China lockdowns sink oil

China’s Covid-19 lockdown of Shanghai saw oil prices slump overnight, as investors fretted about more sweeping containment measures, which would negatively impact China’s energy consumption. Brent crude and WTI plummeted over 8.0% in overnight trading, although the rot had started earlier in the day in Asia. Oil’s volatility continues to make eye-watering viewing, but increasingly, the moves are being driven by falling liquidity in the futures markets, and the exchanges’ itchy trigger fingers on raising margins.


Also assisting the negative sentiment in energy markets, which is positive for the rest of us, is the first meeting in Turkey today by Ukrainian and Russian representatives. Markets are always keen to price in the prospect of a peace deal, if one could call it that, with what might be hints of concessions by both sides. Comments out from both sides though late in the day, suggest an agreement will be as elusive as ever. If there is a break though, watch out for sub-USD 100 Brent, a mad rush into the euro and European equities, and a slump in the US dollar and gold. Asian equities should catch a nice tailwind as well.

US yield curve causing jitters

US bond markets continue to send negative signals, with swaths of the yield curve flirting with inversion overnight. Unsurprisingly, financial stocks, along with energy producers, were two of the least favourite sectors in New York trading. For all the talk of the yield curve signalling a recession, equity markets continue their recovery, led by tech overnight, thanks to a Tesla share split announcement. A cynic could argue that given how far the Fed was behind the “transitory” inflation curve, they would also make a dog’s breakfast of sorting the mess out, accidentally tipping the US economy into a recession.


Analysts seem to be in a race to price in 0.50% hikes by the FOMC now, in stark contrast to the end of December. I’m waiting for the 0.75% predictions to start if this Friday’s US Non-Farm Payrolls is particularly strong. The pressure is mostly being felt in the 3-month to 10-year part of the curve, hence the inversions, but I do believe that there is still plenty of room for the curve as a whole to move higher as the Fed plays catchup. Eventually, that should weigh on equities.


Threats of higher US rates are making themselves felt most noticeably in Japan, where the USD/JPY rose almost 300 points overnight to 125.00 before falling to 123.90. The Bank of Japan didn’t get any bang for its buck yesterday, placing an unlimited bid in the 10-year JGB market to cap yields at the top of the acceptable range at 0.25%. That bid has been extended until tomorrow. Meanwhile, Japanese officials have gained some temporary respite by making USD/JPY comments this morning and oil falling overnight. The yen’s woes will likely be reflected elsewhere in Asia this year, where regional central banks appear happy to accept inflation as the price of growth. They have bulging currency reserves. It is not at all clear though, whether they will spend them to prop up their national currencies.


Australia releases its federal budget this evening and is likely to hand out plenty of pre-election goodies ahead of an expected May election. Like countries everywhere, Australians are facing a soaring cost of living on multiple fronts, as the Ukraine war and the downstream effects of ham-fisted quantitative easing mean the piper finally has to be paid. Voters will naturally blame the government now that the party is over. Although the budget will be significant for the embattled Morrison government’s hopes of re-election, its impact on markets will be modest. It may give President Biden a headache though as he ponders mid-terms in November and a lame-duck presidency.


Australian Preliminary Retail Sales rose 1.80% in Feb, better than expected but old news considering events since. South Korean March Consumer Confidence held firm at 103.20, while Japan’s Unemployment for February dropped to 2.7-%, both a pleasant surprise given the events of February. Whether that trend continues is another thing altogether. German Consumer Confidence for April is likely to slump for obvious reasons this afternoon.


In the US, we have three Fed presidents speaking, and some closely watched data. The S&P/Case-Schiller Home Price MoM for January will be watched for more signs the housing market is topping out, although it is a lagging indicator. We also have the February JOLTS Job Openings. A fall below 11 million open positions could give some temporary respite to the bond market, hinting that the US labour crunch is starting to ease. That’s a reach though. President Biden will also make a 2023 budget speech. Preliminary details yesterday targeted rate hikes for the rich and spending increases.  I can’t see it moving the needle on the mid-terms and I believe it will remain stuck in Congress for a long time.


Otherwise, we should all be watching our news providers for breaking news on a breakthrough in Ukraine-Russia negotiations, or not.

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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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