices overnight, Europe is unlikely to have any reason to click the buy button this afternoon. That may all change post the ECB is the central bank is more dovish than expected. Conversely, if the ECB delivers a hawkish surprise, European equities are likely to remain pressured.
Currency markets continue to range trade
US yields climbed higher overnight which was enough to lift the Dollar Index to a 0.20% gain to 102.55. It has given most of that back in Asia, falling to 102.40 thanks to a modest Yen rally. Another inconclusive session leaves support/resistance at 101.30 and 102.70.
EUR/USD edged higher to 1.0715 overnight, adding another 0.15% to 1.0730 in Asia as JPY strength has spread, once again, to the broader FX market in Asia today. Resistance is between 1.0770 and 1.0830 remains a formidable barrier, while support remains at 1.0650. The outcome of today’s ECB meeting will set the tone for the single currency for the rest of the session.
Sterling fell 0.45% to 1.2535 overnight as economic worries, leadership concerns, and the Northern Island protocol weighed on the sterling. Like the other majors, it remains in a choppy range-trading scenario overall. Resistance remains at 1.2670, 1.2800, and 1.3000. Support is still at 1.2460 and 1.2400.
It was another feeding frenzy by USD/JPY overnight, by far the highlight in an otherwise dull night for currency markets. The disparity between US and Japan monetary policies was once again to the fore. USD/JPY leapt by 1.22% to 134.25 overnight. In Asia, nerves around invention have spurred some long-covering, pushing it slightly lower to 133.95. The Relative Strength Index (RSI) is overbought, but not grossly so, so I do not foresee an aggressive move lower just yet, that may have to wait for 135.00 to trade.
Although I can see an increase in rhetoric about the currency from Tokyo increasing, I do not believe we are close to intervention by the authorities at all. A far more likely occurrence would be some sort of tinkering with the BOJ’s yield curve control policy. Given the vehemence around no change from the BOJ and MOF, that would be a huge surprise as well. ("Huge surprise" used for the 3rd time, danger Will Robinson!) A move by the BOJ in this regard would provoke an ugly washout of USD/JPY long positioning, potentially targeting 125.00. In the meantime, it is business as usual. Support is at 132.65 with the next upside target being 135.00.
Both AUD/USD and NZD/USD fell once again overnight, and I will admit to some confusion over the recent price action. AUD/USD fell 0.55% to 0.7190, easing to 0.7180 in Asia. NZD/USD fell 0.65% to 0.6445 where it remains in Asia. Although the reason behind the negatively eludes me, the technical picture is becoming more soggy than a wet piece of paper. Both currencies have broken below ascending one-month trendlines. Failure of 0.7150 and 0.6425 respectively, suggests another material move lower is occurring.
USD/Asia continues to range trade, with regional currencies almost unchanged today after a directionless New York session. Ominously, the Indian Rupee shrugged off a 0.50% rate hike by the RBI yesterday and the USD/INR is trading at 77.678, near its highs for the year. Similarly, USD/MYR, USD/THB and USD/PHP are all closing in on their year’s highs again. The rally in oil prices could also cause USD/KRW to play catchup and appears to be weighing on all four. A higher than expected US CPI number tomorrow could complicate that picture further, lifting Fed hiking expectations.
UAE Oil Minister lifts oil prices
Oil prices shot higher overnight with the UAE oil minister warning that China’s reopening and the inability of OPEC+ members to pump at production targets posed more upside risks to oil prices. Tensions around Iran’s nuclear program also diminished hopes of more Iranian crude on international markets. Finally, although US crude inventories rose by 2 million barrels, gasoline production was flat, keeping up the squeeze on refined products in the US.
That saw Brent crude ratchet higher by 2.40% to $123.75 a barrel, while WTI rallied by 2.25% to 122.45 a barrel. In Asia, oil prices have remained flat, with the lockdown of the Minhang district in Shanghai spurring China COVID-zero part two fears, crimping demand in Asia today. That said, it is indicative of how tight supplies are that oil has not retreated on that news today.
That leaves the chart picture looking positive with the respective RSIs still not yet in overbought territory. Brent crude has traced out a series of highs at $124.25 marking initial resistance. After that, the road opens to $125.00 and $128.00 a barrel, bringing the Ukraine invasion highs back into sight. WTI has resistance at $123.15, the overnight high, and then $125.00 and $127.00 a barrel. Support is at $119.35 and $117.50 a barrel.
Gold remains in a coma
With little movement in the US dollar overnight, gold remained sedated as well, closing almost unchanged at $1853.35 an ounce. In Asia, a slightly lower US dollar has seen gold crawl modestly higher to $1855.00 an ounce. It seems that like currency markets, we are going to have to wait for tomorrow's US Inflation data to create a directional move one way or the other. In the meantime, bring a good book.
Gold has resistance at $1870.00, followed by the 100-DMA at $1890.00, and then $1900.00, where I expect there to be options-related sellers in the first instance. Support is at $1837, $1830.00, and then $1780.00 an ounce. I do not discount a disorderly retreat if the latter fails. The wider $1830.00 to $1870.00 range seems set to continue until Friday.