Overnight Headlines

*US stocks fell weighed by surging energy prices

*USD consolidated just below recent highs, AUD the main winner

*WTI oil closed above $80 for the first time since November 2014

*Imminent Evergrande payments intensify contagion fears

US equities slid as the global energy crunch fuelled more inflation worries. Investors remain uncertain ahead of the US earnings season. With yields, metals and oil all rising, the inflation/stagflation trade dominated ie. cheap energy stocks outperformed tech. Asian markets are mostly lower this morning with reports of Evergrande again missing an interest payment deadline. US and European futures are lower.

USD rose versus most of its peers amidst a pullback in stocks. The DXY recouped its losses from Friday, trading just below cycle highs at 94.50. USD/JPY was on a tear with the yen capitulating. The pair closed at 113.36, its highest level since late 2018. EUR continued to trade near 14-month lows, weighed by dovish talk from the ECB’s Chief Economist Lane. GBP failed to make gains on BoE Saunders suggestions of earlier than expected rate hikes.

Market Thoughts – US earning season

Along with the global energy crisis, supply chain disruptions and the ongoing China Evergrande story, Q3 earnings releases are about to add to the mix. Earnings expectations are still rising but have slowed down as the above market concerns take hold.

The third quarter results will be all about rising input costs and how they are driving margin pressures. This comes at a time when we have elevated equity valuations and record high profit margins and could lead to a glut of profit warnings. It may well also highlight the difference between physical and digital companies. First up are the banks with JPM giving us an indication on investment banking and BoA revealing the loan demand situation in the US.

Chart of the Day – AUD/JPY explodes to the upside

We chose CAD/JPY yesterday but could equally have picked AUD/JPY. The major, USD/JPY (which we highlighted on Friday) broke to new cycle highs on rising US 10-year Treasury yields. This saw huge selling in the yen. Meanwhile, the aussie was underpinned by rising energy prices and oil.

AUD/JPY broke above trendline resistance last week around 81 and hasn’t looked back. Prices broke through both the 100-day and 200-day SMA below and above 82 late Friday and yesterday. We are overbought on the RSI and through the upper Keltner channel. The 200-day SMA sits at 82.34 as initial support. More buying will try to get to the July high at 84.19.