The run up to the FOMC rate decision tonight is proving to be a tumultuous time for the markets and global economy. The ECB have announced an unscheduled meeting to discuss the current market conditions which are seeing global yields rising exponentially as bonds sell-off. The Bank of Japan offered an additional emergency bond buying operation with an unlimited scope to how many 10-year JGB’s at a fixed yield they’ll take on this week. The fall in the price of Japanese government bonds caused a circuit breaker to trip at the Tokyo Stock exchange.
The above US yields chart shows that the 20-year yields have spiked higher, but the 3-year to the 30-year is an inverted curve, which is the clearest signal that the market anticipates the future of the markets as being progressively worse under this current monetary policy.
The price of Brent has dropped from the $120 per barrel level after the American Petroleum Institute (API) reported last night that US crude oil inventories increased by 736,000 barrels in the week ending June 10. Demand worries are expected to affect the price of oil going forward as reports have now warned that GDP and energy demand is expected to drop in the US in 2022. As producers get more concerned that the demand is going to drop off, they will begin to hedge more at these elevated prices. It is then up to the speculators who are long to absorb the selling pressure or decide to close out their positions. The commercials on the COT report have over the last month added to their short positioning but there hasn’t yet been a dramatic shift. On the opposite side of the world, Australia’s energy market operator is setting prices to ensure a reliable and secure electricity supply, as the national wholesale electricity market has been suspended.
China’s National Bureau of Statistics (NBS) released a couple of reports this morning. Retail sales of consumer goods for May rose despite a -6.7% drop from the same period last year to 3,354.7 billion yuan. China’s industrial production also advanced 0.7% in May year-on-year to land above analysts’ projections of -0.7%.
With the market anticipating a 75bps rate hike tonight from the Fed, the risk event that I anticipate is a yield sell-off that drags the US dollar lower, on the FOMC’s decision not to raise by more than 50bps. The US dollar index has swept the recent swing high, which is confluent with a Fibonacci extension. This could be a bull trap, which results in the US dollar back filling the move from $102, when the market started pricing in a larger rate hike. If the market gets the 75bps rate hike, there is also a case for that decision already being priced in. The MACD shows that momentum has been building to the upside which will help the market grind higher, should that be the direction after tonight. It should also help slow the fall on any disappointment.
The EURUSD had bounced from the lows seen this week and looking left on the GBPUSD we’ve filled in an imbalance area and found support. Both charts could move higher on a weaker dollar but both related economies are not firing on all cylinders, so I still have a bearish bias. That would change if the market structure showed higher highs and higher lows, but as we’re a long way off from that there will be plenty of notice should things change.