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Market Overview

07/07/22, 09:05

Smiling Young Businessman

Stephen Innes

SPI Asset Management

With more than 25 years of experience trading both voice and electronic markets, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets. He is regularly called upon by leading TV, radio and print publications to offer views on the financial markets. Stephen has appeared extensively on global news channels such as Bloomberg, BBC, Reuters, CNBC, Sky TV, Your Money, Channel News Asia, CNN, France 24 and ASTRO Awani. As well as published in prestigious publications, the New York Times, Bloomberg, Reuters, AFP, AP, Wall Street Journal and The Economist, among others.

Fed And Markets In Data Dependent Mode

Despite hawkish-tinged FOMC minutes, the good news is that stocks rallied as runaway commodity and oil prices are sinking—both of which, the Fed was hoping to tame with its rate hike. As a result inflation expectations are coming under control.

Still, the market is looking through for any excuse for the Fed to pause. But more robust macro data in the US yesterday is not providing that excuse, and Fed pricing did not budge. So for now, the rates pricing keeps the hiking path steady despite the recent downdraft in commodities.

However, we should take these small wins. The fall in oil prices has likely sent the VIX to its lowest level in a month which is positive for stocks.

The Fed and the market are now in a data-dependent mode. CPI and inflation expectations matter, but I think their impact on the market could be limited given the recent pullback in gasoline prices and the slowdown in freight data.

What matters from here is growth data like nonfarm payrolls on Friday and retail sales next week. Also, today's weekly EIA report will give us more colour on gasoline consumption.

So, stocks are bouncing higher with the global market backdrop not quite as gloomy as it was on Tuesday; the most significant challenge for markets right now is to break out of this negative feedback loop, with recession risk and stubbornly hawkish Fed prices cratering the runway.

Oil Prices

Oil prices extended their recession-driven washout after the API reported a build for crude oil of 3.825 million barrels this week. In comparison, analysts predicted a draw of 1.1 million barrels.

Oil is getting decimated with little new information about production or consumption. Still, with commodity traders turning very risk-averse due to growing demand and the still hawkish Fed policy concerns, the recessionary headline risk is like an anvil around the market's neck.

While lockdown in China provides sour eye candy and triggers fears of what happens when winter hits, it has not dented their thirst for cheap Russian crude which is triggering a price response from Saudi Arabia and others, offering some grades of crude at a steep discount as more cheap Russian oil flows spark intense competition. Cleary OPEC is getting antsy about losing market share.

Because this is a commodity-wide breakdown, with many big desks forced to close out risk as reflected in the latest open interest report, the extent to which the decline in oil prices could reflect technical margin-call-related factors on the broader commodity sell-off may determine how long the rout lasts.

And of course, the ensuing lack of liquidity from major players is not helping the market either due to the lack of a steady buy-on-dip mantra; instead, traders are waving the white flag sell-on rally signal.

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