Overnight Headlines

*Talks to end Ukraine war pause as Russia’s offensive intensifies  

*Oil extends slump to $100 with retreat gathering momentum

*China tech stocks tumble after historic rout as risks mount

*Yen slips further as Treasury yields hit new cycle highs

US equities closed lower after initially climbing on continued ceasefire talks. Energy and tech sectors weighed. The Nasdaq slid 1.92% and closed in a technical bear market. The S&P500 fell 0.74% and the Dow ended flat. Asian stocks are mostly weaker as surging Covid-19 cases in China hit confidence. The major index is down 8.2% this month, while the Hang Seng is off some 17% so far. European futures are in the red, with Euro Stoxx 50 down 0.8%.

USD consolidated its recent moves and closed marginally lower but above 99. EUR rebounded to near 1.10 before paring losses. GBP slid for a third day and closed near 1.30. USDJPY rose above 118 hitting its highest level in five years. Rising US 10-year Treasury yields are helping, with today’s high above 2.16%. AUD underperformed among the majors, dropping 1.5% and below the 50-day SMA. USD/CAD resumed its move above 1.28after topping at 1.29 last week.

Market Thoughts – Rising yields, pre-FOMC

It’s a massive week in terms of calendar risk events with the Fed and BoE meetings. Inflation is the obvious focus, even as the oil spike disappears. Brent crude is pretty much flat on the month, after rising 38%. But with energy and commodities still expected to remain elevated for a protracted period, bond markets are reacting.

US bond yields are now at their highest level in nearly three years. The growth hit is negligible compared to the inflation shock. Seven 25bps hikes are now priced from the Fed this year. Can DXY break to new highs and 100? Perhaps not if there is any major de-escalation.  

Chart of the Day – Gold (like oil) tumbles

Safe haven status and plunging “real” interest rates saw the precious metal get very close to the all-time high last week at $2,075. Stagflation concerns also helped. But the question lingered as to whether the “stag” will fade at a faster pace than the “flation”. It seems that we are getting the answer emphatically already.

Gold has sold off sharply as a more persistent inflation shock pushes prices back to major support at $1916. Like oil, the metal is back to flat on month. The 61.8% Fib level at $1923 should also offer support. Below is November top at $1877.The weekly shooting star candlestick looks ominous. But the RSI is back near 50 so some consolidation wouldn’t go amiss for bugs.