A target on your back

Target’s soft outlook boosts equity markets

I warned yesterday that with a dearth of heavyweight data this week until Friday’s US CPI, we were likely to experience choppy trading, driven by swings in sentiment and headlines hitting the news ticker. Sure enough, that is what occurred overnight after US retailer, Target, gave a soft outlook and announced it had too much inventory and would cut prices to shift it.

If that headline had come out on another day or week, it may well have been subsumed in the day. But, with little else to go on, and a genetic predisposition to pick the low in the equity markets, investors in New York immediately interpreted that as the high in US inflation was nigh. US yields duly fell, US 10-years moving back below 3.0%. That saw some US dollar weakness, gold rally a little and of course, lower inflation means buying equities, which is what happened. To be fair, consumer discretionary got a pasting, but other sectors such as big-tech roared higher.

Tonight, it may well be another headline that the FOMO gnomes of Wall Street don’t like, and markets could well unwind all the overnight moves, or not. Roll on Friday.

In Asia today, we have had a few data releases already ahead of today’s main event, the Reserve Bank of India’s policy decision. Circling back to yesterday briefly, the Reserve Bank of Australia surprised both markets, and the author, by announcing a 0.50% rate hike. Local equities got clubbed, and the Australian dollar traded in a near 100-point range and managed to hold onto most of them as the RBA becomes the latest central bank to climb off the fence on inflation. Interestingly, the incoming Philippines Central Bank Governor also signalled rate hikes ahead, and after a slow start, Asia-Pacific central banks are playing catchup to the Federal Reserve. That should partially insulate Asian currencies from further weakness for now.

This morning, Japan’s final Q1 GDP Growth received a tiny upward revision to -0.10% as reopening saw strength in the consumer segment, if -0.10% could be called strength. The data is now historical and has been ignored by markets which remained laser-focused on the rapid ascent of USD/JPY, hitting 133.00 today, as the US Fed continues to signal more tightening, while the Bank of Japan signals it has no intention of adjusting its ultra-easy monetary policy. There has been an increase in verbal intervention from Tokyo officialdom, but not massively. I do not believe we are anywhere close to intervention in the Japanese yen by the Ministry of Finance yet. Japanese equities are enjoying a weakening yen though.

South Korean Q1 GDP got a slight downward revision from 0.70% to 0.60%. Again, in the context of recent events, the data is old news now and will be mostly ignored by markets. Cost of living and potentially softening consumer and export demand are far more pertinent and will probably keep the pressure up on the won, even though the Bank of Korea has itself started raising interest rates.

Today’s main event is the Reserve Bank of India interest rate decision due shortly. Markets have priced in a 0.40% hike after the unscheduled rate hike previously and a sharp swing in hawkish rhetoric by the RBI. With possum-in-the-headlight uber-doves, the RBA, hiking 0.50% yesterday, I’m not ruling out more aggressive action by the RBI today either, with inflation far above 6.0%, the top of their inflation band. Notably, the Indian rupee continues to weaken, despite recent US dollar weakness lifting other currencies across the world. USD/INR is trading at 77.6450 today, not far from recent highs around 77.80. That may factor into the RBI’s equations. A 0.75% hike would probably see the Sensex take a hit, but provide much-needed support for the currency, although India’s imported energy bill and wheat export bans will continue to erode the current account.

The data releases across Europe and the US today are strictly second-tier. Probably the most interesting will be the US official crude inventory data after last week’s surprise 5 million-barrel drop. With Brent crude and WTI both around USD 120.00 a barrel, sharp falls in headline crude inventories or refined products could spur another rally in oil prices. Otherwise, it is as I said earlier, markets swinging on sentiment shifts and headline risks.

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