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On October 11, according to the Philippine Institute of Volcanology and Seismology, a magnitude 5.8 earthquake occurred in the sea east of Davao Oriental Province in southern Philippines at around 18:27 local time on October 11, with a focal depth of 10 kilometers.UK Ministry of Defence: Two Royal Air Force aircraft carried out a 12-hour mission on Thursday alongside US and NATO partners to patrol the Russian border.Sudanese residents said drones from Sudans Rapid Support Forces killed at least 12 people at a shelter in El Fasher, while activist groups said the death toll had reached dozens.Ukrainian energy company DTEK: Power supply has been restored to 240,000 households in Ukraines Odessa region after Russias overnight attack.According to a report from Guoxin Securities on the gold industry on October 11th, the current gold price surge is primarily driven by expectations of a Federal Reserve rate cut, geopolitical risks, and surging investment demand, signaling a new period of strength in the gold market. Regarding short-term investment recommendations, focus on event catalysts, such as the October Federal Reserve meeting minutes and US inflation data (an unexpected rebound in CPI could trigger volatility). In the short term, prices may fluctuate briefly above 3,800, with specific performance fluctuating depending on the data. Regarding medium- to long-term allocations, it is recommended to allocate 10%-15% of your portfolio to gold assets to hedge risk and increase diversification.

Analysis of Oil, the Japanese Yen, and the Australian Dollar – Nowadays, It's Getting Easier to Locate Air Pockets

Drake Hampton

Apr 06, 2022 10:06

Fundamental Analysis of Markets

Tuesday, US equities plummeted, with the S&P 500 losing 1.3 percent. US 10-year rates increased 15 basis points to 2.55 percent after Fed Governor Brainard cited Paul Volcker on runaway inflation and urged the Fed to rapidly reduce its balance sheet (more below). 2yr yields increased 9bps, reintroducing marginally positive territory to 2s10s. Germany's 10-year bunds increased 11 basis points to 0.61 percent. Oil is down 1.7%.


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Equities fell sharply as incoming Fed Vice Chairman Lael Brainard made more hawkish-than-expected comments about the rate of balance sheet reduction, driving the UST 10-year yield higher.

 

Nothing is conclusive, but the Federal Reserve appears to be on track for an aggressive rate hike path in the near term. Thus, with the aggressive Fed once again biting at stock market investors' heels, US stocks plummeted overnight.

 

Despite the tape's risk-off move, financials remain a relative outperformer (on a margin). The big increase in the US 10y +16bp and the steepening in the 2s10s overshadow the tape's stagflation concerns-tilt.

 

Meanwhile, the market may have expected Fed Governor Brainard to deliver more balanced remarks — instead, they received statements on the hawkish side from someone like Brainard. She was not excessively hawkish, but she also did not give anything on which the doves could hold.

 

Liquidity remains scarce, and no one appears willing to take the other side as air pockets become more accessible. 

Fundamental Analysis of Oil

According to reports, the EU intends to propose a phase-down of mandatory coal imports from Russia, with details still being worked out. Additionally, the EU is anticipated to bar the majority of Russian trucks and ships from entering the bloc.

 

Oil is slightly down as the market views the proposed penalties against Russia as being limited to coal, while leaders remain divided on how to handle Russian crude. US National Security Advisor Jake Sullivan, however, has stated that Washington will announce additional sanctions on Russia this week, including additional oil sanctions.

 

The United States' appeal for a coordinated SPR release last week fell on deaf ears, with no OECD countries adopting the idea thus far. Although the Japanese Industry Minister stated that the details of the IEA-led reserve release are still being worked out, oil prices have remained relatively stable.

Forex

Central banks are still attempting to strike a balance between combating inflationary supply shocks on the one hand and not worsening growth or demand shocks on the other. Europe appears to be having the most difficulties balancing the two, which means Thursday's ECB minutes will be closely watched. They come ahead of the current FOMC minutes, which are scheduled to be released later today. On that call, and in light of Vice-Chair Leal Brainard's remarks yesterday as a plate warmer, we should anticipate hawkish FOMC minutes focused on accelerating the run-off of the balance sheet.

Fundamental Analysis of the Australian Dollar 

The Australian rates market underperformed on a less dovish RBA. Economists now anticipate a May or June rate hike by the RBA. Nonetheless, traders can shrug their shoulders, as the AUD has been one of the best performing G10 currencies over the last month, owing to strengthening terms of trade and more aggressive RBA pricing, with a cash rate of roughly 3.25 percent priced by end-2023.

 

The rates markets, on the other hand, are suddenly second guessing themselves, and for good cause. A 3.25 percent cash rate would increase the mortgage repayment share of income for a new borrower to an equal record high of 35% (70 percent pre-tax) and cause a housing market correction, so throwing the economy into recession and prompting an RBA "stop out" policy.

 

Fortunately for bulls of the AUD, the rate hike channel is only one component of the long AUD trade. Nonetheless, terms of trade are a big driver and should support the AUD on falls, even more so now that China is attempting to shift its policy lever in favor of commodities.

Fundamental Analysis of the Japanese Yen

USD/JPY sold off overnight from 122.80/90 to a low of 122.375 before establishing a foundation and bouncing. While official comments may evoke a kneejerk reaction on the spot, the risk of the BoJ changing policy or intervening directly in FX markets is low.

 

USD/JPY should remain supported on dips as both US rates and energy prices continue to rise.