Markets
The selloff in US stocks extended on Monday as investors worried that the Federal Reserve would not be able to rein in inflation and orchestrate a soft-landing for the economy.
There was a risk-off tone to start the week, focusing on China's continued struggle to contain COVID and no end in sight to the Russia-Ukraine war. With the US economy seemingly late-cycling with the market already pricing a sizeable Fed hiking cycle, the focus remained on recession risk.
We were even caught in a “good is bad” scenario. Ostensibly, with US data holding up, recession modeling suggested the Federal Reserve was on track for the soft landing it so desired; however, the risk was the data remained strong, inflation expectations elevated—and policy tightened until something snapped, and unfortunately for investors, it looked like stocks were the first to break.
That was the path the markets feared and one that investors kept up front and personal.
Oil
Oil crumpled under the weight of a broader market selloff as the European Union softened some of its proposed sanctions on Russian crude to appease potential holdouts.
The worm turned for oil bulls positioned for EU sanctions only to get sideswiped by headlines suggesting Shanghai was tightening mobility restrictions and no EU embargo agreement.
However, the swift repricing of global recession risks on the back of central banks hiking rates into a perfect storm was triggering investors' sell-all reaction mode.
Hence oil prices were getting caught up in the "risk-off "carnage as recessionary thunderheads enveloped the global economy, with the Fed clearly the most prominent cloud seeder.
Tangible assets like oil present a hedge to rampant inflation. But compared to higher prices from 'real' demand sources, such as Chinese fixed asset investment, in addition to supply concerns, 'superficial' hedging demand has been a critical contributor to the continued rise in oil prices; the implications would be when the Fed finally ratchets up interest rates high enough to stem the growth of inflationary pressures.
Oil prices fall as basically the Fed has been trying to slow down the US economy.
The European Union continued to face internal objections from some members. On the other side, the G7 agreement and support from key EU members indicated continued progress toward an eventual deal.
The holdouts within the EU are individually heavily reliant on Russian oil and gas. Still, they were small from a volumetric perspective in more total EU imports so we could see some speculative support for Brent between $104-105.
Forex
Hard To See USD/JPY Breaking Higher Before Wednesday
Japan returned from the Golden Week holidays to continue local buying of USD/JPY.
On the break of SPX 500 4000 and decidedly lower oil prices, there has been a reduction of USD/JPY longs that were nudged along after Atlanta Fed President Raphael Bostic said he did not believe the FOMC needed to hike by increments of more than 50bp—that was the main comment that spooked the USD/JPY markets.
We defer to Technicals without crucial data infection points as traders turned to focus on Wednesday's US CPI. The Asia session opened near 130.45-55/70, and the 131.00/50 zone remained a key pivot on the topside, with the Apr. 28 high of 131.25 and Monday's high of 131.35.
Ahead of the US April CPI on Wednesday, it was tough to see the pair breaking through this level decisively. The pair did make a marginal new high, so a reversal of this level would, for now, put in a double-top.