Markets 4x4: What caught our eye in Asian trade

Welcome to Markets 4x4, post delivered daily by 4pm in Sydney detailing the key macro themes from the Asian session.

Here’s what you need to know for Thursday, October 26

Crude powering yields and FX

Crude oil should be on the watchlist given how influential it’s proving to be across multiple asset classes, especially bonds and FX. You need only look at movements in crude, dollar and Treasury yields over the past week, with gyrations in the former playing an unusually outsized role in determining what happens with the latter two. Given the United States is a major global oil producer and the flow through of higher energy prices to inflation, the relationship is not all that surprising. But what is surprising is how strong it seems to be, especially on days devoid of big macro events.

About that RBA rate hike…

It felt like an RBA rate hike in November was close to a lock this time yesterday. We’d just had a hot quarterly inflation report following several hawkish warnings from the RBA about the risk that rates may need to increase again. But a lot can change in 24 hours.

When almost everyone expected her to sound hawkish, and potentially give a nod to market pricing, RBA Governor Michelle Bullock did the exact opposite, telling Senators the bank had not determined whether the inflation outlook had changed materially and that it had not yet decided whether or not to raise rates.

The reaction was swift with probability of a25 basis point rate hike Tuesday week being sliced in half to as low as 30%, contributing to the AUD/USD tumbling to fresh 2023 lows. Not even Westpac Bank, with former RBA Assistant Governor Luci Ellis now forecasting a hike, was enough to stem the tide moving towards a November hold. As it stands, that outcome is now priced around 60%.

Yen-tervention risk ramps

Asia woke to news USD/JPY had broken through 150 and stayed there, encouraging traders to target layers of stops placed above figure following the spectacular 270 pip plunge seen the last time it traded above there. With nothing other than jawboning from the usual suspects we’ve heard umpteen times before, it was like stealing candy from a baby with layer after layer of stops steamrolled over the course of the session.

While the warnings from policymakers were nothing new, the frequency picked up relative to usual standard, suggesting we may be getting closer to another “rate check” or actual BOJ intervention.

Whether it’s sooner or later, arrives or not, the key takeaway is the BOJ is facing one almighty market test. It wants its cake and to eat it too, wanting to support the yen while simultaneously capping Japanese government bond yields, widening rate differentials with other monetary jurisdictions. It may be forced to choose one or the other, not both. Next week’s BOJ meeting looms large.

Now or never for tech

Tech earnings in the States have been decent so far. But when you have seven giant companies priced to absolute perfection, decent can quickly turn to catastrophic when there’s even minor disappointment. We’re discovering that right now. Combined with surging bond yields and persistent unease towards the global economic outlook, hammering the value of future cash flows while simultaneously generating downside risks for earnings, the Nasdaq 100 rally is facing a potential moment of truth, sitting right on key support that could easily spark a significant downside move should it give way. Amazon, for one, needs to deliver tonight.

Market of the day: Gold

The US dollar is flying high, so too real bond yields. They’re traditional enemies for gold yet bullion keeps on rallying. There’s probably a message in that. Out of the stable of traditional safe havens, gold has stood tall in October when others have faltered.

Having come within a couple of bucks of hitting $2000 on Friday, the price action this week suggests traders are itching to have another crack, buying dips below prior channel resistance on multiple occasions, including Wednesday.

Should $2000 be successfully breached, there’s not a lot of major resistance evidence until $2048.7. Beyond that, we start talking the cluster of 2021, 2022 and 2023 highs above $2070. On the downside, dips below former channel resistance located around $1967 have been bought recently. A more pronounced support level is found at $1946. RSI and MACD have broken their respective downtrends, suggesting momentum is switching to the upside. However, for the former, it suggests gold is nearing overbought territory in the near-term.

-- Written by David Scutt

Follow David on Twitter @scutty