Today is looking remarkably like a rerun of yesterday, especially in US markets. Equities slumped once again, led by the Nasdaq, as did oil and Bitcoin. The Federal Reserve financial stability report highlighted risks around rising interest rates, wars, and high inflation amongst others which frazzled Wall Street’s nerves. US 10-years traded in an impressive 17 basis point range, rising to 3.20%, before settling lower at 3.03%.
The late rebound also saw the US dollar give back most of its intraday gains, although Bitcoin only retraced part of its daily losses and stocks gained no solace. Markets can thank the Fed’s Bostic for the rebound, as he dampened down 75 bps hiking noise. The price action is endemic of a market on edge as markets find themselves in a multi-directional vice grip of high inflation, supply chain disruption, a hiking Fed, a slowing China thanks to covid-zero, and the Russian invasion of Ukraine.
That stagflationary noise just won’t go away, and it’s a scenario with no good choices for central banks. As a result, the rate hike globally inducing a recession is gaining more credence. Little surprise that it is not a favourable environment for equities in particular, and other darlings that were pimped up in the central bank QE orgy through the pandemic like cryptos.
Apart from a China-induced slump in oil overnight, the other big mover was the crypto space with Bitcoin dropping a mammoth 14.25% to $30,900.00. The end of the era of central banks providing unlimited zero per cent money to the world economy, and backstopping downward cycles at the first sign of trouble has come to an end. Asset markets like cryptos, which rose that wave higher, are among the most exposed and it is becoming increasingly harder to hide for them, although they are not alone as the world resets itself to the late mid-’90s.
As far as Bitcoin goes, I noted that a break of the 1-year symmetrical triangle support at $37,400.00 would signal a move lower, initially targeting the $32,000 region. That has been carved out and the technical picture suggests Bitcoin could trade as low as the $17,000.00’s. That is a big call, and it does seem to be making a stand ahead of $30,000.00. Realistically, it needs to reclaim $37,000.00 to change the technical outlook and give the HODL’ers hope of a good night’s sleep.
In Asia today, the data calendar is light. Japan’s Household Spending MoM for March exceeded expectations, rising to 4.10% as the economy reopens and perhaps as Japanese consumers, front-load spending, faced with a non-deflationary environment for the first time in three decades. Japan officials have reiterated the Bank of Japan monetary settings though, capping JGB yields at 0.25%, so nobody should be expecting a sustained Yen rally unless US yields take a tumble.
South Korean data remains firm. The Current Account for March shrank slightly to $6.73 billion, but exports remain robust, although import costs rose sharply due to a weaker Won and soaring energy prices. That will flow through to higher inflation and keep the Bank of Korea on track for another hike at its next meeting. Similarly, Indonesian inflation popped through the topside of forecasts yesterday, and the pressure will increase on Bank Indonesia to hike next month. It seems to be capping USD/IDR around 14,500.00 still but that strategy relies on favourable moves in US yields. It will soon need help from monetary policy, as will India, where the RBI was intervening in USD/INR overnight. The election of the Marcos/Duterte ticket yesterday in the Philippines on subsidy promises means the BSP has another headwind to cap USD/PHP appreciation, and its rate hike hand will soon be forced.
Australia’s NAB Business Confidence plunged to 10 in April from 16 in March, another headwind for local markets pricing in a China slowdown and an imminent federal election. AUD/USD and NZD/USD remain at the mercy of global risk sentiment, and unsurprisingly, got clobbered once again overnight. Malaysian Industrial Production was a bright spot, increasing to 5.10% in March, although repeating that in April will be challenging. Like the Australian and New Zealand Dollars, the Malaysian Ringgit seems to be being used as a proxy for the China slowdown, and as a result, USD/MYR is going to remain bid unless US yields take a sudden and prolonged dive, leading to broader US Dollar selling. Bank Negara is another that may be forced into a prolonged series of rate hikes, just when it doesn’t want to. As I said, stagflation leaves no good choices for monetary settings, just least-worst choices.
The data highlight this evening will be the German ZEW survey, which, for obvious reasons, has continued downside risks. The US NFIB Business Optimism Index for April makes for increasingly interesting reading these days, especially the broader report on the state on independent businesses in America. However, it will likely be the slew of Federal Reserve talking heads tonight that will dominate intraday volatility.
In Asia today, short-term moves in currencies and equities seem to be following the intra-day moves in Bitcoin. Or it could be the other way round. I’m not sure if the dog is wagging its tail or the tail is wagging the dog. It is a powerful indication of the nervousness out there. Looking at real markets though, I am monitoring oil prices. Having tumbled heavily overnight, we are not seeing the usual Asian buy-the-dippers today. In fact, oil is lower in Asia today and that speaks much louder to me than noise in the crypto-space.
Asian equities follow Wall Street lower.
Wall Street suffered another day of recession fears overnight, with equities slumping once again, relying on Bostic’s comments to salve the wounds and cap US yield rises and the US dollar rally. The S&P 500 retreated by 3.20%, with the Nasdaq slumping by 4.29%, and the Dow Jones losing 1.97%. No sector was spared notably, and despite high inflation, cash is increasingly becoming King. The rot has stopped in Asia, with US futures attempting to claw back some of the overnight losses as the bottom-feeders come out to play. S&P 500 futures have risen by 0.60%, Nasdaq futures have jumped by 0.95%, and Dow futures have gained 0.45%.
In Asia, equity markets initially tumbled in response to the Wall Street moves, in a rerun of yesterday. However, the recovery by US futures this morning seems to have taken the edge of the sell-off, with Asian markets recouping some of their earlier losses. Japan’s Nikkei 225 is now done just 0.44%, with South Korea’s Kospi down 0.47%,
Meanwhile, after a tough session yesterday, the intraday rally in sentiment has pushed Mainland China exchanges well into positive territory. The Shanghai Composite and CSI 300 have rallied by 1.0%. Hong Kong was pummelled earlier today but has also recovered somewhat, but it remains 2.25% lower for the day.
In regional markets, Singapore is still down by 1.20%, while Kuala Lumpur is unchanged, and Jakarta has slumped by 2.90% led by resource stocks. Taipei has retreated by 1.65%, while Manila is down 1.0% post-election, with Bangkok managing a 0.30% gain. Australian markets are also in retreat, the ASX 200 and All Ordinaries falling by 1.30%.
What makes the session odd is that markets with a high sensitivity to the China slowdown are the worst performing in Asia today, but Mainland equities have rallied. The cynic in me suspects that China’s “national team” are busy today supporting the market, especially as covid-zero policies remain in force and nerves are rising around Mainland property developers once again.
European markets will struggle to construct a bullish case today as well, also President Putin not declaring a was on Ukraine at yesterday’s May Day parades could be a straw to grasp. The question is really whether the bounce in US equity futures today is the start of a recovery or merely a corrective bounce to short-term oversold indicators.
US Dollar eases in Asia.
Currency markets had a volatile overnight session, the US Dollar racing higher initially, before the rate-hike comments from the Fed’s Bostic stopped the rot, causing US yields and the greenback to unwind their intraday gains. The dollar index finished just 0.10% higher at 103.75, having probed above resistance at 104.00 intraday. In Asia, some bottom-fishing is evident as US equity futures and Bitcoin rally. That has seen the dollar index ease by 0.16% to 103.59. Support at 102.50 remains intact. A close above 104.00 will signal rapid gains to 105.00 and in the bigger picture, the technical picture still says a multi-month rally to above 120.00 is possible.
EUR/USD and GBP/USD finished sideways overnight after trading in over 100 pip ranges overnight, endemic of the uncertainty and resultant tail-chasing out there. The dollar correction this morning has lifted EUR/USD 0.14% higher to 1.0575, and GBP/USD 0.27% higher to 1.2360. Concerted breaks of 1.0600 and 1.2400 could see the correction extend another 100 points higher for both, but the medium-term technical picture remains grim.
The easing of US yields overnight stopped the USD/JPY rally just above 131.00 and it is trading unchanged at 130.40 in Asia after the New York late retreat. USD/JPY direction remains at the mercy of the US/Japan rate differential, especially as a Japanese official reiterated the BOJ’s dovish stance this morning. Support lies at 128.50, but a rally by USD/JPY through 131.35 sets the stage for a move to the 135.00 area.
Asian currencies remained under heavy pressure overnight, with the RBI intervening to sell USD/INR yesterday afternoon to cap USD/INR gains. I suspect they weren’t the only Asian central bank around on the topside yesterday. The retracement lower by the US Dollar late in New York has carried on into Asia giving Asian currencies some respite. Bitcoin is rallying impressively, and it could be that some cross-margining pressures in other asset classes have been reduced, allowing the Dollar to fall slightly. It is likely to be the eye of the storm, however, and lower Asia FX remains the path of least resistance, caught in a vice between higher US yields, and a China slowdown.
Oil prices crushed overnight.
Oil prices fell heavily overnight as the Fed stability report highlighted recession risks for the US and other countries, and the China slowdown story gathered momentum. President Putin declining to declare an official war on Ukraine also removed a risk factor supporting prices. Brent crude fell 6.90% to $105.20, and WTI fell by 7.15% to 102.60 a barrel.
In Asia, the usual procession of dip-buyers has been notably absent today, leaving Brent crude to ease slightly lower to $105.10, and WTI to edge down to $102.35 a barrel. It is notable that Asian buyers have not appeared today, although oil has recouped some of its early Asian losses. That suggests that Asian buyers, with a China slowdown for context, are not feeling an urgency to buy oil on any sort of dip for a change. Normally that means they end up chasing prices higher in the days following, but today, oil markets do look like they have more room to fall in the shorter term.
Brent crude has formed a triple top at $114.75 a barrel, which will be a formidable barrier in the near term. Similarly, Brent crude had formed a triple bottom at $103.30 a barrel. A loss of $103.00 could signal a deeper correction targeting $100.00 a barrel. However, I am sticking to my broader $100.00 to $120.00 a barrel wider range ahead for now. WTI has resistance at $111.50 with support at a triple bottom at $100.25, failure of which should see a test of $100.00 a barrel. Once again, I remain comfortable with a $95.00 to $115.00 a barrel outlook in the medium term.
Gold’s range-trading continues.
Gold fell heavily overnight, although it remains contained within a broader $1850.00 to $1900.00 an ounce range. Gold tumbled nearly $30 to $1954.00 an ounce overnight, despite the US Dollar and US yields staging a late session retreat. I suspect gold was found guilty by association with the Bitcoin sell-off, and that we also saw an unwinding of risk-hedging longs after Putin declined to declare war on Ukraine.
Gold has risen by 0.42% to $1861.55 an ounce in Asia, piggy-backing the Bitcoin recovery and the green shoots of risk sentiment pushing the US Dollar lower in Asia. The rally is anaemic though and if the US Dollar regains its mojo later today, gold could make a decisive test of the bottom of its recent range.
Gold is trading in a wide but noisy $1850.00 to $1900.00 an ounce range for now. A US Dollar rally could see gold test the break-out triangle apex at $1835.00 swinging it into bearish territory. That said, gold needs to close above resistance at $1900.00, $1920.00, and preferably $1960.00 an ounce to signal a renewed structural move higher. I foresee more whipsaw trading ranges in the days ahead.
Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA
