Dumb and dumber

Readers should probably stop watching US stock markets for economic wisdom, as the price action overnight confirmed that part of the financial world has as little future insight as anywhere else. Last week, US equity markets rallied on the back of the arcane logic that a US recession would mean a lower terminal Fed funds rates and thus, was bullish for stocks, especially bombed-out tech stocks. That premise was boosted by weak Michigan Consumer Sentiment data last week.

Overnight, even weaker US Conference Board Consumer Confidence data provoked the opposite reaction, with US stocks plummeting. The nervous outlook was helped along by the Richmond Fed Manufacturing Index plummeting to -19 overnight, joining the ugly numbers from the Dallas Fed the night before. Both the Richmond and Dallas Services Indexes also fell heavily overnight. Equity investors continue to conjure up excuses to buy the dip, and I’m sure China cutting hotel quarantine to one week yesterday will elicit a similar reaction over there. Just remember, the virus only has to only get lucky once in China’s covid-zero world.

If the equity market’s hope versus reality keeps revealing itself to be a paper tiger, currency markets appear to be something resembling the adult in the room. With the stock market rallies last week boosting risk sentiment across asset classes, the US dollar traced out a modest retreat as Fed hiking zeal was downgraded. As equity markets decided that a recession isn’t good for stocks, after all, the US dollar index managed to unwind almost all of last week’s retreat in just one session. USD/JPY is back above 136.00 this morning, and the Indian rupee took a pasting to a new all-time low. Notably, US yields barely moved overnight so the yen and INR have no excuse on that front. It seems that markets are far more comfortable rushing into the apparent safety of the US dollar at the first sign of trouble, and I suspect that it was only a few Asian central banks’ offers around that stopped the rest of USD/Asia from rallying.

G-7 eyes Russian oil cap

The G7 Summit continues to be very busy with most attention focused on a mechanism to cap the price of Russian oil on international markets. Reuters is reporting that talks with China and India, about participating in the measures were “positive.” I’m still unsure about how such a mechanism would work, it seems to involve ramping up insurance premiums for seaborne cargoes so high that it drops the net price Russia would receive. It would need to be high enough to keep Russia pumping, but low enough to entice China and India to sign on, and not open arbitrage opportunities that would upset the other OPEC+ members. Game theory supercomputers will be burning the midnight oil, me thinks. I’m not sure how that plays with Russia and China’s “unlimited” partnership mind you?

For you and I, it would mean very little price-wise, and that’s certainly what the oil market thinks as well, as Brent and WTI futures rose once again overnight. The sell-off early last week looks increasingly like a culling of speculative positioning and I won’t buy a material fall in oil prices until the backwardation in the Brent and WTI futures curves shrinks markedly. That didn’t happen last week. OPEC and OPEC+ meet today and tomorrow, but we should expect a rubber stamp. Given that OPEC+ can’t even meet its present targets, and hasn’t for a long time, I expect no bearish surprises.

Today has been a mixed bag for Asia data-wise. South Korean Consumer Confidence fell sharply to 96.4, although local markets are likely more focused on reports that the Bank of Korea may enact a large interest rate hike if this month’s inflation data is above 6.0%. In contrast, Japan’s Retail Sales climbed to 3.60% YoY in May, with April’s number revised up slightly to 3.10%. The gradual reopening of the economy still seems to be playing out well domestically. However, Bank of Japan Governor Kuroda stated today that the increase in Core CPI above the targeted 2.0% was almost entirely due to the rise in energy prices. With that in mind, hold off on taking on the BOJ in the JGB market I say.

Elsewhere, Australian consumers are refusing to go quietly. Despite sharp cost-of-living increases, Australian Retail Sales unexpectedly rose by 0.90% this morning for May, the same as last month’s number. I suspect this might be as good as it gets though, and with the Australian dollar barely reacting to the data, the markets seem to think so as well.

Vietnam Industrial Production has outperformed today, and if Thailand Industrial Production does the same, as expected, this afternoon, that bodes well for the Asian ex-China PMI releases on Friday, although China’s PMI releases tomorrow and Friday have downside risks. Equity markets are holding up fairly well in Asia today, so either Asia is getting fed up following Wall Street’s histrionics, or the easing of inbound covid quarantine restrictions announced by China yesterday, is providing support.

This afternoon sees a slew of European business and consumer confidence data releases, as well as German Inflation for June. But all eyes and ears will be on the ECB summit in Portugal. ECB Chair Christine Lagarde will be speaking again after hawkish remarks yesterday. The main event will be Federal Reserve Chair, Jerome Powell, who is also speaking at the summit. As ever, markets will be dissecting his every word, looking for hints in this case, that the Fed is wavering on its hawkish bias as recessionary fears rise. They are likely to be disappointed, but it should be good for some intraday vol.

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