"EURGBP, GBPUSD – the Bank of England is seen hiking rates at this Thursday’s meeting (...) " | Saxo Bank
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Summary: The market was crushed to new cycle lows yesterday by the market more fully pricing in the risk of super-size hikes from the Fed at the FOMC meeting this Wednesday and in July, with a 75 basis point hike now seen as a certainty tomorrow and very likely for the July meeting. This would be the first time the Fed has hiked more than 50 basis points since 1994. Some argue that the Fed may need to shock the market with a 100 basis point move. This has the market increasingly concerned that the Fed’s accelerated tightening will lead to a recession. Crude oil holding up as supply concerns outweigh slowdown risks with gold challenged by sharply higher real yields.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) were headed lower in yesterday’s session with Nasdaq 100 futures down 4.3% hitting a fresh new low for the cycle at the 11,327 level. The VIX forward curve is getting more inverted to levels around where a vicious volatility and liquidity driven selloff could start, so we remind everyone to be careful now. US equity futures are attempting a rebound in early trading hours here in Europe, which we believe is linked to the improvement in cryptocurrencies as no margin call on Microstrategy has surfaced despite Bitcoin breaking below 21,000.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) stabilised after an initial selloff following a massive risk-off day overnight in the U.S. Hang Seng Index was flat and CSI300 was down less than 1% as of writing. Alibaba (09988) was down 3% while Meituan (03690) climbed 2%. Semiconductors traded weak, with leading names down 2% to 4%. In addition to the prospect of a more hawkish Fed, potential resurgence of COVID-19 breakouts and restrengthening of pandemic control measures in China is another risk that keep investors awake at night.
EURGBP, GBPUSD – the Bank of England is seen hiking rates at this Thursday’s meeting, with the market still leaning for a 25 basis point move, which looks out of touch with the market’s shift in the expected FOMC move this week. The Bank of England has loudly fretted the risk of an incoming recession and the unsuitability of its policy tools for addressing the cost-of-living and supply-side constraints that are dogging the UK economic outlook but may be forced to hike 50 basis points on Thursday to avoid the inflationary risks of aggravated currency weakness – and it will be interesting to watch whether that FX factor is rising in its observations. GBPUSD has poked to new cycle lows below 1.2150 ahead of the massive 1.2000 level, while EURGBP has remained bottled up below the key 0.8600 level.
EURUSD and USD pairs – the rush to price two 75 basis points hikes at the next two FOMC meetings has driven a sharp USD rally that has taken it back toward the cycle highs and to new highs this week versus the JPY. For EURUSD the focus is on the 1.0350 low, which lies just ahead of the 1.0341 low of 2017, the lowest level in over 19 years. The market will key off the FOMC decision and guidance – with the Fed either needing to surprise with a 100 basis point rate hike or, regardless, for market sentiment to continue to deteriorate amid widespread deleveraging for the USD to continue higher. Yesterday, the Dollar Index hit its highest level in almost 20 years.
Crude oil (OILUKAUG22 & OILUSJUL22) showed once again during Monday’s market rout in stocks and bonds that the sector remains relatively immune from the potentially negative demand impact of an economic slowdown and China’s current struggle with Covid19 outbreaks. Simply because the outlook for supply looks equally challenging with OPEC struggling to increase production, US producers adopting a much more disciplined approach, sanctions against Russia reducing flows to the US and Europe, and not least the latest news from Libya where another political crisis has almost halted production with ports and fields shut down. Monthly oil market reports from OPEC today and the IEA tomorrow should give the market some additional guidance from two major forecasters.
Gold (XAUUSD) tanked on Monday after heavy US treasury selling lifted yields at a historic pace. Since Fridays higher than expected US CPI print, the market has been pricing in an even more aggressive pace of rate hikes, potentially starting with 75 basis points on Wednesday. The US 10-year real yield has reached a +3 year high at 0.68%, and back then gold traded around $1300, more than 500 dollars below the current level, and it has raised concerns about a deeper selloff. Combined with the stronger dollar, there is no doubt, the market will be trading nervously ahead of the FOMC meeting. However, developments in ETFs should provide some guidance to whether investors worrying about stagflation are prepared to ride out the current storm. Key support in the $1780 area with resistance at $1844.
US Treasuries (TLT, IEF) US treasury yields jumped yet again yesterday, with the 10-year yield firmly clearing the 3.26% high from 2018 and trading to new 11-year highs north of 3.4%. That sharp gain was outpaced at the short-end as the market has rushed to price in super-size hikes from the Fed this week and at the July meeting, taking the slope of the US yield curve negative for the second time for this cycle after an episode in late March and early April as the market predicts this will eventually lead to recession.
What is going on?
April UK GDP contracted 0.3 %. This is worse than expected (+0.2 % and prior minus 0.1 %). The drop is partially explained by the fact the UK government rolled back overall state support more quickly than other G7 countries (think France or Germany for instance). This is a worrying figure for the Bank of England. Extra government support will likely be needed to avoid a consumer-led recession.
The task for Bank of Japan keeps getting tougher. USDJPY is back below the key resistance at 135.15 but the yields on long-dated bonds still keep the threat of a Bank of Japan (BOJ) policy tweak alive. The central bank boosted scheduled purchases of five-to-10-year debt to 800 billion yen ($6 billion) Tuesday from an expected 500 billion yen after the benchmark yield climbed to 0.255%, above the upper end of its 0.25% tolerance band. The selling threat for longer than 10-year bonds still continues and may prompt BOJ to conduct an unscheduled operation. The BoJ meets this Friday.
Crypto chaos on crypto lending firm Celsius halting withdrawals and concerns that Microstrategy, a large holder of Bitcoins, will be forced to liquidate some of its holdings on margin calls if the price drops below an unknown level – thought to be somewhere near 21,000, which is around the overnight lows.
Oracle shares rise 15% on strong earnings. The old technology companies have not died yet as exemplified by Oracle’s FY22 Q4 earnings releases last night. Operating income was $5.6bn vs est. $5.4bn and revenue was $11.84bn vs est. $11.66bn, but it was the expected FY23 Q1 revenue growth of 20-22% in constant currency that was surprising the market driven by strong cloud performance.
What are we watching next?
FOMC Meeting tomorrow is a critical event risk as the market has to decide if the Fed can ever really catch up with the curve or whether the backdrop is simply forcing to the Fed to continue to do what it has to do to get ahead of galloping inflation and now inflation expectations, in other words, to continue down the road of tightening “until something breaks”.
U.S. primaries are held in Maine, Nevada, North Dakota and South Carolina, as part of the 2022 midterm election.
ECB’s Isabel Schnabel will give a speech at the French university Université Paris 1 Pantheon-Sorbonne today, focusing on monetary policy. She is one of the key ECB members. Expect interesting insights on the short-term evolution of monetary policy in the eurozone.
Risk of biggest “stress point” in global policy breaking: BoJ yield-curve-control policy. Huge volatility risk in FX if the Bank of Japan finally abandons this policy, something that could happen at any time, for example at this Friday’s Bank of Japan meeting, but Governor Kuroda and company could try to hang on for a bit longer...
VIX forward curve. The curve is now 8% inverted with the spot (VIX Index) surging indicating more stress in the system. The VIX forward curve has still not reached capitulation levels so based on the volatility market there is still room for a further leg down in US equities.
Earnings Watch. Today’s earnings focus is DiDi Global, the Chinese equivalent of Uber, which is down 85% since its IPO as mobility stocks have been hit on their equity valuation by rising operating costs and higher interest rates impacting valuation.
- Tuesday: DiDi Global, Ferguson, Ashtead
- Wednesday: JD Sports
- Thursday: Adobe, Kroger, Jalma
Economic calendar highlights for today (times GMT)
0800 – Norway May Region Survey
0900 – Germany Jun. ZEW Survey
1000 – US May NFIB Small Business Optimism survey
1230 – US May PPI
During the day: OPEC’s Oil Market Report
1700 – ECB's Schnabel to speak
2030 – API's Weekly crude and fuel stock report
0030 – Australia Jun. Westpac Consumer Confidence
0120 – China Rate Decision
0200 – China May Industrial Production/Retail Sales
Source: Financial Markets Today: Quick Take – June 10, 2022 | Saxo Group (home.saxo)
