Markets stewed in their own juices yesterday leaving equities and currencies and precious metals trading in noisy ranges, but ultimately finishing not too far from where they started. The big mover was oil, which had another impressive rally, this time helped along by a Reuters story where France’s President Macron was overheard telling US President Biden at the G7 meeting, that a call to the UAE had informed him that both they and Saudi Arabia were maxed out on production capacity.
That is probably the last thing the world needs to hear right now, given that Saudi Arabia and the UAE are regarded as the world’s two available swing producers at the moment. The UAE released an official response stating that they were indeed near-maximum capacity, although this was crouched as within the context of its allowable OPEC+ quota. If true, President Biden’s upcoming cap-in-hand trip to Saudi Arabia may have lost one of its raisons d'etre.
The pain doesn’t stop there for energy markets. Along with reduced Russian gas flows to Europe, Libya also announced it may declare a force majeure on over half of its daily production shortly. Ecuador said over the weekend that it may cease production entirely due to domestic cost-of-living protests, something we’re going to see a lot more of frontier/emerging markets this year sadly. By my rough calculations, Ecuador and Libya will add up to around 1.1 million barrels per day. Not a deal-breaker normally, but much more so in these abnormal times. The reality that energy price inflation isn’t going anywhere anytime soon may partially explain the modest retreat by equities in the last 24 hours.
US data was mixed yesterday. US Durable Goods surprised to the upside, rising by 0.70% MoM in May, well above the 0.10% rise forecast. Even the numbers ex-defence and transport (read Boeing (NYSE:BA)), exceeded forecasts easily. In contrast, US Pending Home Sales came in worse at -13.60% YoY for May, while the June Dallas Fed Manufacturing Index slumped to -17.70. With US and German yields also rising yesterday, the rally in oil prices, and the Durable Goods, in particular, forced the FOMO gnomes of Wall Street to reassess the lower terminal Fed Funds excuse to buy equities.
We could still see the equity bounce continue, though. Markets are in a schizophrenic frame of mind day-to-day, but underlyingly, are still desperately keen to buy this medium-term dip. Additionally, it is the month and quarter-end this week, and that will prompt no small amount of portfolio rebalancing by institutional investors globally. We should expect the back-and-forth chop-fest to continue this week in the equity space, and possibly, the currency space.
In Asia today, the calendar is as empty as I have seen it for a while. Japan’s 2-year JGB auction and Malaysian PPI are unlikely to move the needle. ECB President Lagarde and Chief Economist Lane both speak today, and we can expect their comments to be dissected for clues on both monetary policy direction and their anti-fragmentation tool to manage bond spreads between members. Fed Chairman Jerome Powell also speaks tomorrow at an ECB event, along with Ms Lagarde, which could up the ante on mid-week volatility.
In the US, most attention is likely to be on Wholesale Inventories and the Case-Shiller House Price Indexes. Markets are becoming nervous that corporate America may end up with lots of inventory they can’t sell, and the nerves around the US housing market are well known. Given the poor Dallas Fed Manufacturing Index yesterday, the Richmond Fed Manufacturing Index may garner more attention than usual as well, especially if it is weak.
US Dollar mixed
A rise in US yields yesterday boosted the USD/JPY slightly, but elsewhere, the greenback continued its modest retreat versus the G-20 space as currency markets showed very little reaction to the US data. The dollar index eased 0.17% lower to 103.95, where it remains in Asia. The charts do suggest the downward correction still has more to run, with a failure of 103.50 signalling a deeper correction. The dollar index has support at 1.0350 and 102.50, with resistance at 105.00 and 1.0570.
Elsewhere, currency markets are comatose in Asia, with both DM and Asian currencies almost unchanged from their yesterday closes.
EUR/USD rose by 0.25% to 1.0580 yesterday, where it remains in Asia. It continues showing resilience as the Russian natural gas exports to Europe situation deteriorates, but initial resistance at 1.0600 and 1.0650 remains challenging. Support is at 1.0450 and 1.0400. Sterling was unchanged at 1.2275 once again, unmoved in Asia. GBP/USD has initial resistance at 1.2360 and 1.2400, with support at 1.2200, 1.2160, and then 1.1950.
USD/JPY edged 0.25% higher to 135.45 yesterday as US yields moved slightly higher. It has fallen slightly to 135.30 in Asia. USD/JPY has support at 134.25 and 132.00, with resistance at 136.65 and 138.00. The short-term direction remains at the mercy of US yields, although a fall by the US 10-year through 3.0% could provoke an unwinding of USD/JPY longs.
Asian currencies continued to trade sideways yesterday, mostly booking some small gains, but overall, remaining near recent lows versus the US Dollar. That suggests that the rise in investor sentiment in equity markets is yet to spill out into the broader EM complex. The Chinese Yuan has had zero reaction once again to another large liquidity injection by the PBOC. Markets are clearly anticipating the PBOC draining all the liquidity via the repo next week after the quarter-end has passed. Reserves data suggests that Asian central banks have been busy selling US Dollars recently to smooth out currency volatility, but it looks like any consistent rally is going to need a big US Dollar move lower.
Oil prices rally on supply concerns
Oil prices rallied once again overnight, as the Reuters story outlined above over Saudi Arabia and UAE capacity constraints, as well as disruption of supplies from Libya and Ecuador, overrode US recession concerns. Another lesson is that markets ignore crude futures backwardation at their peril when trying to pick a top in oil prices. Brent's backwardation actually widened during the sell-off early last week.
Brent crude rose by 2.60% to $115.40 yesterday, gaining another 0.90% to $116.300 a barrel in Asia today. WTI rose by 2.30% to $110.00 rallying another 0.80% higher to $110.70 a barrel in Asia. The rhetoric around declaring victory in Shanghai over Omicron seems to be prompting Asian traders to continue buying this morning.
Notably, Brent crude tested and held its rising longer-term support line, today at $108.00, in the early part of last week. Nor was its 100-day moving average (DMA) tested either. That is a technical development that should be respected. Brent crude has support at 111.35, its 100-DMA at $109.40, and the six-month support line at $108.00. It is testing resistance here at $116.50, and a daily close above here would clear the way for a retest of $120.00 a barrel.
WTI’s technical picture has improved markedly yesterday, regaining its rising 2022 support line, today at $107.50 a barrel and initial support. A close above $111.25 this evening clears the way for a larger rally to $116.00 a barrel.
Gold fades
Gold attempted to rally yesterday as the G-7 announced a ban on Russian gold imports. That was a rubber stamp exercise though, and although gold climbed intraday, it faded ahead of $1840.00 an ounce. It then proceeded to give back all those gains, finishing 0.25% lower at $1823.00 an ounce. Although US yields rose slightly, the US Dollar was generally slightly weaker yesterday, making the price action by gold even more disappointing. It appears that the downside is increasingly gold’s path of least resistance.
Gold has resistance at $1840.00, $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, potentially reaching $1700.00 an ounce. On the topside, I would need to see a couple of daily closes above $1900.00 to get excited about a reinvigorated rally.