Friendly Friday

Asian markets began the day in an altogether positive mode after Wall Street outperformed yesterday. Driving the equity rally were good results from department store retailers,Foreign exchange dealers with low spreads notably high-end ones. The only blotch was Gap (NYSE:GPS), which fell down a Gap with its stock price punished accordingly. That allowed the perpetually circling and no desperate buy-the-dip mafia to load up on risk positioning again with the US Dollar also falling. It also allowed markets to ignore a downward revision of US Q1 GDP QoQ to -1.50%, Kansas Fed Manufacturing Index for May falling to 19, and Pending New Home Sales for April slumping deeper into negative territory at -9.1%. The latter is particularly ironic as recent soft housing data had been responsible for some previously ugly sessions on Wall Street recently. Still, why let the facts get in the way of the desperation to buy the dip.

Notable once again, are that US 10-year yields are once again retesting the four-decade downtrend line, which by my estimates comes in around 2.75%. Fears of gasoline and diesel shortages during the US driving season also pushed oil over 3.0% higher yesterday. Some unofficial gossip ahead of next week's monthly OPEC+ JTC meeting suggests that the grouping will stick to its scheduled 432,000 bpd incremental increase. Brent crude could test the top of my $120.00 a barrel medium-term range next week. I can’t see US yields and oil moving higher being constructive for equities next week.

Tokyo’s Core CPI in May remained at 1.90%, although with the Bank of Japan saying inflation is driven by external factors, and not the Japanese consumer, we shouldn’t expect any change in their ultra-low forever stance. Australian Preliminary Retail Sales eased, as expected, to 0.90% with no serious cost-of-living cracks appearing as yet in the Lucky Country. ​China’s Industrial Profits (YTD) YoY for April fell to 3.50% from 8.50% in March. The Shanghai shutdowns and covid-zero policies account for the slowdown, but market impact was minimal as the number was right on market expectations. China will have bigger fish to fry going forward as it tries to keep growth and the property market on track, while enacting sweeping lockdowns across parts of the country thanks to its covid-zero policy.

The rest of Asia’s calendar is light with Singapore PPI likely to be ignored after firmer Industrial Production data eased slowdown fears. Europe’s calendar is similarly second tier. US Personal Income and Personal Spending for April, along with the PCE Price Index and Michigan Consumer Sentiment round out the week. Personal Income and Expenditure and the PCE Index could settle nerves on inflation and Fed tightening if they print on the low side, ditto for Michigan Consumer Sentiment. That would set Wall Street up for another positive season to round out the week and weigh on the US Dollar.

Apart from oil, most of this week has been one of frantic range trading, as the herd runs this way and that on swings in risk sentiment. Lots of noise, little substance, although reading the financial press swinging from doom to bloom day-to-day has been mentally tiring.

Next week sees the arrival of June and its “business time.” Asia sees the release of China and India PMIs and Australian GDP and Trade Balance. Europe has German, French and Eurozone Inflation, as well as the ongoing saga of an EU oil ban on Russia. Russia has kindly offered to allow exports of wheat from Ukraine and Russia, in return for sanctions relief.

I believe June will be a watershed month for Europe, the UK, and America as to the depth of their commitment to a war economy and Russia. Perversely, if they blink for short-term national gains, it would be quite a tailwind for global equities and bonds. The financial markets are a harsh mistress.

June also brings us a bevvy of US data and a Bank of Canada policy decision next week. US data releases include the house price index, JOLTS Job Openings and ADP Employment, and ISM Manufacturing before the one ring to rule them all, Friday’s Nonfarm Payrolls. Oddly enough, the most important event of them all is being largely ignored by markets to their peril.

In the Dark Tower of the Fed, they have $8.5 trillion of debt instruments they need to get rid of. Quantitative tightening starts next week, scaling up to $95 bio a month by September. I’d hate to see the mark-to-market P&L on that position, but I guess when you can print money, it doesn’t matter. It may well matter to markets though with the Fed also set to tighten by 0.50% per month over the coming months (including June). I am yet to be convinced that the Fed can pull this off without causing another taper tantrum or sending the US 10-years well North of 3.0%, or both. They, like everyone else, will be hoping inflation indicators flatten in the months ahead, to keep the bids out there in the bond market. All I’ll say is don’t mistake short-term noise in the equity market as a structural turn in direction higher.

Oil rallies sharply

Oil prices rallied sharply yesterday as markets continued to fret over tight US galena and diesel supplies ahead of the summer driving season. News that President Biden is investigating restarting mothballed US refineries had zero impact on markets. That is not surprising as refineries, like aircraft parked in the desert, don’t have a simple on/off switch. News is also emerging that suggests OPEC+ will only raise production next week by the previously agreed 432,000 bpd, providing another supportive factor in a tight market. The street may also be pricing in peak virus in China with Shanghai’s port back to 95% of normal operations.

Brent crude jumped 2.55% to $117.30 a barrel yesterday, adding just 0.20% to $117.50 in quiet Asian trading. WTI leapt by 3.11% to $114.10 a barrel. The firm price action this week leaves both contracts poised to potentially test the upper end of my medium-term ranges, at $120.00 and $115.00 respectively, today, or early next week. That will be a severe test of resolve around Russian sanctions as rather surprisingly, it has resulted in no material movement on easing restrictions on Iran and Venezuela, which would go a long way to changing the global supply picture. WTI’s relative outperformance is due to US gasoline and diesel supplies. The US though doesn’t have an oil problem, it has a pipeline and refining bottleneck problem.

Brent crude should find some resistance at $118.00 initially. After that, the chart shows nothing until $124.00 a barrel. ​Support is at $114.00 and $112.00 a barrel. The 2022 support line lies at $104.00, and only a weekly close below that signals the end of the bull market. WTI still has resistance at $115.50 and $116.60, but after that, that chart is empty until the $128.00 region, the top of the Ukraine/Russia spike. Support is at $110.35 and then $108.00 a barrel. Its long-term, 2022 support line lies at $101.50.

Gold trades sideways

Gold seems determined to bore traders to death after another inconclusive yesterday range-trading session. It finished 0.13% lower at $1851.00 an ounce. In Asia, some pre-weekend risk hedging has lifted it slightly higher to $1854.00 an ounce. Most concerning about the price action by gold, was that despite a broadly weaker US Dollar seen elsewhere, and the rally in risk asset positioning yesterday, gold actually finished the session lower. Its inability to rally on US Dollar weakness is an ominous sign and risks are increasing for a serious downside washout of long positions.

Gold has nearby support at $1840.00, followed by $1836.00 an ounce. Failure sees the possibility of a mini-capitulation by longs that could reach as far as $1780.00 an ounce. Gold has resistance at $1860.00, $1870.00, and $1886.00 an ounce, its 100-day moving average.

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