USD declines on improved risk sentiment

Markets.com

Andrew Bailey, the governor of the Bank of England, yesterday lamented the state of inflation in the country but insisted that the central bank couldn’t have done more. “I don’t think we could [have done anything differently.” he told MPs.

No one could have seen the war in Ukraine, certainly, but pinning inflation squarely on that and on the latest Covid disruption in China misses the point; CBs around the world failed to be proactive in withdrawing the stimulus as quickly as they pumped it into the economy. Such an asymmetry, given the well understood supply problems in the global economy at the time, could be nothing but inflationary. The Fed at least is showing some contrition – ex-chairman Bernanke saying that they acted too slowly but are recognising that mistake now is an accurate description of where the FOMC seems to be. The trouble with the BoE is that it won’t recognise its failure to act when it had the opportunity, leaving it forced to act now at the worst possible moment. And even then, the BoE, if you pardon the imagery, is getting its feet wet while relieving itself in something with a marginally stronger pressure gradient force than a light zephyr.

Just as well that wage price spiral thingy isn’t happening, central bankers everywhere say. But alas, Mr Bailey has to contend with that too! Nominal wages have risen 7% in the last three months on a year-on-year basis, well above the 5.4% expected. This is good and bad. Employees are getting closer to matching inflation, helping to keep up living standards. However, and it’s a big but, wage price spirals are the absolute worst kind of inflation for central banks to deal with since they have only one recourse: force a recession. Evidently people are ignoring Mr Bailey’s request that they do not ask for a pay rise. Amazing. Bad policy and bad communication have been the hallmarks of the BoE under Bailey. A small thing but noteworthy – the fact he let the word ‘apocalyptic’ slip into his testimony – allowing every editor the perfect headline – showed his incredible lack of nous.

Anyway, good news for sterling with today marking a third straight day of gains after sinking to a 2-year low last week at 1.2160. GBPUSD moved back to 1.24 this morning and has a certain pep about it again. Maybe the max CB divergence thesis just needed an extra innings to play out before the turn. Wage data from the UK helped raise bets the Bank of England will do more hiking, whilst the dollar is off somewhat on better risk sentiment. EURUSD is also moving up again and we may have just made the low.

Fed chair Jay Powell is due to speak on inflation later in the day…I don’t think he will want to get dragged into conversations about this topic between President Biden and Amazon’s Jeff Bezos…suffice to say the billionaire is correct to say that raising corporate taxes has zilch to do with taming inflation.

European stock markets moved higher in early trade on Tuesday, with the FTSE 100 trying to recapture 7,500 and the DAX rallied to 14,100. Chinese tech stock soared in Hong Kong as analysts and regulators sounded a more favourable environment for some of these hard hit names like Tencent and Alibaba. That could deliver another boost for the Nasdaq at the open after it fell 1.2% on Monday. ARKK slumped 6% having rallied strongly on Friday.

JPMorgan raised the ratings for the stocks of seven Chinese tech firms including Tencent, Alibaba, Meituan, NetEase and Pinduoduo to “overweight” from “underweight”. Only in March analysts at the bank had called the sector ‘uninvestable’. Meanwhile Morgan Stanley reiterated an overweight rating on Meta (FB) and a price target of $330. Analyst Brian Novak said Amazon would be next to slash costs, with Tesla down a similar level. Stock markets still look very susceptible to big swings.

Musk stuff…speaking in Miami he said reducing the agreed $54.20 price for Twitter would not be “out of the question”. Meanwhile he rightly pointed out to the current Twitter CEO Parag Agrawal that Twitter really ought to know how many accounts are spam or bots since it matters a lot to advertisers. “This is fundamental to the financial health of Twitter,” Musk tweeted. Musk apparently now says the deal cannot move forward until Twitter proves that fewer than 5% of accounts are fake since he based his offer on their SEC filings being accurate. Sounds reasonable no? Except Musk waived his right to carry out due diligence. We’ve talked before about this and the point is Musk doesn’t really follow any rules so it kind of doesn’t matter what he has said or done before or supposedly bound by legally. “My offer was based on Twitter’s SEC filings being accurate,” Musk tweeted. “Yesterday, Twitter’s CEO publicly refused to show proof of <5%. This deal cannot move forward until he does.” Shares in TWTR fell 8% yesterday and are down more than 2% this morning.

Meanwhile, crude oil broke higher yesterday out of the recent range to its highest since the last week of March. There was some pullback this morning as Hungary held out against a ban on Russian oil. China is still in lockdown … US SPR has fallen to its lowest level since 1987and will need to restock at some point … and seasonal oil demand is about to explode – 3/4m bpd extra over the summer when it’s driving season in the US. Hard to see much downside.

Dollar pullback – looking perhaps for the 23.6% retracement of the rally since April 1st to come into play. Bullish MACD crossover backs view that dollar has now peaked.