The European Central Federal Reserve Bank of Australia and Japan; sorry, I mean the US Federal Reserve, were completely on message yesterday, announcing a $15 billion per month taper to their $120 bio per month bond-buying program, while at the same time, saying interest rate hikes were not on the horizon. Combined with a strong US earnings season, those noises were enough to keep the party going in US equities which traced out another record high. The US dollar edged lower while US yields firmed, suggesting The Street had gone into the FOMC decision long.
How the reality of the taper plays out over the next few months will be interesting. Mr Powell said something along the lines of inflation is still transient, but it could be transient for longer than expected. A rise in US yields over the next couple of months as the taper really gets going should continue to keep the US dollar in the driver’s seat, while hypoxia inducing equity valuations may find the altitude challenging, particularly if consumers start pushing back on pricing increases.
Asian markets, which have been late to the reopening party for obvious reasons, have their central banks lined up in supportive mode still, and rightly so. The stress of the taper could be felt in this region more than others, especially if, as expected, the US dollar rally continues, and US yields rise. That could lead to a burst of imported inflation if the region’s central banks choose not to spend foreign currency reserves defending their currencies.
Thankfully, this time around, those reserves in the region are bulging at the seams. Probably the elephant in the room will be China. If its slowdown continues, whether by material, COVID-19, property sector defaults or energy of supply-chain constraints, a move to a looser monetary bias and a weaker yuan would give the rest of Asia another headache, especially in currency markets.
The central bank world is rapidly splitting into two teams. Those in the lower-for-longer camp, forever if you are Europe or Japan, and those that are looking at the distortions caused by unconventional monetary policy, particularly on the young whose future wealth we are stealing with QE, and those on low or fixed salaries.
Poland slipped in a 75bps hike yesterday and they may well be joined by Norway and the United Kingdom today. US markets need not worry though, the Fed has signalled, like Europe and Australia, that they will come to the rescue at the first sign of trouble. It is no surprise, therefore, that the music continues to play across equities and other asset classes. You could even argue the crypto-boom is in part a function of the ham-fisted opioid monetary largesse from prominent members of the central bank space.
This week is a busy one still culminating with Friday’s US Nonfarm Payrolls data. On Wednesday, ADP Employment exploded higher, while the US ISM Non-Manufacturing PMI and sub-indices suggest that the services sector is back with higher activity and costs, after a Q3 delta-induced slowdown. The risks are now skewed towards the Nonfarms finally aligning with signals elsewhere in the US economy, after a few months of disappointments. A number north of 500K could cause equity markets to reconsider ignoring the implications of the Fed taper. Similarly, a low print will keep the lower-for-longer monetary party in equities going well into the night.
The Norges Bank and Bank of England rate decisions aside, I expect to see continued volatility in the energy space as OPEC+ meets today to decide if a change to production targets needs to be revised upwards. I would expect OPEC+ plus to ignore the pressure from COP26, I mean President Biden, to increase oil production. Oil prices fell overnight as inventories rose, but the announcement that the US and Iran would restart talks at the end of the month should be the death knell of production hike hopes from the grouping.
Australia’s Retail Sales rose by 1.30% MoM in September while the headline Q3 number by 4.40%. Market impact has been minimal to non-existent, as the reopening of Victoria and New South Wales, along with international borders, means those numbers will surely rebound strongly, helped along by their resident fence-sitting central bank. The Data calendar is tier-2 in Europe and non-existent in Asia today with holidays in Singapore, Malaysia and India reducing activity.
US Initial Jobless Claims will attract higher than usual interest, thanks to being sandwiched between the FOMC and Nonfarm Payrolls. But I would argue to readers that the OPEC+ meeting will be the biggest source of volatility later today. And in case you thought it had gone away, units of China’s Evergrande (HK:3333) have another US dollar P&I totalling $82.50 mio due by this Saturday.
FOMC greenlights equity rally
A fence-sitting FOMC which announced a long-overdue tapering, but stuck to its no rate hikes and transitory inflation line was enough to greenlight another rally on Wall Street overnight, which was happy to keep the momentum of the impressive Q3 earnings season going. It was another record close as the S&P 500 rose by 0.65%, with the rate-sensitive tech-heavy NASDAQ leaping 1.04% higher. The Dow Jones traced out a more modest 0.29% gain. US yields firmed overnight but that appears to have weighed more on the Dow Jones while the FOMO gnomes feasted on the S&P and NASDAQ.
The FOMC and Wall Street’s reaction after has been enough to greenlight a positive day in a holiday-thinned Asia. The Nikkei 225 has jumped by 0.92% with the South Korean KOSPI rising by 0.77%. China has ignored another liquidity withdrawal by the PBOC, with pent-up demand seeing the Shanghai Composite rise 0.65% and the CSI 300 leap 1.0% higher. Hong Kong is recording some decent gains as well, rising by 0.85%.
In regional Asia, Singapore and Kuala Lumpur are closed with Taipei climbing 0.40% while Bangkok is unchanged with Jakarta rising by 0.90%. In Australia, markets are rebounding after a tough week so far. The ASX 200 and All Ordinaries climbing by 0.35%. The FOMC decision should see European markets open higher today, while it is hard to see anything other than a huge drop in Initial Jobless Claims derailing the positive momentum in US markets later on Thursday.
US dollar eases post-FOMC
With the FOMC taper announcement overnight being followed by a masterclass in fence-sitting, some profit-taking pushed the US dollar slightly lower, with the short-term market having clearly gone into the FOMC long. The Dollar Index fell by 0.26% to 93.85 but has risen 0.12% to 93.96 in Asia. Given Asia’s higher sensitivity to Federal Reserve policy, the small rally is not surprising. The Dollar Index has support at 93.80 and it looks set to trade in a narrow 93.75 to 94.15 range ahead of tomorrows Non-Farm Payrolls, despite higher US yields post-meeting overnight.
EUR/USD has risen slightly to 1.1600 today and 1.1580 to 1.1630 will likely cover its range in the next 24 hours. If the BOE hikes in the UK today, gains could be could vis EUR/GBP selling. Key support is at 1.1520, failure of which signals more losses to 1.1400. Resistance remains at 1.1700. Sterling rose by 0.50% overnight, trading at 1.3665 in Asia. Markets seem to be experiencing a last-minute swing bank to a BOE hike this afternoon after exiting the trade over the past few sessions. Positioning looks more balanced now meaning we should expect a decent directional move whatever the BOE decision. A dovish Bank of England can still see Sterling retest the 1.3400 region, but equally, a rate hike and a hawkish outlook could see it jump to 1.3700 and 1.3750.
USD/JPY is locked in a narrow range each side of 114.00, rising with US yields to 114.20 as of this morning. It remains a slave to the US/Japan rate differential and looks to set to continue ranging into the Nonfarm Payrolls. USD/JPY has support at 113.40 while a rise through 114.70 signals more gains above 115.00.
AUD/USD and NZD/USD rebounded overnight as bullish sentiment in New York post the FOMC mean a return to business as usual for the Australasians. AUD/USD is 0.35% higher at 0.7455 as of this morning and still looks vulnerable to a retest of 0.7400 thanks to the dovish fence-sitting of the RBA, and a fall in Australian yields yesterday post the RBA decisions. Resistance remains solid at 0.7550. With an RBNZ in hiking mode, NZD/USD caught the best of overnight jump in sentiment in the US, having been dragged lower by the AUD yesterday. Kiwi has risen 0.65% to 0.7160, the middle of its 0.7100 to 0.7260 range. It has an upside bias now, especially against the AUD and JPY.
The PBOC set a slightly weaker yuan setting today at the USD/CNY fixing but offset that with a liquidity withdrawal in local markets. Having rallied into the FOMC overnight, USD/Asia is slightly lower today, wary of the firming of US yields across the curve seen overnight. KRW, THB, MYR, and TWD are around 0.20% lower this morning. Having negotiated the FOMC without incident, Asian currencies will continue marking time into Friday's US Nonfarm Payrolls. A blowout number to the topside and a consequent rise in US yields could see another wave of selling in Asian FX next week.
Oil awaits OPEC+ after a tough day
Oil prices were in full retreat overnight as markets await the outcome of today’s OPEC+ meeting. Oil markets ignored a weaker US dollar and instead ran for cover on two developments. Firstly, official US EIA Crude Inventories unexpectedly rose by 3.3 million barrels, with gasoline and distillate inventory moves balancing each other out. Cushing stocks fell once again to multi-year lows, but this was ignored. More importantly, US/Iran talks are going to resume at the end of the month and the prospect, however remote, of a rush of Iranian crude, prompted a sell-off in oil markets.
Brent crude fell by 3.35% to $81.30 a barrel, while WTI fell by 3.50% to $83.10 a barrel. In Asia, Brent has remained steady, while WTI has slipped below $80.00 to $79.90 a barrel. The US/Iran news has likely wiped out any last hope that OPEC+ will increase production targets, which may be supportive later in the session. With speculative markets heavily skewed to long positioning, this culling could continue for another session although I suspect once OPEC+ is out of the way, physical buyers will return, as oil's fundamentals remain very constructive.
Both Brent and WTI closed on their lows overnight, an ominous sign for short-term prices. A fall by Brent crude through $81.00 does open the possibility of a spike to $79.00 a barrel. Resistance is distant at $84.00 and $85.10 a barrel. WTI fell through its 2-month trendline support at $82.30 overnight, which becomes resistance, followed by $83.00 a barrel. More immediately, a fall though $79.50 signals another leg lower that targets the $76.00 to $77.00 a barrel region.
Gold’s price action worsens
Gold had a volatile session overnight, spiking as low as $1760.00 an ounce, with the wider $1770.00 to $1810.00 range barely holding. Gold finished the day 1.0% lower at $1770.00 an ounce, before retracing some of those losses in Asia, rising by 0.35% to $1776.00 an ounce. The price action was especially negative given that the US dollar actually fell overnight, and Jerome Powell gave a master class in dovish fence-sitting. A firming of the entire US yield may have been the culprit, although the price action was relatively modest.
Whichever way one looks at it, gold’s price action has been uninspiring this week and even more so overnight, and the balance of risks has unambiguously swung back to the downside. Only an extremely weak US Nonfarm Payrolls print tomorrow will give gold a chance to recapture $1800.00 an ounce. Today’s rally in Asia looks like a dead cat bounce.
Gold fell through its one-month trendline support on Friday, which is today at $1800.00 an ounce. That is followed by resistance around $1810.00 and then $1835.00 an ounce. Failure of $1760.00 and $1750.00 should see gold retest $1720.00 an ounce.