Pre-FOMC shuffling

S&P, Nasdaq climb higher

Some pre-FOMC position shuffling is occurring across asset classes at the moment. Equities continue on their merry way higher, with the S&P 500 and Nasdaq tracing new record highs overnight. The Dow Jones is lagging, perhaps as its components could be perceived as more vulnerable to the rising inflation data being seen across the world. US yields moved higher across the curve overnight, notably in the 30-year tenor. Given the recent gains in bond prices, though, the price action looks more corrective and cautious, with US Retail Sales and PPI to come this evening before the main event tomorrow US time.

Currency markets held steady, having had their US dollar rally day in the sun on Friday, but gold’s woes continued. Gold fell over USD30 an ounce at one stage overnight before recovering somewhat, with the price action highly suggestive of stop-loss selling, culling the herd of heavy speculative long positioning. Notably, the USD1840.00 to USD1845.00 an ounce support zone, containing the 200-day moving (DMA) average held for now.

Bitcoin’s rally maintained momentum, boosted by that most fundamental of economic indicators, an Elon Musk tweet. Bitcoin rose around 4.0% yesterday, hovering around USD40,000.00. Paul Tudor Jones said he liked having a bit of virtual in his portfolio as well, boosting sentiment, and Goldman Sachs have announced they will offer Ether futures and options. All meat and three veg for the virtual currency bugs and bitcoin looks like it will target the 200 DMA near USD42,500.00 sooner rather than later.

China and Hong Kong equity markets are under pressure this morning, even as the rest of Asia is following Wall Street higher. Two factors appear to be at play here. Firstly, the PBOC drained a net CNY 10 bio via the repos after the long weekend. Secondly, every major news outlet is running a story about potential problems with a French-designed nuclear reactor located in Taishan, located west of the Pearl River Delta and just 140 km from Hong Kong. Readers can find the details online easily themselves; I’ll not pump up the volume on it other than to say we should be watching developments closely.

India dodged a bullet yesterday as its WPI Inflation by an above-consensus 6.30% YoY in May. It was saved by the food sub-component falling unexpectedly to 4.31% YoY even as the other components rose above consensus. The RBI can’t do much but sit on its hands from here, boxed into a stagflation canyon but needing to do its part to assist in the recovery from India’s Covid-19 tragedy. Even as it is effectively forced by opposing forces to sit on the side-lines, it likely means we have seen the highs for the Indian rupee for now unless the US dollar collapses.

This morning’s RBA minutes were as dovish as expected, with AUD/USD heading 10 points lower in sympathy. Indonesia’s Balance of Trade should rise above USD2.0 bio at midday, taking some pressure off the rupiah as exports continue to increase. The UK employment data will be closely watched as it experiences US-style labour shortages in specific sectors. A print above 150,000 could ease the corrective downside pressure on sterling. Last night’s one-month delay to phase 4 reopening made barely a ripple, having been well telegraphed over the weekend.

The US releases May Retail Sales, New York Empire State Manufacturing and PPI and Core PPI. Retail Sales should ease from the post-reopening jump, but the Empire data should outperform, with the PPIs of most interest. Both headline and core could rise well north of 0.50% MoM, mainly as US PPI includes services sector costs and not just factory gate prices. Although it won’t move the needle materially on the transitory inflation wagon financial markets have glued themselves to, it could see the pre-FOMC bond market correction gain some momentum. Higher yields are likely to push the US dollar higher, and mute equities, likely leaving gold vulnerable to a deeper correction lower.

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