Markets face the perfect storm of central banks tightening and weakening economic momentum; Bank of Japan defies tightening pressures while Swiss central bank steals the show

Gold Has A Chance For The Rejection Of The Support

Summary:  Markets seem to have finally digested the Fed’s 75bps rate hike but along came the rising risks of an economic slowdown after a series of disappointing US macro data. Bank of Japan still avoided tightening pressure, although a rare mention to FX has been made in the statement. Swiss National Bank (SNB) threw a surprise with a 50bps rate hike, while the BOE stuck to 25bps.

What’s happening in markets?

Big Picture

It seems the economy is at a boiling point with high growth and high employment. But there is a strong chance carnage is coming as central banks want to contain spiralling inflation by aggressively raising rates. The biggest risk to developed markets (the US, Australia, UK) is that consumer discretionary spending could crumble and property price growth could fall over 20%. This will unravel the wealth effect, causing GPD to further shrink; with business and personal spending to dwindle at a time when business and consumer confidence is falling in anticipation of more aggressive rate hikes. Company forward earnings for 2022 and 2023 are likely to slow, so we expect companies to downgrade earnings and more businesses to cut staff given the financial strain. Tesla’s 10% staff cuts have already began, Elon is calling for Twitter to cut staff numbers. Property groups in the US (Redfin, Compass) are cutting staff by 8-10%. Revlon will probably follow after filing for Bankruptcy. And given banks, businesses, and consumers are strained, we remain very bearish and think the US and Australian markets are likely to fall sharply. As such, we urge clients should exercise utmost caution, as we think global markets could fall just like we saw in the 1970s; we’ve been forewarning this since November last year. In this environment, we believe clients should consider being defensive, and look at what outperforms in recessionary periods.

Asian markets respond to Fed’s 75bps rate hike today

Following the Wall Street selloff, Asia Pacific markets were mostly in the red to end the week with losses. Markets finally reacted to the Fed’s 75bps this week and erased the post-Fed gains, but also visible for clear concerns on slowdown in the economy as macro data continued to disappoint. Japan’s Nikkei 225 (N225.I) and Australia’s ASX200 were both down over 2% in the morning, recording losses of 7-8% for the week. In Australia, the ASX200 has fallen 2.2% and is now down collectively 11% in the last three months, but we see the pain for the broad market getting much worse for now. The mining sector today is leading the market lower as risks emerged that China will keep its zero-covid policy the same till next year. So, the Iron Ore (SCOA) price fell for the 7th day losing 3% today, dragging down iron ore stock like Champion Iron (CIA) 6% and Rio Tinto (RIO) 5%. Meanwhile, investors chase the safe-haven play, buying into gold mining giants like Newcrest Mining (NCM), St Barbara (SBM), Evolution Mining (EVN) rising 3-5%, and all flagging technical rallies are ahead. Singapore’s STI (ES3) was down 0.6% in the morning, and over -3% for the week. More pain still likely ahead in the equity markets as higher energy and food inflation continues to challenge Fed’s hawkishness.

Hong Kong and mainland China equity markets stabilized

Despite ugly selloffs in overseas markets overnight, China and HK markets were somewhat stable. As of writing, Hang Seng Index (HSI.I) and CSI300 (000300.I) were up close to 1%. The fall in property prices in the top 70 cities slowed to -0.17% MoM (April: -0.3%).  Property prices in tier-1 cities rose 0.35% MoM and the declines in Tier-2 and lower-tier cities moderated.  On the other hand, JD.COM’s (09618) JD Retail CEO told Bloomberg that recovery in consumption in China had been slow from the reopening of cities, such as Shanghai.  The company was expecting that it would take a long time for household consumption to recover as the economy and household income had been severely hit over this wave of lockdown. 

What to consider?

US economic indicators weaken

US building permits and housing starts eased in May to 1.695mn and 1.549mn respectively while the initial jobless claims were at 229k versus 217k expected. Further, Philadelphia Fed manufacturing survey printed a negative figure of -3.3 for June, the first such contraction since May 2020. More so, the future activity index was contractionary for the first time since the GFC.

Bank of Japan defies the global tightening wave

The Bank of Japan maintained ultralow interest rates on Friday, confirming that it won't join the Federal Reserve and other major global central banks in tightening monetary policy. The Japanese central bank kept its target for short-term interest rates at -0.1% and its target for the 10-year Japanese government-bond yield at around zero. While the central bank said we will take additional easing measures without hesitation if needed, there was a rare reference to the yen weakness. USDJPY rose from 132.50 to 134.63 but reversed most of the gains ahead of Kuroda’s press conference.

Bank of England’s smaller hike to keep future ammunition

BOE raised rates by 25bps, which was the lower end of the expectations. But GBPUSD rose to 1.2400 because the vote split was 6-3 with three calling for a 50bps rate hike and the door for a bigger August hike was left open given that the CPI inflation is expected to print over 9% during the next few months and may rise further in Q4. Still, the risk of a slowdown is higher for the UK and a slower pace of rate hikes may remain more sustainable.

SNB (Swiss central bank) joins the tightening party

The SNB surprised with a 50bps rate hike, and has kept the room for further rate hikes as well. SNB is by far one of the most dovish central bank and it was their first hike in nearly 15 years. It indicated the move was an attempt to ward off inflationary pressures as food and fuel prices rise worldwide. USDCHF slid to lows of 0.9632 from parity while EURCHF plunged to 1.02 from 1.045 previously.

Potential trading and investing ideas to consider?

Fed blackout period ending

The Fed speakers will be back in action as the blackout period ends. Chair Powell is speaking later today at the inaugural conference on the International Roles of the US Dollar. Other Fed speakers are due as well including Esther George who voted for a 50bps rate hike this week. Any concerns on economic slowdown could mean equities could reverse some of the massive selloffs seen yesterday.

Commodity investors move out of industrial metals into safe haven commodities

Industrial Commodities (oil, gas, coal, iron ore) remain under heavy pressure and are taking a haircut. The big pivot comes as China advised its covid restrictions probably won’t ease till next year. Reflect that most stock market growth in the US and Australia has come from commodity stocks. But these commodities are taking a haircut, given commodity prices are starting to pivot lower expecting the China economic rebound trade to not kick off this year given China’s warning. So as its HY in US and EOFY in Australia, many commodity equity investors are taking profits in industrial metals given the downward pressure for now (iron ore, copper, aluminum, etc), and are moving to precious metals that are likely supported by rising stagflation risks, like gold. That being said, gold may act as a safe haven store of wealth, but so is the USD and the USD and Gold traditionally have an inverse relationship.

Gold Has A Chance For The Rejection Of The Support

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