Equities yield to bonds

US yields hit 3-year high

Markets got a case of inflation nerves overnight, with long-dated US yields shooting higher ahead of US inflation data this evening. The US 2-year 10-year curve now has nearly 30 points of positive daylight in it, thankfully removing the “inverse yield curve, we’re all doomed” headlines off the front page for now. US 30-year yields hit a three-year high of 2.80% in what seems like a begrudging acceptance of reality by markets, ahead of the start of quantitative tightening and some juicy 0.50% rate hikes from the Fed starting next month.

US headline inflation could well hit 8.50% YoY this evening and equity markets didn’t like that story, staging a retreat overnight with the tech-heavy Nasdaq coming in for particularly negative attention. EM currencies also started giving ground, despite oil prices moving sharply lower overnight.

Asia itself is potentially caught in a pincer movement of higher US interest rates and slowing China growth which slightly lower oil prices are not offsetting. We can expect more Asian currency weakness ahead as the region’s central banks tinker with tightening monetary policy. Those pressures may well magnify in May as the FOMC rolls up its sleeves and gets to work.

Although some Ukraine fatigue seems to be settling into the market, others like myself would call it complacency, the war in Eastern Europe will continue complicating the inflation picture globally. Austria’s Chancellor visited Moscow yesterday, but in his own words, came away with “no optimistic impression.” OPEC also rebuffed quite firmly European accusations that it could pump more oil if needed. The bottom line is that Russian sanctions, low to non-existent grain exports from Ukraine and a war set to escalate, not deescalate, will continue playing havoc with commodity prices and therefore, inflation.

China markets had a tough day at the office yesterday but saw a few glimmers of lights overnight and today. The Chinese government gave out its first online game approvals in months, lifting tech China ADRs overnight. In Shanghai, restrictions have been loosened for about half the population. If an apartment complex has had no cases for two weeks, residents can start moving around. The caveat being that if one case is found in the complex, it will be locked down again in its entirety. China markets attempted to rally this morning but have quickly reversed into the red once again as the potential for widening Covid-zero restrictions on the mainland continues slamming sentiment. A few online computer games and Shanghai olive branches aren’t enough to structurally change sentiment.

Of course, one part of the world continues to defy the doom and gloom: Australia. NAB Business Confidence rose to 16 this morning but hasn’t been enough to turn the tide for the Australian dollar or local equities. The picture was less impressive in New Zealand. NZIER Business Confidence wilted to -40% in Q1 in the face of omicron and then soaring inflation and supply shortages. Meanwhile, NZIER Capacity Utilisation for Q1 climbed to 97.10%. Overheating anyone?

The RBNZ tomorrow has a difficult decision at its policy meeting. A 0.25% rate hike is priced in by most pundits, but a 0.50% is required. More than one, certainly as the New Zealand yield curve has already told the RBNZ as much. Another 0.25% hike tomorrow and another possum in the headlights statement are likely to see the New Zealand dollar get a beating. The farmers will be happy, but not many others.

Germany also releases its March inflation this afternoon and could well touch 7.50% YoY. That will increase the pressure on the ECB to do “something” on Thursday, even if it is to more strongly suggest that monetary expansion will be reigned in faster. The ZEW Economic Sentiment Index is likely to make grim reading as well for obvious reasons. Neither data point will make a case for a bounce in the euro.

United Kingdom Unemployment and Average Earnings for February will be closely watched as well. Although slightly backwards-looking now in the context of the Russian invasion of Ukraine, a strong set of data will increase the pressure on the Bank of England to get more proactive on rate hikes as well. Sterling has yet to have a daily close below 1.3000, signalling the next technical down move. But it is looking wobbly at 1.3025 today, and today could be the day.

Another big mover has been bitcoin overnight, showing a high correlation with the Nasdaq of late. After consolidating last week, it broke support at USD 42,000.00 overnight and plunged 6.20% to USD 39,700.00 as of this morning. In the bigger picture, it is still consolidating in a triangle pattern stretching back to mid-January. The lower and upper boundaries today are USD 36,500.00 and USD 47,500.00. A break above or below those support/resistant levels signalling an USD 18,000.00 move either way.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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