Rinse and repeat

Wall Street fall on recession jitters

Today is looking remarkably like a rerun of yesterday, especially in US markets. Equities slumped once again, led by the Nasdaq, as did oil and bitcoin. The Federal Reserve financial stability report highlighted risks around rising interest rates, wars, and high inflation amongst others which frazzled Wall Street’s nerves. US 10-years traded in an impressive 17 basis point range, rising to 3.20%, before settling lower at 3.03%.

The late rebound also saw the US dollar give back most of its intraday gains, although bitcoin only retraced part of its daily losses and stocks gained no solace. Markets can thank the Fed’s Bostic for the rebound, as he dampened down 75 bps hiking noise. The price action is endemic of a market on edge as markets find themselves in a multi-directional vice grip of high inflation, supply chain disruption, a hiking Fed, a slowing China thanks to covid-zero, and the Russian invasion of Ukraine.

That stagflationary noise just won’t go away, and it’s a scenario with no good choices for central banks. As a result, the rate hike globally inducing a recession is gaining more credence. Little surprise that it is not a favourable environment for equities in particular, and other darlings that were pimped up in the central bank QE orgy through the pandemic like cryptos.

Apart from a China-induced slump in oil overnight, the other big mover was the crypto space with bitcoin dropping a mammoth 14.25% to USD 30,900.00. The end of the era of central banks providing unlimited zero per cent money to the world economy, and backstopping downward cycles at the first sign of trouble has come to an end. Asset markets like cryptos, which rose that wave higher, are among the most exposed and it is becoming increasingly harder to hide for them, although they are not alone as the world resets itself to the late mid-’90s.

As far as bitcoin goes, I noted that a break of the 1-year symmetrical triangle support at USD 37,400.00 would signal a move lower, initially targeting the USD 32,000 region. That has been carved out and the technical picture suggests bitcoin could trade as low as the USD 17,000.00’s. That is a big call, and it does seem to be making a stand ahead of USD 30,000.00. Realistically, it needs to reclaim USD 37,000.00 to change the technical outlook and give the HODL’ers hope of a good night’s sleep.

In Asia today, the data calendar is light. Japan’s Household Spending MoM for March exceeded expectations, rising to 4.10% as the economy reopens and perhaps as Japanese consumers, front-load spending, faced with a non-deflationary environment for the first time in three decades. Japan officials have reiterated the Bank of Japan monetary settings though, capping JGB yields at 0.25%, so nobody should be expecting a sustained yen rally unless US yields take a tumble.

South Korean data remains firm. The Current Account for March shrank slightly to USD 6.73 billion, but exports remain robust, although import costs rose sharply due to a weaker won and soaring energy prices. That will flow through to higher inflation and keep the Bank of Korea on track for another hike at its next meeting. Similarly, Indonesian inflation popped through the topside of forecasts yesterday, and the pressure will increase on Bank Indonesia to hike next month. It seems to be capping USD/IDR around 14,500.00 still but that strategy relies on favourable moves in US yields. It will soon need help from monetary policy, as will India, where the RBI was intervening in USD/INR overnight. The election of the Marcos/Duterte ticket yesterday in the Philippines on subsidy promises means the BSP has another headwind to cap USD/PHP appreciation, and its rate hike hand will soon be forced.

Australia’s NAB Business Confidence plunged to 10 in April from 16 in March, another headwind for local markets pricing in a China slowdown and an imminent federal election. AUD/USD and NZD/USD remain at the mercy of global risk sentiment, and unsurprisingly, got clobbered once again overnight. Malaysian Industrial Production was a bright spot, increasing to 5.10% in March, although repeating that in April will be challenging. Like the Australian and New Zealand dollars, the Malaysian ringgit seems to be being used as a proxy for the China slowdown, and as a result, USD/MYR is going to remain bid unless US yields take a sudden and prolonged dive, leading to broader US dollar selling. Bank Negara is another that may be forced into a prolonged series of rate hikes, just when it doesn’t want to. As I said, stagflation leaves no good choices for monetary settings, just least-worst choices.

The data highlight this evening will be the German ZEW survey, which, for obvious reasons, has continued downside risks. The US NFIB Business Optimism Index for April makes for increasingly interesting reading these days, especially the broader report on the state of independent businesses in America. However, it will likely be the slew of Federal Reserve talking heads tonight that will dominate intraday volatility.

In Asia today, short-term moves in currencies and equities seem to be following the intra-day moves in bitcoin. Or it could be the other way round. I’m not sure if the dog is wagging its tail or the tail is wagging the dog. It is a powerful indication of the nervousness out there. Looking at real markets though, I am monitoring oil prices. Having tumbled heavily overnight, we are not seeing the usual Asian buy-the-dippers today. In fact, oil is lower in Asia today and that speaks much louder to me than noise in the crypto-space.

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