Maxed out

Markets stewed in their own juices overnight leaving equities and currencies and precious metals trading in noisy ranges, but ultimately finishing not too far from where they started. The big mover overnight was oil, which had another impressive rally, this time helped along by a Reuters story where France’s President Macron was overheard telling US President Biden at the G7 meeting, that a call to the UAE had informed him that both they and Saudi Arabia were maxed out on production capacity.

That is probably the last thing the world needs to hear right now, given that Saudi Arabia and the UAE are regarded as the world’s two available swing producers at the moment. The UAE released an official response stating that they were indeed near-maximum capacity, although this was crouched as within the context of its allowable OPEC+ quota. If true, President Biden’s upcoming cap-in-hand trip to Saudi Arabia may have lost one of its raisons d’etre.

The pain doesn’t stop there for energy markets. Along with reduced Russian gas flows to Europe, Libya also announced it may declare a force majeure on over half of its daily production shortly. Ecuador said over the weekend that it may cease production entirely due to domestic cost-of-living protests, something we’re going to see a lot more of frontier/emerging markets this year sadly. By my rough calculations, Ecuador and Libya will add up to around 1.1 million barrels per day. Not a deal-breaker normally, but much more so in these abnormal times. The reality that energy price inflation isn’t going anywhere anytime soon may partially explain the modest retreat by equities in the last 24 hours.

US Durable Goods outperforms

US data was mixed overnight. US Durable Goods surprised to the upside, rising by 0.70% MoM in May, well above the 0.10% rise forecast. Even the numbers ex-defence and transport (read Boeing), exceeded forecasts easily. In contrast, US Pending Home Sales came in worse at -13.60% YoY for May, while the June Dallas Fed Manufacturing Index slumped to -17.70. With US and German yields also rising overnight, the rally in oil prices, and the Durable Goods, in particular, forced the FOMO gnomes of Wall Street to reassess the lower terminal Fed Funds excuse to buy equities.

We could still see the equity bounce continue, though. Markets are in a schizophrenic frame of mind day-to-day, but underlyingly, are still desperately keen to buy this medium-term dip. Additionally, it is the month and quarter-end this week, and that will prompt no small amount of portfolio rebalancing by institutional investors globally. We should expect the back-and-forth chop-fest to continue this week in the equity space, and possibly, the currency space.

In Asia today, the calendar is as empty as I have seen it for a while. Japan’s 2-year JGB auction and Malaysian PPI are unlikely to move the needle. ECB President Lagarde and Chief Economist Lane both speak this afternoon, and we can expect their comments to be dissected for clues on both monetary policy direction and their anti-fragmentation tool to manage bond spreads between members. Fed Chairman Jerome Powell also speaks tomorrow at an ECB event, along with Ms Lagarde, which could up the ante on mid-week volatility.

In the US, most attention is likely to be on Wholesale Inventories and the Case-Shiller House Price Indexes. Markets are becoming nervous that corporate America may end up with lots of inventory they can’t sell, and the nerves around the US housing market are well known. Given the poor Dallas Fed Manufacturing Index overnight, the Richmond Fed Manufacturing Index may garner more attention than usual as well, especially if it is weak.

Overall, it looks like Asia will settle for a sideways session, with equities content to mirror Wall Street’s direction, and currencies, precious metals and cryptos staying comatose. A lack of data in Asia today leaves markets vulnerable to headline bombs on the news ticker.

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