EUR/USD Affected By Powerful US Dollar And Natural Gas Situation. Copper And Crude Oil Decreased. Why Should We Observe AUD/USD And AUD/JPY?

ECB's Dovish Shift: Markets Anticipate Softer Policy Guidance

Summary:  Crude oil and copper prices plunged to new lows on recession fears. European stocks were most hit by a double whammy of economic slowdown and a crisis of natural gas shortage. Falls in bond yields are sending signals that central banks may not be able to raise rates as much as previously thought. Rate sensitive NASDAQ shrugged off the drag from European equities and rallied in the afternoon and closed higher. Chinese equities faced pressure from renewed anxiety about the risk of Covid induced lockdowns.

What’s happening in markets?

Market focus shifts squarely to recession concerns

Big overnight moves beyond equities as markets shifted focus to demand destruction fears and USD was the clear outperformer on safe-haven flows. Recession worries sent yields lower, which helped equities to rebound later in the session, led by the interest-rate sensitive tech sector. There was capitulation across the commodity space as risk sentiment took a hit, with European gas being the only exception amid fresh worries of natural gas crisis in Europe. Also, worth noting that we are in a low liquidity situation right now with Europe’s summer holiday underway, so that generally amplifies the moves. Asia sentiment was also hurt by the return of lockdowns and mass testing in China. Japan’s Nikkei (NI225.I) fell about 1.3% led by energy and utility companies, with shock waves also seen from rising government bailouts of European utility companies. Singapore’s STI (ES3) was however in modest gains of about 0.3% as REITs surged higher.

Mandatory mass PCR testing in Shanghai and mobility restriction in Xi’an caused investor anxiety

The locally transmitted cases in Shanghai surged to 24 for Tuesday and triggered two rounds mandatory mass PCR testing in three days in 12 out 16 districts of the municipality.  The city of Xi’an ordered closure of restaurants, entertainment venues and schools after reporting 11 new cases.  The resurgence of Covid-19 cases and the measures trying to stamp out transmission in major cities has raised much anxiety among investors about the risk of another wave of lockdown and sent equites lower this morning.  Hang Seng Index (HSI.I) and CSI300 (000300.I) lost more than 1%.  Mining and energy stocks led the charge lower.

ASX200 falls 0.5%, but outperform APAC equities, as tech stocks charge after Aussie bond yields fall

Given recessionary risk decreased after the oil price fell back to $100, Aussie bond yields fell, to 3.46% (a level not seen for four weeks) and this has fuel tech stocks, making them look ‘cheap’. But we argue this is a disillusionary and probably short lived rally, as bond yields are likely to rise again as rates rise. That said, Tech stocks up the most today include Megaport (MP1) and Zip (ZIP) , Life360 (360) up 7-13%. Such tech businesses are facing headwinds and typically don’t do well when economic growth slows. And lastly, also consider, investment managers are being stopped out of their shorts, i.e being forced to close shorts. As for the worst performers today, huge profits/selling is taking place in oil stocks which we might continue to see for some time while oil is pressured. Beach Energy (BPT) is down 6.6% and Woodside (WDS) down 5.2%. While Copper and iron ore stocks are also being sliced after both commodity prices fell.

Crude Oil, copper, iron ore prices face renewed pressure, while coal beats higher to a different drum

Crude oil (OILUKSEP22 & OILUSAUG22) prices tumbled overnight on demand destruction concerns, dragging oil stocks. While there was some reversal in the Asian session with the WTI futures back at $100/barrel and Brent back at $104/barrel amid short covering and bargain hunting. However, Russia’s announcement on further cuts to its oil supplies will also bring the focus back on supply issues. With demand and supply both being a concern, volatility is set to remain high. Major investments banks have been diverging on oil views for H2 with a significantly large price difference. While Citigroup is calling for a collapse in oil prices to $65 by year-end, JP Morgan is warning for sky-high prices, highlighting the uncertain market environment. In Saxo’s Q3 Quarterly Outlook, Ole Hansen, Head of Commodity Strategy, anticipates a trading range of $100 to $125 before resuming a prolonged uptrend. 

Copper is likely to continue to deteriorate in the near term too as China starts mandatory mass testing in 12 districts in Shanghai. The Iron ore Price (SCOA) fell 3.3% to $108 and looks like it could fall to the $99 level (being the next level of support). While iron ore searches for a bottom in the bear market, it’s likely to say in hibernation until the China’s cases fall. This means stock in BHP (BHP), Rio Tino (RIO), Fortescue (FMG) are likely to announce big falls in earnings given the iron ore price is 41% YOY, and we think guidance levels will be slashed too. This is definitely a major consideration for investors. Meanwhile, Coal futures show no signs of slowing down, supporting coal stocks.

EURUSD at 20-year lows

The EUR has been weighed down because of the strength of the dollar amid the safe haven flows, but also the renewed fears of gas shortages in the Eurozone as Russia threatens to cut supplies further. EURUSD broke below the key 1.0350 support as we highlighted in our daily note yesterday, and that has brought back focus on parity with the USD. The ECB will continue to remain short of the Fed on tightening and recession worries are greater for the Eurozone economy than the U.S. Sterling bulls will also remain challenged amid the political jitters and a stagflation threat to the UK economy.

JPY acting as a safe haven again, but only until yields remain capped

USDJPY remained capped below 136.40 despite a stronger dollar overnight with the yen once again acting as a safe haven. Still, lower yields had a role to play and the Japanese yen may likely suffer again once inflation trade is back. US 10-year Treasury yields dropped below 2.80% overnight and USDJPY has traded below the 136-mark in the Asian session as the dollar eased. US ISM services data due later today, along with JOLTS job openings. Key focus will still be on FOMC minutes from the June meeting to watch for hints on potential rate hike path beyond the July meeting and the expected peak in interest rates.

What to consider?

The bond market is calling the Fed’s bluff

With increasing anticipation of an incoming recession in the U.S., the front end of the U.S. yield curve is now pricing in a 3.33% terminal rate in the Fed Fund in this rate hike cycle, nearly half-a-percentage-point below the median projection of 3.8% by the Fed in its June FOMC dot-plots.  The 2-year vs 10-year U.S. treasury yield curve has also turned once again inverted, with 10-year t-note yield at 2.83%, 2 basis points below the 2.84% of the 2-year t-notes.

Natural gas surge pushing Europe closer to recession

Dutch TTF gas (TTFMQ2), the European benchmark surged above €160/MWh, thereby extending a rally which resumed last month following an explosion at Freeport LNG in Texas, a major US export hub and after Russia’s Gazprom cut supplies to Germany through its Nord Steam 1 pipeline. Developments that have left many utilities scrambling for supplies that needs to be bought at punitively high prices in the spot market, thereby raising the risk of bankruptcies and recession. Strike action at several fields in Norway starting today and the risk of Russia keeping Nord Stream 1 closed following upcoming seasonal maintenance all adding the risk of storage levels not being filled to the level required to avoid a winter of blackouts and restrictions on consumption.

Dust settles after RBA hiked rates. Here is what you need to know.

One of the biggest risks as we highlighted in our Quarterly Oulook is we have runway inflation which will likely worsen later this year, all while the economy is at risk of derailment. We think food and energy prices will pick later this year, with wheat prices likely to push up as Australian wheat fields have been pelted with rain (while the US also endures unsavoury/drier conditions). Also coal prices, the biggest fresh pressure on Utility bills, will likely move to take up a biggest chunk of CPI. All-in all- higher prices are huge concern not just for the consumer. CPI figures in the forward quarters will probably be higher than expected and thus spook markets. For the mortgage holder, if rates rise to 3.1% as the futures indicate, it will increase mortgage payments by $658 per month (for a $600k mortgage). The median borrow is 21 months ahead of their repayments.  Yet just the 25th percentile of borrowers have no buffer at all. Meaning, 2.5 million Aussies may be forced to sell their homes. This is a concern for banks. Bad debt provisions will swell banks outlooks will be downgraded and then consumer spending will likely be pressure again.

Potential trading and investing ideas to consider?

Gold may be on a technical downtrend

Gold (XAUUSD) is having a tough time finding a bid despite recession concerns picking up. The yellow metal pierced below the $1780 support last night although some recovery is being seen in the Asian session but it still trades below that level. Our technical analyst has confirmed a short and medium-term downtrend. Copper also crashed to its lowest levels since November 2020, and the Copper/Gold ratio implies a dramatically lower 10Y yield going forward.

Aussie dollar crosses in focus again after RBA hike and ahead of tomorrow’s export data

The Aussie dollar (AUDUSD and AUDJPY) is worth watching ahead of tomorrow’s Australian trade data. Exports will be a focus for May as they’re expected to hit a record, despite iron ore exports falling, coal and LNG exports are expected to surge. It’s also worth looking at the AUDJPY as the RBA and BOJ have completely different rates policies. As mentioned yesterday, we see strength against the Yen and weakness in the Australian dollar and this could play out for some time across different pairs. Side note; the AUD vs the Yen (AUDJPY) is a favored cross for many Japanese traders. It’s worth watching.



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ECB's Dovish Shift: Markets Anticipate Softer Policy Guidance

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