A quiet day in Asia

With the US on holiday yesterday, activity was muted overnight. Currency, precious metal, and crypto markets traded sideways, while equities used a slow news night to stage a modest recovery, led by European equities. The modest equity market recovery continues in Asia, thanks to US index futures grinding higher since the early morning opening yesterday in Asia.

Energy markets have continued unwinding the Friday capitulation at a steady pace this week. Reduced Russian natural gas flows are supporting European prices, with a number of countries looking to reactivate coal-fired power plants to make up potential energy shortfalls. Chinese energy demand is hitting record highs in the north of the country thanks to a heat wave. Reuters is reporting that Iran is preparing to step up uranium enrichment, and US Treasury Secretary Yellen is circulating a plan to put a price cap on Russian oil to deprive them of revenues.

Taken in totality, the physical market is as tight as ever, and thus, the speculative capitulation in futures markets probably shouldn’t be taken as a picture of the reality on the ground in the real world. Iran’s measures, if correct, likely mean we won’t be seeing a return of Iranian crude to greater world markets anytime soon either. The bottom line seems to be that until we see physical demand destruction, oil and other energy markets are as tight as ever.

In Asia today, South Korean 20-day exports for June fell unexpectedly by 3.40% YoY. Most of that though will be down to the truckers’ strike this month, and a recovery should occur in July. The Bank of Korea put out a statement saying that “CPI would likely remain over 5.0% for the time being.” The BoK seems to be priming markets for a 50bps hike in July and a couple more hikes shortly thereafter. Some concern around the currency is clearly evident as they warned they would take action over “herd-like” behaviour. Translating as “if you all keep buying USD/KRW, we’ll intervene.” They won’t be the only Asian central bank with that problem this year.

RBA signals another 50bps hike

The Reserve Bank of Australia Minutes were released this morning. The minutes signalled potentially another 50bps hike next month followed by a series of 25bps hikes for the rest of the year. They also mentioned that the RBA had lost some credibility in how it exited its yield control policy. They shouldn’t feel too bad about this. There are plenty of other central banks with eggs on their face, and their trans-Tasman neighbours, the Reserve Bank of New Zealand, have put on a veritable Muppet Show with monetary policy and will make the RBA look good, no matter what.

That is about it for data releases today in both Asia and Europe, leaving markets to continue quietly reversing Friday’s price moves until the US walks in the door, or we get a headline bomb. The Fed’s Barkin speaks this evening, but most eyes will be on US Existing Home Sales for May. There is downside risk to the 5.40 million forecasts with stresses in the US housing market evident for some time now as mortgage rates rose precipitously. I’m not sure what the reaction will be to a bad number. Theoretically, the gnomes of Wall Street will price in less Fed tightening and send US yields lower and equities higher and buy risk sentiment currencies. But I can’t see how a slowing US housing market is a positive environment for equities going forward either. I think I’ll sit this one out and watch from the sidelines.

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