MARKETS

 I am not sure of a better way to describe price action than to tell it as risk sentiment is on a Fed rate hike impulse yo-yo string as this morning, at least it is the return of the “bad news is good news, “or maybe it’s just the absence of overly good news. Front end rate hike pressure that had built the day prior on robust economic data immediately eased off after a weaker than expected May ADP employment print, suggesting things are cooling off.

Seemingly, anything that keeps the FED from a more aggressive rate-hiking path appears to be greeted with open arms by equities.

Tech is leading the tape higher. Mega Caps remained well bid and out the risk curve pockets within Growth squeezing higher, despite Vice-Chair and super Fed dove Leal Brainard beating the rate hike drum. Suggesting even the September Fed rate hikes are pretty well digested.

China’s Covid situation is fluid, but it should help further ease supply chain issues/ concerns in the near term. And take the sharp edge off inflation concerns.

One would think this market would be better for sale, given the daily stew is constantly accented with anecdotal doom and gloom. However, some of the bids today may be systematic as the VIX drops below 25 for the 1st time in 6 weeks, which usually gets the machines revving up the buy engines.

However, a pullback in crude would be crucial for any prolonged risk rally, given implications for inflation expectations. It is otherwise hard to see a meaningful Fed shift in September, not to mention the negative consequences for Europe, with the ECB increasingly vocal on hiking aggressively even though the root causes of inflation in Europe are supply-side and mainly energy.

After the Fed’s next two meetings, which will likely see 50bp hikes at each, the Fed is then likely to move into ” assessing conditions mode,” which could become the most significant market mover. Any softening of inflation numbers is expected to be the primary source of volatility across asset classes, leading to higher stocks.

China, Hong Kong, and Taiwan markets will be closed on Friday for the dragon boat festival and reopen Monday. To counter growing economic headwinds, policy supports remain primary catalysts, and that support should speak for itself.

OIL

Again, more ink was spilt on the OPEC narrative than the group will deliver to the market.

The group, led by Saudi Arabia, has been doggedly sticking to its plan for gradual monthly supply increases even after the invasion of Ukraine by Russia.

The increase would be divided proportionally between members in the usual way, delegates said. Countries that have been unable to raise production, such as Angola, Nigeria and most recently Russia, would still be allocated a higher quota. That could mean that the actual supply boosts are smaller than the official figure, as in recent months.

To put it another way, traders think the incremental increase is too small relative to the growing downside supply risks from the EU embargo amid an expected increased demand from China.

Oil trader then donned their rally caps after the EIA report showed crude oil inventories down 5068k bbl last week, which is more significant than the -2100k bbl estimated. Even removing the seasonality effect, the reduction in crude oil stocks was still considerable, about 4.2m bbl.

 FOREX

Traders hit the pause button on this week’s USD rally. European yields rose across the board on the back of strong Switzerland CPI ECB’s Villeroy saying inflation is too strong and broad, and even Riksbank’s Jansson saying more rate hikes than planned may be warranted. Though the rates market is trimming probabilities of “central bank puts”, equities reacted resiliently, suggesting stock investors are digesting these hikes well, making for a reasonable USD lower backdrop.

While no one has a crystal ball into the NFP – tomorrow, things can go in the opposite direction on any solid print. It is just the kind of market we are in where stock and bond market interactions are always at the nexus of currency determination

Stephen Innes

Managing Partner

SPI  ASSET MANAGEMENT