Chips slide, Iran flares up again and the RBA catches a break

Preview text: Chip rout deepens, Iran-US tensions reignite, & soft Aussie CPI reshapes RBA bets ahead of today's Fed decision.

Asia chip rout deepens

The chip rout continued overnight in Asia, with South Korea's Kospi sinking more than 6% by the close, bringing MTD losses to an eye-watering 33% and putting it on track to record its worst month on record. The losses also triggered another 20-minute trading halt after the index fell 8%.

It comes back to SK Hynix and its recent earnings report. The stock was down as much as 20% at one point, which is remarkable given the company reported exceptional earnings growth. But it clearly was not enough to satisfy investor expectations. When you layer in the company lifting its capex, keeping a lid on shareholder returns and the pricing inside its long-term contracts, this has evidently left investors on edge.

Frankly, I do not think it is about the earnings numbers for now; it is more about positioning. Investors piled into these names expecting nothing less than perfection, and when they are anything but, it comes across as disappointing.

US-Iran tensions reignite

Over in the Middle East, after a couple of days of calm between the US and Iran, tensions escalated again yesterday after the US reported intercepting an Iranian missile. The US and Saudi Arabia struck Iran-backed targets in Iraq, which, of course, brings the Strait of Hormuz back into focus. Benchmark oil prices are marginally higher this morning, though Brent is currently capped below the 50-day SMA at US$85.68.

The RBA just got some breathing space

The Q2 26 Australian CPI numbers hit the wires overnight and came in softer across the board, sending the AUD lower and the ASX 200 higher. Even the RBA’s preferred measure of inflation – the trimmed-mean figure – came in below the minimum market estimate and the RBA’s own forecasts. This offered traders a decent scalp opportunity for those at their desks, as investors pared back RBA tightening bets from 20 bps by year-end a day ago to around 13 bps this morning – so it is now a coin toss.

According to ABS, housing prices are doing most of the damage (up nearly 7% YY), while cheaper fuel prices are taking a bite out of transport costs, down 2.7% MM. While we have seen markets effectively price out a hike this year, the gap between ‘tradeables’ and ‘non-tradeables’ inflation is wide, with the former easing to 1.5% and the latter rising to 4.9%. With non-tradeables running high, I do not expect the RBA to explicitly announce any pivot on these inflation numbers, and it will likely keep the hawkish language at the August meeting. 

Fed day: Hike or hold?

It is all about today’s Fed meeting. Nearly all of the 88 economists polled by Bloomberg expect the central bank to leave the target rate on hold at 3.50-3.75%, though a handful of desks – Citadel Securities among them – believe a rate hike may be on the table.

OIS markets are implying about a 35% chance of a rate increase, with two dissenters expected – likely Beth Hammack and Lorie Logan. However, while there is a very modest chance of a hike, I think this pricing could, in part, reflect hedging – remember, oil prices remain incredibly volatile. If the Fed holds with two or fewer dissents, I would expect USD downside; if the Fed actually hikes the target rate, I would naturally be looking for USD upside.

My base case is still a hold, given softer June US CPI/PPI prints as well as calmer June jobs growth, especially compared with earlier months. There are no economic projections at this meeting, so it all really comes down to the dissents and whether Fed Chair Kevin Warsh offers any guidance on September’s meeting (22 bps currently implied), but I really do not expect much from him.