Geopolitical chaos, FX Intervention, and US banks’ stress test results

• Russia’s weekend mutiny cast doubts on Putin’s grip on power.
• No major impact on markets but keep a lookout on Gold, which bounced off the key support zone of US$1,913/1,896 per ounce.
• Stern FX verbal intervention from Japan’s top currency official. Watch USD/JPY key near-term support at 142.50/25.
• US banking stocks tumbled ahead of annual key Fed’s banks’ stress test results

Before the start of this new trading week, market participants were being jolted from their weekend leisure activities to shift their focus to the internal coup in Russia that may put President Putin’s power grip in jeopardy.

Yevgeny Prigozhin, leader of the Wagner Group, a Russian key independent military contractor that has played a significant role in the ongoing Russia-Ukraine territorial conflict voiced displeasure with Russia’s top leadership in handling the Russia-Ukraine situation, took over two Russian cities and order his mercenaries to march towards Moscow on Saturday.

Russia’s weekend mutiny started fast and ended fast

Upon reaching 200 km within Moscow, Prigozhin’s troops halted and made a U-turn back to their field camps. In addition, Putin dropped earlier treason charges on the Wagner Group and allowed Prigozhin to head to Belarus, Russia’s western neighbour for exile.

In less than 48 hours, the mutiny in Russia is over without any clear details on what has transpired that led to Prigozhin’s retreat as Putin has not made any official speech or press conference yet. US Secretary of State Blinken commented that the weekend’s uprising by Prigozhin, a former Putin royalist has posed a direct challenge to Putin’s grip on power in Russia and provided a battlefield advantage to Ukraine.

On the other hand, several geopolitical commenters have analyzed the situation to be in favour of Putin in which Wagner Group’s mutiny may be used as a cover for Putin to remove the top brass in Russia’s Ministry of Defence; Shoigu, the defence minister and Gerasimov, chief of the general staff as they posed a threat to Putin’s rule. Thus, the change of Russia’s military leadership may be part of the “deal” package that the Kremlin and Prigozhin agreed on.

No significant movements in markets but watch gold

In today’s Asian session, both the S&P 500 and Nasdaq 100 e-mini futures were up slightly by around +0.20% after posting their worst weekly losses last week in three months. Major Asian stock indices were mixed at this time of the writing, Nikkei 225 (-0.24%), Kospi 200 (+0.60%), Hang Seng Index (-0.14%), Hang Seng China Enterprises Index (+0.13%), and CSI 300 (-0.70%).

The US dollar is almost unchanged on average with the US Dollar Index inching down by a meagre -0.1%. Gold, a traditional safe haven asset that tends to benefit in light of major geopolitical risks upheaval in the past has exhibited some interesting price actions movement from a technical analysis perspective.

Gold’s decline has managed to bounce off from a key support zone of US$1,913/1,896 per ounce

Fig 1: Gold (XAU/USD) medium-term trend as of 26 Jun 2023 (Source: TradingView, click to enlarge chart)

Last week’s decline seen in Gold (XAU/USD) has led its price actions to hit a crucial medium-term pivotal support zone of US$1,913/US$ 1,896 per ounce (printed an intraday low of US$1,910 last Friday, 23 June) which is being defined by a confluence of elements; the lower boundary of the medium-term ascending channel in place since 3 November 2022 low, 38.2% Fibonacci retracement of the prior medium-term up move from 3 November 2022 low to 4 May 2023 high, and approximately the downside price objective of recent “Descending Triangle” bearish breakdown.

Momentum has also improved as the daily RSI oscillator has managed to stage a bounce off the key corresponding support at the 36 level. Watch the US$1,896 key medium-term pivotal support and a clearance above US1,940 intermediate resistance sees the next resistance coming in at US$1,990 (also the 50-day moving average).

FX verbal intervention from Japan

After a strong upside movement seen in the USD/JPY that recorded a weekly gain of +1.3% last week which outperformed other major USD crosses, the US Dollar Index only rose by +0.56% over the same period, Japan’s Vice Finance Minister Masato Kanda, a top currency official that has oversight over foreign exchange market matters has sounded the alarm in today’s morning Asian session.

Based on a Reuters report, Kanda said that the authorities will respond to any excessive moves in the foreign exchange market, warned that the recent yen moves were rapid and will not rule out any chance of an FX intervention.

He said, “Regardless of the direction, it’s generally not good for the economy if exchange rates move excessively in a way that deviates from economic fundamentals.” Today’s verbal intervention was the most pronounced made by any of Japan’s finance ministry officials in the past month when USD/JPY sailed past the prior 141.00 and 142.00 psychological levels “effortlessly”.

USD/JPY has shed -0.2% intraday and broke key near-term support at 143.45 at this time of the writing, the next support to watch will be at 142.50/25 (former swing highs of 11/21/22 November 2022).

Fed’s annual banks stress test results out on Wednesday

The US Federal Reserve will unveil the results of its annual stress tests on the 23 biggest US banks on Wednesday, 28 June. The key focus will be on a section of the test, labelled as “exploratory market shock”, this is the first time such a test is being conducted on the trading books of the largest US banks.

The urgency and significance of the “exploratory market shock” stress test come after the US regional banks’ turmoil. Hence, monitoring of fixed income duration risk is paramount now given that the latest Fed’s hawkish monetary policy guidance is to keep interest rates higher for a longer period.

Last week, the US banking stocks shed by -6.80% as indicated by the SPDR S&P Bank exchange-traded fund, its worse weekly performance in seven weeks and underperformed the S&P 500.

Fig 2: S&P 500 major trend with VIX as of 26 Jun 2023 (Source: TradingView, click to enlarge chart)

If the “exploratory market shock” stress test results come in unfavourable, it may put more downside pressure on US banking stocks which in turn may trigger a volatility upside breakout in the VIX, a measurement of implied volatility on the S&P 500 as it has compressed to a low level of 13.44 not seen since early February 2020 before the pandemic. A sudden spike in VIX may dampen the current bullish mood for US stock indices.

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