A sense of positivity returned to financial markets as the prospects of more ceasefire talks between Russia and Ukraine soothed investor jitters.
Asian shares opened higher on Tuesday morning, tracking the positive overnight cues from Wall Street as market players cast aside fears of rising interest rates to focus on geopolitical developments. European pushed higher this morning amid the improving market mood, with the risk-on sentiment potentially keeping US equity bulls in the driving seat later this afternoon.
In the currency arena, the yen hijacked our attention by weakening to levels not seen in seven years as the Bank of Japan intervened in bond markets to cap yields. Oil prices tumbled as China lockdowns prompted demand worries, while gold stood little chance against an appreciating dollar and rising Treasury yields. The widely watched US 10-year Treasury yield hit 2.5% yesterday.
On the geopolitical front, Ukraine’s president has said he is willing to discuss becoming a neutral country as part of a peace deal with Russia. Should a ceasefire agreement become reality, this could boost global sentiment further and revive investor confidence, sending equity markets higher.
Japanese Yen melts as BoJ interventions
The yen is struggling to nurse the deep wounds inflicted by yesterday’s painful selloff. It weakened to a seven-year low against the dollar after the Bank of Japan (BoJ) offered to buy an unlimited amount of 10-year Japanese Government Bonds after yields rose to a fresh six-year high of 0.255%.
One would think that the extreme levels of uncertainty and geopolitical risks would send investors rushing towards the yen. However, the currency has weakened against every G10 currency since 24 February, when Russia began its invasion of Ukraine.
It is becoming clear that the yen’s weakness is a product of central bank divergence among other themes. While the Fed is willing to raise interest rates aggressively to tame rising inflation, the BoJ continues to stick with its dovish policy settings. If it carries on intervening to prevent yields from rising beyond the 0.25% policy target while other major market yields continue to rise, this could result in further yen weakness.
Looking at the technical picture, USD/JPY is heavily bullish on the daily charts. A strong close above 125.00 could open the door to the 2015 high around 125.85. Should 125.00 prove to be reliable resistance, prices could decline back towards 122.50 before experiencing some consolidation.
Oil prices shaken ahead of OPEC+ meeting
Oil benchmarks were shaky this morning after falling in the previous session amid fears over weaker fuel demand in China. WTI Crude and Brent have shed over 7% since the start of this week.
The world’s second-largest economy has announced its biggest city-wide lockdown since the Covid outbreak started more than two years ago. Given how China is the world’s largest crude consumer, this development continues to weigh on oil markets.
There could also be more volatility ahead with the OPEC+ meeting on Thursday. The cartel will determine output production beginning in May with markets expecting the group to stick with its pre-planned production quota hike of 400,000 barrels per day. Expect oil to remain sensitive to any news revolving around the China lockdown and Ukraine developments.
Gold breakdown on the horizon?
This could be a rough week for gold as renewed peace talks rekindle risk appetite. An appreciating dollar and rising Treasury yields are likely to rub salt into the wound, sending the precious metal on a slippery decline. On top of this, the US jobs report on Friday could compound gold’s woes if the numbers exceed market expectations.
Looking at the technical picture, prices have the potential to sink lower if a solid breakdown below the $1910 support is achieved. This could open the door towards $1900 and $1875. Should $1910 prove to be reliable support, prices may rebound back towards $1965 and $2000, respectively.