Circularity Stagflation Problems, Euro Falls Like A Faulty Hot Air Balloon And Oil Tumbles

MARKETS

Stocks are selling again with plenty of macro data points to digest ahead of the CPI later today, including the regressing China Covid situation and the hawkish pivot from several central banks this week triggering higher rates on stock markets, a weaker negative feedback loop. Not to mention the growing number of corporate earnings warnings that as stocks swell, they tend not to age well.

With monetary policy fueling lower growth expectations, concerns about circularity stagflation are building as central banks continue to surprise hawkers with no end in sight until inflation moves more convincingly closer to the goal. Indeed, this week highlights a broader point about central banks’ implicit comfort in accepting lower asset prices.

But worryingly, markets now fear that the US CPI may have peaked in March, and indeed there could be even higher drawdowns in the months ahead. Continued strong inflation impressions would put the FOMC under pressure to accelerate rate hikes, which would provide a massive sounding board for the hard landing crowd.

Either way, this stagflation narrative has started to play out in the larger macro, with curves flattening and commodities struggling to advance as the dollar remains high. It is therefore not surprising to see sectors of the stock market sensitive to global growth being massively affected.

OIL

After getting rid of China’s lockdown, for the most part, the oil complex has accepted the stop and start of the Chinese economy; Crude Oil is a little hit due to the strengthening of the US Dollar as fears of stagflation again flip broader markets.

And another suffocating point for energy bulls is that since the ongoing global release of strategic reserves and the recent increase in OPEC+ production quotas do little to cool oil prices, they think U.S. policymakers may grow increasingly desperate ahead of the November election and may even allow Venezuela to export to Europe, which could be a price cap.

But the clearest reading for oil markets, regardless of what equity markets do, is that as we head into the US summer season, tight oil and commodity markets should still support oil.

Meanwhile, an explosion and fire at the Freeport LNG terminal is supporting natural gas prices and having a bullish ripple effect across the energy spectrum. The United States has been the largest LNG exporter this year and has played an important role in easing some pressures on Europe as Russian gas exports have fallen.

The shutdown of Freeport will support prices in the short term and the recovery in Asian demand could mean fewer LNG cargoes to redirect to Europe ahead of the 2022/23 winter season. The situation for gas storage in Europe looks less dramatic than at the start of the year, but considerable risks remain in the coming months, which means that it may be too early to expect normalization gas prices.

FRIDAY FOREX FOLLIE

USD

The euro is falling like a faulty hot air balloon where action speaks louder than words.

The message from the ECB was clear about leaving the door open for bigger hikes due to concerns about wage growth and the admission of flawed forecasts. But above all, the much-talked-about spread control tool was just hot air. After all, any purchase program would have been difficult to justify in the context of an APP exit and negative rates and PEPP reinvestments would simply not be enough.

The markets anticipated a rise of 50 basis points in July, whereas a rise of 25 basis points in July was already a fatality for the market. Now that the ECB has outlined its intentions regarding July being on the table, it is now a case of action that speaks louder than words

Why the ECB got into a corner by committing more or less to 25 basis points is unclear, but if it sees the market worrying about peripheral spreads, it is unlikely that it reached 50 basis points in July before having resolved this thanks to some control of spreads. tool.

CNH

Time for the USDJPY catch-up trade?

One of the potential drivers of the USDCNH rally has been CNHJPY reaching 20. With CNHJPY up around 20 after USDJPY’s last move, it is worth adding positions again long, given the past tendency of FX traders to catch up with the USDJPY.

BODY

In a worrying signal, the Loonie is lower despite a hawkish Tiff. And for us, who have pared our FX chops trading the CAD on Bay Street, and who call the loonie the “truth,” this is a dire sign for global growth.

Bank of Canada Governor Tiff Macklem sounded belligerent on the wires, saying the odds of rates above 3% have risen and bigger or bigger rate hikes could be on the cards, but the Canadian dollar has fallen sharply. underperformed.

For the central bank fraternity concerned with frontloading rates, as we move into chapter two of the current playbook, it is now stated that aggressive tightening is likely to cause a significant decline in housing, consumer confidence and consumption, which will eventually push their respective economies into recession and send equities plummeting.

USD

Even temporarily losing China’s tailwind exposes the underbelly of the AUD, a real estate bubble sitting atop an iron ore mine.

The RBA will continue its front-loading rate hikes, with a firm focus on controlling inflation. When the fixing periods end, these increases will hit Mike Tyson like a punch in the face of Australian homeowners, some of the most indebted property owners on the planet. Aggressive RBA tightening risks a more secular decline in housing and a hard landing for the economy.