All eyes are looking toward the March FOMC meeting

Markets

Asia looks to open higher after US equities found some early footing on Tuesday, despite the widespread weakness overseas, which helped fuel a broad rebound ahead of Wednesday’s FOMC announcement. Volumes were understandably light, along with a low appetite to outlay new risk into today’s main event. The SPX buy the dip thesis could be in for a stern test and if the risk market does not cross that rate hike bridge well, watch out below.

Chinese ADRs finally see a bit of a bid after the recent brutal drawdown. There have been a lot of questions on the moves, though there appears to be no apparent catalyst. Oversold conditions are among the terms being thrown around, which is fair to say given KWEB is -30% in three sessions.

There is not much in the way of updated news – the lack of any further negative communication is being taken as a positive.

OIL 
Oil is trading a bit higher after press reports China will relax some covid restrictions.
And with all the attention given to headline oil and gasoline prices, the dire diesel supply situation is going unnoticed. Before Russia/Ukraine, diesel inventories had fallen to shallow levels as global diesel hit an all-time high in Q4 ’21. Indeed, this is an acute situation in the US and Europe, where inventories fell to the lowest levels in roughly 15 years. 

China, a significant diesel exporter, is cutting its overseas sales to save fuel at home. Saudi Arabia, a considerable diesel supplier to Europe, is now buying rather than selling. So, a gnarly hurricane season could make a horrible distillate situation much worse.
GOLD 
Oil prices were beaten down overnight as the market broadly de-risked correlated war hedges with the drop crude oil influencing the broader commodity space lower. In this interest rate hike environment, gold prices were only benefiting from safe-haven flows that have come on the back of the Russia-Ukraine war.

Once that support completely evaporates, gold loses a significant anchor. That said, I still see gold hanging around the $1850-$1950 range on a residual higher commodity inflation effects before falling below $1800 towards the end of the year as the Fed will keep the pedal to the metal on rate hikes this year.

Over the short term, however, precious metals seem to have had the bulk of the correction for now, so it might be worth buying some dips pre and post FOMC on a short-term reversion trade. But keep stops tight as a break below $1893 could trigger a broader capitulation.

FOREX
JPY 
I expect USDJPY to consolidate ahead of the FOMC meeting. That said, and consistent with my policy tempered view on JPY weakness, Japanese Finance Minister Suzuki indicated he would continue to closely monitor the weak JPY’s impact on the economy and that stability in FX markets was important. These comments are in the tradition of Japanese officials not wanting significant short-term volatility in JPY. However, for the BoJ, the watch level is higher than 120

There is not much room to maneuver with seven Fed rate hikes baked in this year. But the key will be the shift higher in the Fed terminal rate, which could drive market rate hike expectation further out along the curve and support USDJPY higher.

Still, the yen’s sensitivity to US rate hikes cannot last much longer; oil effects are linear but partial; local investors are showing little interest in new overseas asset allocations. If anything, there may even be political support for FX hedging existing assets. Overall, anything above 120, it becomes easier to make the case that the yen is fundamentally too weak.

From Stephen Innes Managing Partner at SPI Asset Management