Looking for ABE

The post-FOMC rally ran in equities out of steam within 24 hours with Wall Street plummeting overnight once again. Even the most ardent FOMO gnome had a conviction crisis as a swath of central banks followed the Fed’s lead and hiked policy rates. Taiwan hiked 12.50 bps, the Bank of England hiked 25 bps and the Swiss National Bank shocked markets, hiking policy rates by 50 bps.

SNB shocks with 0.50% rate hike

It was probably the SNB that broke the camel’s back because if the Swiss are worried about inflation, we all should be. Stock markets went looking for ABE (anything but stocks), and it looks like a US 10-year yield approaching 3.50% yesterday was just too tempting. US bonds saw some impressive ranges and as money poured into the US curve, the 10-year fell from near 3.50% to close around 3.25%.

That set of a negative feedback loop in the US dollar which suffered heavy losses overnight. They were led by a post-SNB rally by the Swiss franc, which spilt over into euro and sterling strength as well, helped along by the BOE hike. EUR/USD rallied by 1.0% and probably would have had an even better day if EUR/CHF wasn’t getting simultaneously crushed. Falling US yields also eroded US dollar strength as did a huge rally of the Japanese yen.

With hiking policy rates this season’s new black for the world’s central banks, offshore markets moved to rapidly price in that the Bank of Japan would raise the 0.25% yield cap on 10-year JGBs at this morning’s policy meeting. USD/JPY fell by just over 1.0% overnight helped along by falling US yields as well. Japanese markets are having none of it though, with USD/JPY rising by 0.80% already today to 133.25.

One side or the other is seriously wrong. We will know which sometime after 1100 SGT today. As a hint, the longer that no noise emerges from BOJ HQ after 1100SGT, the more likely it is we are going to get a surprise, from my experience. We should get a binary outcome once again from the decision. If the BOJ makes no changes and reiterates its commitment to a super-easy policy, USD/JPY will likely be trading on a 135.00 handle by Monday. If they do raise the cap, the correction lower by USD/JPY should continue, possibly in a quite disorderly manner. And I suspect 130.00 or lower wouldn’t be out of the question. You’ve got to love Fridays.

Gold also rallied overnight, but that was because the US dollar fell, with the inverse correlation as strong as ever. The yen gains overnight boosted Asian currencies although the KRW, THB, TWD, and CNH are moving lower with the yen this morning as well. Oil held steady overnight despite probing the downside, no amount of noise elsewhere changes the fact the world doesn’t have enough of it or that refineries can’t refine enough of it. The underachiever overnight was the crypto space. Bitcoin ran into buyers again ahead of USD 20,000.00 overnight but remains uncomfortably close to the danger zone at USD 20.700.00 this morning. The weekend session promises to be emotional.

My overall take on the state of play for markets at the moment is that even the most ardent buy-the-dipper in the equity space is starting to realise inflation is a threat, with central bank banks prepared to hike the world into a slowdown and possible recession to get on top of it. A recession isn’t good news for pimped-up valuations either. The street is looking for anything but equities into the end of the week, and tasty government bond yields seem to be the preferred home.

In other data recently, US Housing Starts and Building Permits in May slumped from April. We can draw a line straight to rocketing mortgage rates on that one and the US won’t be the last to feel housing market pain. Singapore Non-Oil Exports (NODX), surprised to the upside today, rising by 12.40% YoY in May, boosted by electronics. That will be a welcome offset for slowing domestic consumption but unless China really reopens, will start to fade in the coming months.

We have the Bank of Japan meeting shortly, Eurozone Inflation this afternoon, and US Industrial Production and Manufacturing this evening. Federal Reserve Chairman Jerome Powell is also speaking at 2045 SGT. And apart from testing every resident of Shanghai for Covid-19 this weekend, China releases its 1-year and 5-year Loan Prime Rates on Monday. Cryptos may generate some headlines this weekend as well if Bitcoin breaks USD 20,000.00.

Finally, there are apparently USD 3.40 trillion of options expiries on listed US equity markets today where liquidity may be reduced ahead of a US holiday on Monday. That may distort price action on Wall Street this evening. Tonight’s session could be a good one to avoid.

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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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