Overnight Headlines

*Wall Street rally resumes, led by Nasdaq as chipmakers soar

*Yen faces third straight week of declines, risks collapse to 1990 level

*Oil fluctuates as EU refrains from fresh action on Russian crude

*Gold set for weekly gain as war and inflation fuel haven demand

US equities rebounded strongly through the day led by tech and materials. Major indices rose between 1% and 2%. The Nasdaq and S&P500 touched six-week highs. Both are on track to close the week higher. Chinese markets are suffering with tech selling off. The rest of Asia is faring better. Futures are very marginally up on the day.

USD strengthened as it tried to break out towards recent highs on DXY. EUR traded in a narrow range around 1.10. GBP tested support at 1.3160 before bouncing above 1.32. USD/JPY again hit a fresh six-year high this morning at 122.43. AUD traded up to another new peak for the year at 0.7536 earlier today. USD/CAD touched 1.2509, its lowest level since January.

Market Thoughts – Complacent markets?

Stock markets have regained all their losses from before Russia’s invasion into Ukraine. In an inflationary environment, certain sectors can perform. For instance, big tech companies have dominant market positions and so a fair degree of pricing power. But generally, how corporate earnings can be maintained alongside higher inflation and lower economic growth is the key question.

We are now starting to get some economic data covering the post-invasion period. Yesterday’s PMIs were not as bad as some predicted, especially given the sinking confidence indicators. US jobless claims did fall to a new post-Covid low. This suggests ongoing strength in the labour market amid still high demand. Non-farm payrolls are released next Friday. This all points to support for USD against low yielders.

Chart of the Day – AUD/JPY to the moon…

Pro-cyclical currencies remain on a tear. The aussie is the strongest major currency on the month and year. Strong commodity prices are a key driver, especially iron ore. The recent announcement by the Chinese authorities to help support the economy is boosting confidence in the region. In addition, previously more cautious RBA rate hike expectations are now being repriced.

The bullish trend has been seen most clearly versus the yen. The Japanese currency has been hit by the more positive risk mood and a still very dovish central bank. The country is also a net importer of energy so is suffering in the current climate. That said, there is some overnight speculation that the BoJ may not step in to counter the increase in Japanese bond yields. This is seeing some JPY buying this morning.

We can see the move higher clearly on the daily chart. Prices had been consolidating around 83 before the huge move this month. The pair is severely overbought on the daily and weekly chart. Upside targets are 92.69 and 92.97. Long-term support sits at 90.72 and the September 2017 high at 90.30. Below here are the October peaks around 86.25.