Volatility was the winner yesterday, with a multitude of data points and events leaving market price action messier than a teenager's bedroom. The European Central Bank surprised markets by lifting policy rates by 0.50%, ending over a decade of negative interest rates. The euro has already been rallying, but its gains were tempered by the collapse of the Italian government, and post the ECB meeting, German/Italian bond spreads started widening noticeably. The ECB’s Lagarde said policy decisions would be made on a meeting-by-meeting basis going forward, tossing their forward guidance out.
Perhaps more importantly, Russian gas started flowing back down the Nord Stream 1 gas pipeline yesterday, albeit at flows resembling the 40% of capacity before it closed for maintenance. Still, when it comes to Europe and energy, any news is good news as fears had risen that Russia would leave it turned off. EUR/USD had already started rallying on this news, which was likely the major reason that oil prices fell yesterday in another 5.0% intra-day range session. European equities were far more mixed, with some stark winners and losers. For that, we can thank the Italian political situation, widening North/South bond spreads, and the ECB’s 0.50% rate hike.
In the US, a multi-month high for US Initial Jobless Claims and a soft Philly Fed Business Conditions Index spooked bond markets and saw US yields move quite a bit lower yesterday. The US curve now looks bowl-shaped after US 10-year fell by over 15 basis points. That saw the US Dollar weaken as well, as US recession fears also ramped up. I must say, Initial Jobless Claims rising by 7,000 to 251,000 does seem like clasping at straws.
Wall Street liked what they saw, rallying powerfully once again yesterday. Lower bond yields and some solid earnings results keep sentiment perky during the main session. That has changed a bit after hours after weak Snap (NYSE:SNAP) results saw their stock price plummet by 25%. That dragged down the other social media-esque giants. As Meta Platforms(NASDAQ:META) found out earlier in the year, markets will severely punish richly valued tech stocks at the first sign of trouble, and there is now some risk to the broader equity markets from the FAANGS yet to report.
Today we have seen Australian and Japanese Manufacturing and Service PMIs come in on the soft side, along with Japanese Inflation, which edged lower in June YoY to 2.40%. We have a bunch of S&P Global PMIs still to come for the European heavyweights, the Eurozone, and the US today. It looks like they will all have downside risks for obvious reasons, but I am not sure it will be enough to deter the FOMO gnomes of Wall Street.
I will be covering my last FOMC meeting next week, and it seems likely that this will be the defining moment for markets in what has been a tumultuous month. 0.75% or 1.0% I know not, although my gut says 0.75%. The statement will be crucial and, depending on how it plays out, could stop what I consider a bear market rally, in its tracks. Inflation remains and will remain stubbornly high, geopolitical risk abounds, growth is slowing around the world, and recession risks are rising. I can’t see how that is a productive environment for equities, and that’s before the rest of big-tech reports quarterly earnings.
That said, the technical pictures across the equity and currency space suggest we have more room for a further retracement. AUD/USD and NZD/USD have broken up out of falling wedges, with GBP/USD about to do so. The S&P 500 is approaching resistance at 4,020.00, as is the Dow right here at 32,030.00, although the NASDAQ’s lies far away still at 13,500.00. Failure of 106.40 by the dollar index will signal a much deeper correction lower, and the slump in US yields yesterday is setting up USD/JPY for a serious culling of long positions.
Two warning signs remain for me. One is that the US Dollar moves lower has all but passed the Asia FX space buy. Most USD/Asia pairs remain at or near recent highs, which in some cases, are record highs. We likely need to see a much bigger fall in US yields and/or oil prices to change that. I can’t see the Fed being so happy to see the US yield curve slump at this stage in the process, though. The second is gold. Gold’s price performance has been appalling in July, remaining at multi-month lows no matter whether the US Dollar or US yields have rallied or fallen. The US Dollar usually rallies during a recession, part of the “dollar smile” complex. Gold seems to be telling us that we call “peak dollar” at our peril.
One news event that may lift sentiment in Asia today is an announcement by Turkish officials yesterday, saying that an agreement to resume Black Sea grain exports from Ukrainian ports will be signed at some stage today. Fingers crossed on that one.
Oil prices fall overnight
Brent crude and WTI had another session of 5.0% intraday ranges yesterday, closing quite a bit lower than their opening levels. Global recession fears and the resumption of Russian gas flows to Europe seem to have been the catalyst, although I am sure that trading volatility recently is reducing liquidity as well, exacerbating movers. The futures markets remain deeply in backwardation, suggesting that prompt supplies are as tight as ever in the real world.
The leaders of Saudi Arabia and Russia had a phone call today, with Saudi Arabia affirming Russia’s importance to the OPEC+ group and further emphasising which side OPEC’s bread is buttered regarding US relations. Along with Saudi Arabia making noises about rapidly approaching production capabilities, that has sent oil prices higher in Asia today ahead of the weekend.
Brent crude closed 2.45% lower at $103.85 yesterday, climbing 1.30% to $105.20 a barrel in Asia today. WTI closed 3.55% lower at $96.40 yesterday, gaining 1.0% to $97.55 a barrel in Asia. Brent crude has well-denoted resistance at $108.00 a barrel on the charts and then $111.00. It has support at $104.00 and $101.00 a barrel. WTI traced a double bottom at $94.30, its low and 200-day moving average. (DMA). That makes this level quite pivotal now, a sustained failure signalling a retest of $90.00. Resistance is at $100.00, followed by 104.00 a barrel.
Gold remains on the long-term injured list
Gold traded in a wide $40.00 range yesterday between $1680.00 and $1720.00, with the price action suggesting that some sell-at-worst long-liquidation occurred as $1700.00 failed. The longer-term support is around $1675.00 an ounce, barely holding but also emphasising its importance. In the end, a weaker US Dollar and falling US yields allowed gold to record a decent gain for the day, although on the scale of recent moves in other asset classes, gold remains entrenched in the danger zone.
Gold finished 1,32% higher at $1719.00 yesterday, easing 0.26% lower to $1715.00 an ounce in Asia today as US Dollar strength resumed. It has support now at $1680.00, and then the longer-term support around $1675.00 an ounce zone. A sustained failure of $1675.00 will signal a much deeper move, targeting the $1450.00 to $1500.00 an ounce regions. Gold has resistance nearby at $1720.00, then $1745.00, and now a triple top.