Asian Pacific markets slide

US stock index futures were down sharply in early trade on Friday. The S&P 500 broke under 6,600, a level which has offered some mild support recently, to trade at its worst level in four months. The selloff coincided with a jump in crude oil, which reversed earlier weakness this morning.

Source: TN Trader

In fact, sentiment had been mildly bullish going into the session after Israeli Prime Minister Benjamin Netanyahu stated that Israel was assisting efforts to reopen the Strait of Hormuz and suggested Iran had lost key military capabilities. The comments helped to ease oil prices and raised hopes that the conflict may conclude sooner than expected.

Investors were also relieved by yesterday afternoon’s rebound in equities following an earlier decline. This boosted the view that the US majors were stabilising after Wednesday’s sharp selloff, exacerbated by a hawkish FOMC meeting. The Federal Reserve kept rates on hold as expected. But the statement, along with the FOMC’s Summary of Economic Projections and Fed Chair Jerome Powell’s press conference, caused a notable shift in interest rate forecasts.

According to the CME’s FedWatch Tool, the probability of no rate cut this year now stands at 80%, up from 40% before the meeting. Bear in mind that as recently as last month, investors were pricing in two 25 basis points-worth of rate cuts this year.

Add in the uncertainty as the US/Israeli war against Iran now approaches the end of its third week, contributing to fears that markets could be under-pricing the economic and earnings impact of sustained high energy costs and geopolitical instability.

Wednesday’s shocking PPI numbers, which measure wholesale inflation and were calculated before energy prices soared, were food for thought. Core PPI came in at 3.9% year-on-year, way above expectations. Now it’s being argued that some wholesalers may choose not to pass these increased costs onto their customers to help maintain sales. If so, goes the argument, the jump in PPI won’t necessarily feed through to CPI and Core PCE.

But that means those companies must take the hit instead. This will affect their margins and profits and ultimately feed through to job losses. And job losses mean no wages. No wages mean less money in the system, which means a lower tax take.

Investors are already starting to get itchy feet over Federal borrowing, high debt levels and Treasury issuance. Could the US finally be on the brink of the recession that economists have been predicting for the last three years? In other news, Super Micro Computer was down 25% following FBI charges.

European equities followed in the footsteps of US stock index futures. That meant that the modest gains expected for the open soon evaporated. All the European majors lost ground, contributing further to the selloff, which is now into its third successive session. This week’s losses were driven by fears that surging energy prices could trigger a broader inflation shock and weigh on global growth.

Source: TN Trader

Yesterday, the European Central Bank (ECB) maintained a cautious stance, holding interest rates steady while highlighting rising uncertainty linked to the Middle East conflict. The ECB warned of upside risks to inflation and downside risks to growth. This saw the probability of a rate hike at its next meeting push above 50%.

Similarly, the Bank of England signalled that it is “ready to act,” with traders now fully pricing in a rate hike by June. The Swiss National Bank and Sweden’s Riksbank also held rates unchanged. This all represents an about-turn from last month when rate cuts were still on the agenda.

In other news, the UK, Germany, Italy, Japan, France and the Netherlands issued a joint statement pledging to help keep the Strait of Hormuz open and safe for shipping.

On Wednesday night, the US dollar rallied across the board, encouraged by the hawkish tilt which came from the Federal Reserve’s latest monetary policy meeting. At a quick glance, the ‘Dot Plot’ may not have changed materially from the last update in December. After all, members continue to coalesce around an expectation of one 25 basis point rate cut this year.

Source: TN Trader

But underneath, there has been a noticeable shift. This has led to the probability of no rate cut this year rising from 40% on Wednesday morning to over 80% today. In the aftermath of the Fed meeting, the cash Dollar Index rallied to break back above 100.00 again. And yet it slumped yesterday, dropping to 98.75 at one stage, before staging a bit of a comeback this morning.

Again, it was central banks that drove the move. Comments from both the Bank of England and the ECB suggested that rate hikes could be coming soon, even as the Fed leaves its own interest rates unchanged. The Dollar Index has recovered significantly from the lows hit at the end of January.

Yet, once again, it is struggling to break and hold above 100.00. Until it does this convincingly and then holds this level of support on each and every pullback, there’s a fair chance that the dollar’s rally could stall or even go into reverse.

On Wednesday morning, support for gold around $5,000 per ounce finally crumbled. This led to a cascading price collapse, which coincided with a rally in the US dollar. This only came to a halt yesterday, early afternoon, as gold flopped towards $4,500.

Coincidentally, this was roughly in line with the recent high in the Dollar Index. But while the dollar proceeded to sell off sharply, gold’s rally looked pretty half-hearted. Nevertheless, it managed to creep back up above $4,650 this morning.

Source: TN Trader

Could yesterday’s slump mark the end of gold’s pullback from January’s record high? It’s possible. But the bears will also be looking at the recent cycle low of $4,400 just after January’s blow-off top as a likely downside target.

While others will be eyeing up $4,000, which acted as significant support last November. Much depends on sentiment going into the weekend, as a rebound is also a possibility.

One thing is for sure: there is a dwindling number of investors out there who still view gold as a ‘safe haven’. But that’s a shame, because it certainly is. But it’s a ‘flight to safety’ on currency risk, and for now, investors still have faith in the greenback.

Silver had its own significant support level, which came in around $80 per ounce. But that broke on Tuesday, leading to a panicky selloff down to $65.50 yesterday lunchtime, a drop of 18%.

Silver has also stabilised to some extent and was trading above $72 on Friday morning. This week’s moves just go to show that volatility hasn’t died down in silver, even as it has effectively halved in price over the last seven weeks.

This is somewhat ironic, as an uptick in volatility across equities and bonds has led investors to sell liquid assets, such as precious metals, to raise cash or cover margin calls. This dynamic may continue to contribute to sharp price swings for some time to come.

Source: TN Trader

Crude oil markets remain at the centre of global market volatility. Prices were a touch firmer overnight, but then pulled back slightly as Friday’s session progressed on signs of potential easing in supply constraints. Comments from US Treasury Secretary Scott Bessent about potentially lifting sanctions on Iranian oil stored on tankers, along with efforts to reopen the Strait of Hormuz, helped reduce immediate supply fears.

Source: TN Trader

This followed on from last week’s easing of curbs on seaborn tankers carrying Russian crude oil. Despite the pullback, the broader outlook remains highly uncertain. The Strait of Hormuz remains effectively shut, and oil prices are expected to remain elevated for as long as traffic in the Strait is exposed to Iranian attack. The other, somewhat related issue is handicapping the market for an end to hostilities.

In both cases, it feels as if investors are prepared for this war to continue into April. But they also want to see evidence that an end is in sight, and that can’t come soon enough. The premium for Brent has now topped $10 per barrel, having doubled since the start of the war. This reflects the fact that US markets have less exposure to supply risk than most of the rest of the world.

Bitcoin steadied this morning and briefly pushed back above $71,000. This comes after a difficult few days for the cryptocurrency, which itself followed a period of significant recovery, even as other risk markets came under sustained selling pressure.

On Tuesday, it came within a cent of $76,000, its highest level in six weeks, and a strong rebound off $60,000, also from early February. But it has pulled back ever since, and on Wednesday morning, support around $74,000 finally gave way, leading to a drop below $69,000 in early trade yesterday.

It is, of course, reasonable to correlate the selloff to even bigger drops in precious metals and equities. But it’s arguably more rigorous to consider Bitcoin on its own merits. Chart-wise, it continues to consolidate with an upside bias, and this is supported by its daily MACD.

The bulls consider this week’s pullback as a healthy correction after recent gains. The bears argue that current optimism is misplaced and that cryptos will eventually drop along with equities and gold. 

Markets head into the final session of the week with volatility still elevated, with the near-month VIX still north of 24.00. Geopolitical risks and energy market developments continue to dominate sentiment. Stock index futures were weaker across the board, although there’s evidence of some stabilisation in risk appetite.

The broader backdrop remains fragile. Oil continues to act as the primary market driver, influencing inflation expectations, central bank policy outlooks, and overall risk sentiment. With no major data releases or earnings in focus, attention will remain on geopolitical headlines.