It was a frisky session on Wall Street yesterday as President Biden renominated Jerome Powell for another term as Fed Chairman while elevating his rival, Lael Brainard, to Vice-Chair. Ms Brainard is very much a dove, and it appears that stock and bond markets, in particular, had been simmering near recent highs in case Ms Brainard got the nod for the top job.
With Mr Powell nominated, Europe was knocked off the front page as the new J-La combination saw US markets rush to price in faster tapering by the Fed and earlier rate hikes. The US yield curve steepened as long-dated bond yields from ten years out rose sharply, notably in the 30-year tenor. The US dollar recorded another impressive rise, with the yield differential-sensitive USD/JPY jumping nearly 90 points. Rate-sensitive technology stocks didn’t like the J-La song, and thanks to their galactic valuations, headed South, and gold plummeted as it was shown who its boss was, thanks to US yields finally reacting to the reel-in-inflation chorus. Of course, being bullish on gold yesterday, after returning from holiday, should have been a major warning sign to readers. Short gold is my happy place, and to there, I shall return like MacArthur wading ashore in the Philippines.
The moves overnight did Bitcoin no favors either, with the digital Dutch tulip looking wobbly at $56,800.00 this morning. Failure of $55,500.00 could see $53.300.00 tested and failure there sets up a deeper move lower targeting the 100 and 200-day moving averages lurking under $49,000.00. Momentum appears to have stalled between $60,000.00 and $61,000.00 for now. As usual, tee-shirt-clad frontiers of finance-istas, don’t fill up my inbox with mail extolling how you bought Bitcoin at $1.0, someone also paid $67,000.00 and they’re not as happy. I am merely following the voodoo chicken entrail patterns of the charts. Cryptos remain a tradeable, but not investable, asset in my mind, and I haven’t changed my mind.
Whether the Fed taper trade has legs or not, I do not yet know. Long-time readers will know that this is my favored view into the year-end and early 2022, but I have been led numerous times to water only to find a giant crocodile in the watering hole. Currency markets seem to agree with me, helped by external factors like Europe, but central bank repression in the bond markets and bottomless zero per cent world FOMO in equities continues to frustrate. Given that global central banks will hit the wimp/ease button at the first hint of trouble, I wouldn’t bet against either right now, but I am sure that we are in for a lot more two-way directional volatility into December.
In Asia, Japan is on holiday today reducing trading volumes. Market chatter seems to be focused on a Reuters report that China has instructed some banks to lend a bit more to the property sector projects. Additionally, the noise is increasing around a possible RRR cut in December after the PBOC changed some wording in its latest quarterly report. The PBOC set another weaker CNY fixing versus the US dollar today as well, after hinting that the CNY rally had become too one-way over the weekend. Mainland stocks rose yesterday on the weaker yuan story, but the jury is out on whether that will continue. China equities will remain a challenging market into 2022 thanks to the “shared prosperity” policies of Beijing. I do not believe the process of repricing of China equity prices to reflect that policy, or the “there’s never just one cockroach” in the property sector, is complete.
The data calendar is quiet in Asia, with Australian PMIs and New Zealand Retail Sales already out. Singapore inflation will remain benign, while Taiwan Industrial Production if it prints lower than 11.0% YoY for October, could spark more peak-recovery nerves in regional markets where the collapse in coal and base metal prices continues to be mostly ignored.
Circling back to Australia and New Zealand, Australian Markit Manufacturing PMI held steady at 58.20, but Markit Services PMI for November disappointed at 51.80. With the RBA sitting dovishly on the hawkish fence, and the border and domestic reopening proceeding at breakneck speed, the Services PMI should improve rapidly, and today’s number will have little impact.
With an RBNZ policy decision tomorrow, today's Retail Sales have gone a long way towards whether they hike by 0.25% or 0.50%. The data was very weak, thanks to the extended Auckland lockdown. YoY for Q3 fell -5.20%, and QoQ by an even uglier -8.10%, both huge misses. With 0.25% priced into the New Zealand dollar, and no RBNZ meeting until February after tomorrow, the New Zealand dollar has lost its rate-hike premium and is now entirely at the mercy of development in the greenback.
Today sees pan-Europe and United Kingdom Markit Manufacturing and Services PMIs. I expect the UK to continue to surprise to the upside, in line with recent data releases. Given Europe’s already vulnerable outlook, thanks to virus restrictions and riots, low readings from heavyweights Germany and France are likely to see another wave of investor’s head for the exit door in European stocks and the Euro. The US also releases Markit PMIs later today, but I wouldn’t bet in them disappointing. High prints should keep the taper trade alive for another day, while low numbers will likely see a short-term pause.
Taper trade sees mixed results in Asia
Wall Street had a torrid session yesterday as US long-dated bond yields jumped higher after the renomination of Jerome Powell as Federal Reserve Chairman. Rate-sensitive technology stocks slumped pushing the NASDAQ lower. Meanwhile, banking stocks rose in sympathy with a steeper yield curve, which bodes well for future profitability, while a rise in commodity and oil prices boosted the mining and energy sector. The S&P 500 fell by 0.32%, with the NASDAQ retreated by 1.26% as the Dow Jones edged 0.05% higher. Futures on all three are almost unchanged in Asia.
With Japan on holiday today, the price action in US markets is being broadly repeated in Asia. Tech-heavy indices are suffering while those with more traditional resource, banking and property weightings are holding their own. South Korea’s KOSPI is down 0.45% with Taipei falling by 0.35%.
Mainland China sees the Shanghai Composite rising by 0.35%, aided by reports of renewed lending to the property sector. The more tech-centric CSI 300 remains unchanged though. Hong Kong has seen locally listed mainland China tech-titans sold heavily, pushing the Hang Seng down by 0.75%.
In regional markets, Singapore has eased by 0.10% with Kuala Lumpur edging 0.15% lower and Jakarta easing by 0.30%. Bangkok has risen by 0.15% with Manila jumping by 0.65%. In Australia, the rise in US yields overnight, and rallies in oil, iron ore and coal, have lifted the bank and resource sector. That has pushed the All Ordinaries 0.55% higher, while the ASX 200 has rallied by 0.75%.
The COVID-19 hangover in Europe is likely to continue today, although a lower euro should take the edge of exporters. Weaker than expected PMIs from Germany and France could well deepen the malaise and raise fears that the European recovery faces a number of challenges.
Steepening yield curve lifts US dollar
The Powell renomination put the Fed taper trade front and center once again overnight, with markets quickly moving to price in a first 0.25% hike by mid-2022 and long-dated US yields rising sharply. That saw yet another impressive move higher for the US dollar, with the Dollar Index climbing by 0.45% to 96.50 where it remains this morning. The index’s initial target is the June 2020 highs around 97.80 with support at 96.00 and 95.50. Having come a long way in a short time, the index’s relative strength index (RSI) indicator is now in overbought territory. That suggests the US dollar is vulnerable to a short-term correction lower before resuming its uptrend.
The Australian and New Zealand dollars held steady at 0.7225 and 0.6950 overnight as risk sentiment steadied after the Powell announcement. Rising commodity prices see AUD/USD unchanged in Asia, helped by AUD/JPY buying. It is likely to remain under pressure though if the US dollar keeps rising and failure of 0.7220 opening further falls to 0.7150. NZD/USD has eased to 0.6935 after soft Retail Sales and if the Reserve Bank only hikes by 0.25% tomorrow, Kiwi could come under sustained pressure targeting 0.6900 initially and potentially 0.6800 later in the week.
USD/JPY volumes have been thinned by a Japan holiday today, but the effect of the US/Japan yield differential was there for all to see overnight as US yields spiked higher. USD/JPY has risen 100 points in the last 24 hours to 115.10 this morning, moving through resistance at 115.00. If the US yield rise is maintained, USD/JPY could extend to 115.60 in the first instance, while support remains at 114.00 and 113.50.
EUR/USD suffered once again overnight, weighed down by COVID-19 recovery fears and a broad rally in the US dollar. It retreated another 0.40% to 1.1240 where it remains in Asia. The single currency remains on track to test 1.1160 this week and that in turn sets up a potential retest of 1.1000. A reversal by US yields tonight could grant it a stay of execution, although weak PMIs this afternoon likely see renewed selling. GBP/USD continues to find support due to its more impressive data of late but will remain guilty by geographic association with the euro. GBP/USD has fallen to the bottom of its 1.3400 to 1.3500 range. EUR/GBP selling continues to alleviate the effects of a stronger US dollar and only failure of 1.3350 signals a new move lower.
The PBOC set yet another weaker yuan fix versus the US dollar today, but so far, currency markets are refusing to take the bait. USD/CNY remains anchored below 6.3900, perhaps aided by inflows related to the massive trade surplus, weakness in ex-dollar basket components, and inflows into China’s investment-grade bond market. Elsewhere, some weakness is starting to show in regional currencies, with the Malaysian ringgit, Thai baht, Indian rupee, and Indonesian rupiah showing some nerves over the climb in US yields overnight. Only the Korean won is holding its own as the street awaits to see if the Bank of Korea hikes rates this week. The persistent strength in the Chinese yuan continues to shield regional Asia from the worst of the US dollar rally seen in the G-10 space. With policy rates at record lows and going nowhere in most of Asia, their currency strength will depend on the persistence of the rise in US yields.
Oil stages corrective rally
Oil prices reversed sharply overnight, despite a stronger US dollar and persistent noise from the White House and other nations about a coordinated oil reserve release into domestic markets. Brent crude rose 1.30% to $79.45 a barrel, and WTI rose by 1.10% to $76.45 a barrel. In Asia, both contracts have eased by 10 cents in quiet trading.
Brent has resistance at $80.00 a barrel, followed by $82.00 a barrel, while yesterday’s low at $77.60 and the 100-day moving average (DMA) at $76.70 provide support. WTI has resistance at $77.20 and $79.35 a barrel, with yesterday’s low at $74.80 and the 100-DMA at $74.30 providing support. support.
The SPR release story, whether by the US and/or other nations, appears to be losing momentum. In the bigger picture, the amounts allowable by law to be released are only enough to temporarily cap prices. There is no possible way that President Biden can spin the present oil market situation as a supply disruption, allowing a much greater SPR release. Oil is still flowing; it is just that prices are high. The oil sell-off is as much about the weight of speculative long positioning as it is about potential SPR releases.
Additionally, OPEC+ compliance remains well above 100%, and as a group, they missed their production targets last month. That implies that OPEC+’s capacity to hike production, even if they wished to, is limited to a few members. With speculative positioning somewhat more balanced, international travel reopening and lifting fuel demand, and with OPEC+ constraints in mind, any further sell-offs are likely to be short-term in nature and not sustained. Only Europe can throw a spanner in the works and if the Northern Hemisphere winter is a cold one, all bearish bets should be off.
Gold stages post-Powell whipsaw correction
I was impressively wrong about gold overnight and I really should have known better than turning bullish was going to end in tears. Following the re-nomination of Jerome Powell overnight, the Fed taper trade reignited and once again, rising US long-dated yields reasserted their dominance over gold prices, as the prospect of rising real yields reasserted themselves.
That led to a sharp fall by gold and when the critical $1832.00 to $1835.00 an ounce zone failed, it appeared to trigger a mass exodus of the algo and fast money through a very small exit door, as well as triggering other sell stop-losses. Once again gold has whipsawed the bulls in brutal fashion. Gold slumping by over $40.00, or 2.25% to $1805.00 an ounce. In Asia, some modest bargain hunting has seen it rise slightly by 0.17% to $1808.00 an ounce.
Having been burnt so badly, even if US yields retreat over the next few sessions before the Thanksgiving holiday, investors are likely to be much more cautious at re-entering long positions. Momentum will be muted and that means that the $1835.00 to $1850.00 region will cap gains this week, although I feel it unlikely, we will even get that far. If US yields remain firm this week, gold will be vulnerable to further losses through $1800.00. The 50-day, 100-day, and 200-day moving averages are clumped together between $1789.30 and $1794.00 an ounce. A daily close below this zone potentially signals deeper losses to $1760.00 an ounce.