Markets
US equities were little changed Wednesday, S&P up 0.2%. The US dollar index extended its gains, rising to its highest since 2017 in no small part due to the EUR/USD meltdown triggered by a spike in European gas prices.
European gas prices spiked 20% after Gazprom (MCX:GAZP) suspended supplies to Poland and Bulgaria "due to non-payment in rubles."
Fortunately, the Continent is through the peak demand risk period of the 2021/22 winter. Still, even though we are at the end of the heating season in Europe, reducing the need for spot supplies, on a more ominous note, buyers are now stockpiling storage sites for next winter.
US 10-year yields were up 11bps to 2.83% as bond traders wasted little time re-rating bond yields higher as the FOMC is widely expected to hit the hawkish drum next week.
Microsoft (NASDAQ:MSFT) was helping on the index level. Alphabet (NASDAQ:GOOG) was only down a couple of percent after disappointing YouTube numbers—in a more normal session, the stock was likely down much more.
One of the key passages to calmer waters in equities and lower bond volatility was getting through earnings season relatively unscathed. Last night was not a step backwards by any means, but skirting that stagflationary event horizon remains priority number one for the stock pickers.
Sure, some big numbers, but it was all about looking forward rather than back. Many past online favorites were bound to suffer as people found other things to do with their time, and the inflationary squeeze will squash millions of online advertisers.
Oil
Yesterday's news that Russia was cutting off flows to Bulgaria and Poland underscored the continued geopolitical risk element embedded in the oil markets. And this suggested that any tail risk scenario, especially of a significant disruption, should be taken more seriously.
But it was back to another day of "tractor pull and battle" as lockdown in China remained top of mind and the main opposing driver.
Shanghai reported a 13% drop in new COVID-19 cases over the last 24 hours, marking its most significant decline since February. However, Beijing uncovered 31 new cases—the total number of infections in the capital now stood at 136.
Sure these were hardly eye-catching; however, they failed to give a true notion that Beijing was unlikely to adjust the current COVID policy anytime soon despite economic and social costs rising rapidly.
HOWEVER, the CCP may fine-tune its COVID approach gradually, but the roadmap and triggers for this change remained the top macro uncertainty for oil markets.
Gold
Precious metals were struggling despite the heightened geopolitical risk backdrop and higher energy prices. But the dollar was king and had tarnished bullion's appeal.
Still, I suspected the last legs of the positioning adjustment in gold might be month-end related; hopefully, for bulls, it was providing good entry levels into longs in May.
Sitting on the sidelines for now as the very short-term trend still looked relatively bearish, especially with all the talk about peak inflation with US PCE inflation data looming on Friday.
Forex
The Last Dove Standing
The cascading impact of growing global demand-side risks was evident through the $bloc.China lockdowns and the fragility around the Ukraine war continued to trigger risk aversion across currency markets.
Would the Bank of Japan be the last dove standing was going through every FX trader's mind. Hence that discussion led to tricky JPY trading over the past 48 hours.
Month-end traditionally saw corporate demand for USD, which could be why USD/JPY was supported. However, the market's focus was squarely on today's Bank of Japan decision.
As mentioned on Tuesday, there was significant buying of USD puts over the last few days in anticipation of a policy change by the Bank of Japan. But I think that gave way to the notion that The BoJ was unlikely to change anything at today's meeting.
Given Kuroda's unfaltering dovishness signal, Kishida's endorsement, and JGB buying operations continuing this week, the yen looked weak, but USD/JPY could test 130 again.
Mid-year will get interesting if further yen weakness adds to inflation pressure. There was a risk a policy response comes within a few months that would support the yen in 2H.
However, the market will likely interpret any hint of policy change as the first step toward a tightening cycle and will probably see USD/JPY trade back below 125.00.