Hurry up and wait

Hurry up and wait best sums up the overnight session as the street treads water while remaining laser-focused on tomorrow night’s US CPI data. Inflation fears suffered a setback after the NFIB survey showed business confidence slipping. That was enough to lift US equities a smidgen higher. However, the street ignored the considerable rises in the job opening and wage components. Like much data of late, you can cut the cake both ways, depending on your point of view.

The inflation trade has tended to have short legs in months past, and I believe we would need to see the MoM CPI for May print at or above last month’s 0.80% increase to give it more momentum. Anything less, and we’re likely to be back in the market happy space of buy everything except the US Dollar. So, US bonds and equities will rally along with commodities and precious metals, and the US Dollar will fall.

The week’s other heavyweight inflation release from China was out this morning and has passed without incident. MoM Inflation for May came in at -0.20%, slightly lower than forecast. Interestingly, PPI YoY for May surged to 9.0% as the global commodity rally and pandemic supply chain disruption make themselves felt. The big question for markets going forward is whether China’s factories can pass on those increases to consumers globally. History suggests not, and the complete lack of reaction from Asian markets today suggests they think the same. That is being helped along by a procession of Chinese officials promising “action” on rising commodity prices in various shapes and forms.

Off the front pages, it seems, the Biden infrastructure deal appears to be in trouble, with the Democrats and Republicans far apart to the surprise of precisely nobody. A drawn-out process getting that deal across the line, or not, is another headwind in the medium term for the inflationistas.

The rest of the day’s calendar doesn’t look too inspiring, with South Korean GDP and Unemployment, Australian Consumer Confidence, and the Philippines Balance of Trade all completely ignored before the alter of China inflation. The same fate awaits Germany’s Trade Balance this afternoon, and tomorrows ECB policy meeting will meet the same fate unless they mention the t-word, a most unlikely outcome.

One data point that may cause some fireworks is the official US Crude Inventories number. Typically, the impact of the official crude inventory number is directly proportional to the amount of directional speculative positioning in the futures markets and extremes in prices. Right now, the street is very long, and oil prices are at 20-month highs. So a rise instead of a fall in inventories tonight could spark a corrective sell-off.

Bitcoin continues to grab headlines overnight, with a sell-off yesterday partly prompted by the FBI’s mysterious ability to use a private key to retrieve some of the Colonial Pipeline loot. I’m just gutted that the FBI spokesperson wasn’t called Agent Smith so that I could make some Matrix jokes. It seems the FBI has used some other chicanery to obtain the private key other than cracking the Bitcoin algorithm, to the relief of Bitcoin evangelists and cybercriminals everywhere. That saw it pare much of yesterday’s losses. Nevertheless, the technical breakdown through $35,000.00 mentioned yesterday is still in play targeting $22,000.00. I continue to believe that a material break of $30,000.00 will trigger another capitulation trade, which may trigger cash-raising selling in other asset classes.

Another mixed day for equities in Asia

Wall Street has another sideways day overnight, except the Nasdaq, which rose modestly as the default market happy place trade on a slow news day. That has seen Asia once again content itself to range trade with the whole planet, seemingly treading water for the US inflation data tomorrow night. Except for China, regional investors appear to be once again reducing exposure ahead of the inflation data, with most of Asia ever so slightly lower today.

China’s benign inflation print and officials talking of coal price controls has lifted Mainland markets. The Shanghai Composite is rising 0.40%, while the more tech-heavy CSI 300 has climbed just 0.30%. Hong Kong is trailing with the Hang Seng unchanged. The Nikkei 225 is down 0.25%, with the Kospi edging 0.15% lower. Singapore and Kuala Lumpur have fallen 0.25%, Taipei is down 0.40%, with Jakarta rising 0.40% today. In Australia, the All Ordinaries and ASX 200 are just 0.05% lower.

I expect the doldrums to continue, barring a headline surprise, ahead of the week’s main event in the US tomorrow.

Wax on, wax off, the US Dollar rises

The US Dollar rose overnight as the directionless range trading continued ahead of US inflation data tomorrow. Despite US yields falling, the dollar index claimed back all its previous day’s losses, rising 0.18% to 90.13 before easing to 90.09 in Asia. That leaves the index almost exactly mid-point of its near one-month range of 89.50 to 90.50, which sums up the market’s struggle for the next directional trade.

Both EUR/USD and GBP/USD fell 20 points higher to 1.2165 and 1.4145, respectively. Ultimately, EUR/USD is trading in a wider 1.2100 to 1.2250 range this past fortnight, while GBP/USD has clear support and resistance at 1.4100 and 1.4250. In the bigger picture, only failure of 1.2000 and 1.4000 respectively undermine the longer-term bullish outlook for both currencies.

Asian currencies are locked in neutral after the PBOC succeeded in putting a floor under Yuan appreciation last week. USD/CNY is almost unchanged from yesterday at 6.3940, after another neutral fixing today. Until the PBOC signals comfort at more Yuan appreciation, the broader Asian grouping will likely mark time around these levels.

Oil prices reverse Monday losses

The volatility in oil markets is somewhat higher than elsewhere, with Brent crude and WTI powering back to recent highs overnight. Fighting talk from US Secretary of State over Iran sanctions helped oil ignore a stronger US Dollar as fears of a flood of post-nuclear-deal Iranian oil hitting markets faded.

Brent crude rose 0.85% overnight to $72.05 a barrel, climbing another 0.80% to $72.60 this morning. WTI rose 1.10% to $70.00 a barrel overnight before rising another 0.65% to $70.50 in Asia. The daily close above key levels of $72.00 and $70.00 a barrel is significant from a technical perspective, pointing to further gains ahead.

Interestingly, Reuters is running a story that China is moving to reduce oil imports by limiting the trading of oil quotas between PetroChina and teapot refineries. That should be bearish at the periphery, and the fact that oil prices have risen in Asia is another sign that even at these levels, oil demand remains strong.

Only a retreat below $70.00 a barrel for Brent crude and $68.00 a barrel for WTI suggests that the rally is over for now. Otherwise, inflation data or not, Brent crude should target $75.00 a barrel in the week ahead and WTI $73.00 a barrel.

Gold remains in a holding pattern

Gold tested $1900.00 an ounce again overnight, but as the US Dollar firmed, gold made a tactical retreat, falling 0.33% to $1893.00 an ounce. Trading remains subdued in Asia, with gold rising slightly to $1893.75 an ounce in a tranquil session.

Gold’s fate remains tied to the US inflation data tomorrow, and it appears to have settled into a $1880.00 to $1920.00 an ounce range. Only a failure of the $1840 to $1845.00 an ounce support zone calls the longer-term rally into question in the bigger picture.

A benign inflation print tomorrow is likely to be positive for gold, as it is moving inversely to US bond yields and the US Dollar at the moment. However, a further sell-off in the cryptocurrency space could see some old-fashioned risk rotation as well. Once $1920.00 an ounce is cleared, gold’s next target will be the $1960.00 to $1965.00 an ounce region.