Financial markets have been dishing up some harsh lessons to the accepted narrative this week. Having been blithely unkerned about US inflation since the FOMC, the renomination of transitory inflation dove, Jerome Powell, to the Federal Reserve Chair has seen long-dated bond yields ramping higher this week. Markets are now flapping about a faster Fed taper and earlier rate hikes.
Overnight, it was the turn of US President Joseph Biden to receive a similar lesson.
Market’s thanked Mr. Biden for his early signaling of an SPR oil release by taking back their shorts and sending oil over 3.0% higher overnight, after the President formally announced a release, in conjunction with other countries, totally between 70 and 80 million barrels. The devil is in the detail of course.
The release will be dripped in gradually over the coming months. Given there is no way that President Biden can construe the present level of oil prices as a supply disruption, it’s just a market with rising prices; that caps his ability to release more oil. The overnight announcement was a one-shot wonder, and markets responded appropriately. OPEC+ refused to be cowed, but I do not expect them to fly too close to the sun and reduce their planned 400,000 bpd increase next month.
Today, the Reserve Bank of New Zealand raised its policy rate by 0.25% to 0.75%, and signaled interest rates had seen their lows. I would argue we have seen the lows globally, and not just in New Zealand.
The RBNZ signaled a steady pace of hikes ahead, but instead of rallying, the New Zealand dollar was 0.50% lower at 0.6915. That was despite the government announcing an easing in its totalitarian quarantine requirements for overseas visitors (and citizens) which should have also been ostensibly bullish. The street had priced in 0.25% and, like me, was probably looking for 0.50% to be meaningful.
Despite inflation concerns ramping up in the US, as if it was a new and worrying development, gold was now around $90 an ounce lower than a week ago, at $1794.00 this morning. Bitcoin continued to look wobbly as well. Both are allegedly inflation hedges and should thus outperform in this environment. Both having shrugged off a stronger US dollar recently.
I would argue though, that gold, and possibly maybe infinitesimally, Bitcoin, were only inflation hedges when inflation is running really, really hot and real yields are collapsing. That’s not the case at the moment. US front-end yields have risen in recent weeks in response, flattening the curve, and long-dated yields have now started to play catch-up. A faster Fed taper, removing the oppression of QE, would help this process along.
Technology stocks were under pressure this week and rising US bond yields (and yields elsewhere), lay behind the shakiness. Technology valuations have been sub-orbital for a long time now, and they were thus, more vulnerable to an upward adjustment in interest rates. It is hard to justify paying a 14285 P/E with a yield between -150% to 1.50% when you may be able to earn 2.0% on a “risk-free” US government bond in a couple of months’ time.
I’m not calling the top in technology, by the way, there were a number of oligopolies out there in the space that will remain cash-generating machines. If US bond yields continue to rise though, those of us mere mortals may finally be able to contemplate buying the dip—a real dip. Legacy sectors, such as banking, and energy, and resources, should theoretically outperform in this environment.
The Korean won held steady this week as other regional currencies weakened in the face of the mighty dollar and higher US yields. My reasoning behind forthcoming Asian FX weakness has been well documented in past notes, so I won’t repeat myself again.
I believe the won has remained firm because the Bank of Korea was expected to raise policy rates by 0.25% tomorrow. I do, however, feel it will play catch-up and have a Kiwi moment if the hike will be less than or equal to 0.25%; as like oil, gold and Kiwi, the news was priced in. Markets were hedging their bets for now in case there would be a surprise.
The buy/sell the rumor, buy/sell the fact (depending on the asset class), price action this week could have been traced back to one occurrence, the sudden jump in the US 30-year yield this week, and to a lesser extent, the 10-year yield. For evidence, look at the rally in USD/JPY, the world’s premier yield differential play.
USD/JPY topped 115.00 this week, a 45-month high by my calculations, although I ran out of fingers and toes to count and the kitten asleep next to me refused to make her paws available. I will just add, the Japanese Ministry of Finance had no intention of intervening in USD/JPY at these levels so let’s put that to be right now. Call me back when we get to 135.00.
Until long-dated US yields start reversing their recent gains—and the author has long believed that is not a given—we shouldn’t expect an end to US dollar strength, nor should we be getting excited about equity markets for the rest of this month and possibly into Christmas.
The FOMC Minutes tonight might bring solace if they have a dovish tone. My bet was that they will not and that the FOMC members were as divided as the US Congress on the next course of action.
US GDP Q3 estimate tonight will be old news, but Durable Goods and Personal Income and Spending should be good for some volatility. If anything, markets were more vulnerable to the data reflecting more inflationary pressures, especially if Personal Income exceeded 0.50% for October.
Germany’s IFO this afternoon may reinforce the COVID-19 Euro-gloom if it would be weaker than expected. For now, Europe’s issues were being thrust from the spotlight by events in US markets and were unlikely to materially impact energy prices, for example, this week, short of a German and/or France lockdown, partial or otherwise.
Tomorrow is the Silence of the Turkey’s Day in the US, and I expect most Americans will make a long weekend of it. Thus, in an act of famous last words, I expect markets in Asia especially, to coast into the end of the week.
Asia equity markets drifting today
Asian equity markets were drifting today in sympathy with the price action on Wall Street overnight. Wall Street once again marked down technology stocks as US 30-year yields moved sharply higher once again, while banking and energy outperformed. The S&P 500 closed just 0.17% higher, and the NASDAQ fell by another 0.50% as the Dow Jones rose by 0.55%. Futures on all three indexes eased by around 0.20% in Asia.
Price action in Asian markets was broadly reflecting Wall Street. Japan’s Nikkei slumped 1.55% on its return from holiday, while South Korea’s KOSPI fell by 0.30% and Taipei by 0.25% reflecting their more tech-heavy makeup.
In Mainland China, the PBOC added liquidity via the repo today and that is providing some modest support. The Shanghai Composite was -0.10% lower with the narrower Shanghai 50, loaded with SOE heavyweights and banks, which rose by 0.20%. The CSI 300 was just 0.10% higher and Hong Kong was unchanged.
ASEAN markets, which more closely resemble the Dow Jones and S&P in makeup, rose modestly. Singapore was 0.20% higher, Kuala Lumpur unchanged, and Jakarta was up just 0.05%. Manilla was flat while Bangkok rose by 0.65%. Australian markets were also marching on the spot with the ASX 200 and All Ordinaries flat for the session. A post RBNZ rate hike fall by the Kiwi, and an impending easing of international visitor restrictions left the NZX 50 up 0.35%.
European markets were crushed on fourth wave Delta concerns yesterday, and I expect that sentiment to persist throughout today’s session as well, particularly as Wall Street is providing no strong lead. A weak German IFO will add to the dark clouds as will announcements of further movement restrictions from major European governments.
Wall Street will be awaiting the US PCE and Durable Goods data this afternoon before heading for the door early for Thanksgiving. Only a series of low prints, easing inflation concerns, is likely to change the cautious narrative in US stock markets this week.
US dollar consolidates
The US dollar paused for breath overnight, despite more gains by long-dated US yields. With a US holiday ahead and data this evening, currency markets in New York appeared content to consolidate recent greenback gains. The dollar index was almost unchanged at 96.49, before rising to 96.56 in Asia today.
The index’s initial target is the June 2020 highs around 97.80 with support at 96.00 and 95.50. The index’s relative strength index (RSI) indicator remained in overbought territory suggesting the US dollar was vulnerable to a short-term correction lower before resuming its uptrend.
USD/JPY volumes were thinned by a Japan holiday yesterday, leaving USD/JPY unchanged around 115.00 this morning. Comments from a Japanese official that they were watching USD/JPY appears to be capping the upside temporarily. Assuming the US yield rise is maintained, USD/JPY could extend gains to 115.60 in the first instance, while support remains at 114.00 and 113.50.
EUR/USD traded in a narrow range overnight but remained covered in silt at 1.1235 today. US dollar strength has been compounded by Europe’s Delta situation and the single currency remained on track to test 1.1160 this week. That in turn set up a potential retest of 1.1000. Only a reversal of US yields lower would alleviate the negative outlook, although the COVID-19 situation will cap any gains.
GBP/USD probed support at 1.3350 overnight but recovered to 1.3375 in Asia. 1.3400 and 1.3500 were resistance while sterling remained vulnerable to a test of 1.3300, being guilty by geographic association with the euro.
An as expected 0.25% hike by the RBNZ today has seen NZD/USD drop sharply by 0.65% to 0.6905, with nearby support at 0.6900 in danger of failing. That would open further losses to 0.6800 initially. With no RBNZ meeting until February now, the Kiwi is looking a lot more vulnerable than in recent times.
With market hopes of a 0.50% hike dashed, its yield differential support has eroded. AUD/USD was dragged lower by the Kiwi, falling 0.35% to support at 0.7200 today. Failure signaled further losses to 0.7100. With risk sentiment weighted negatively globally now, further US dollar haven buying will darken the outlook further for AUD and NZD.
The PBOC set a neutral fixing, almost unchanged at 6.3903 today while adding CNY 100 billion in liquidity via the repos. USD/CNY, however, remained anchored below 6.3900. That continued to provide some support to regional Asian currencies, but it was only slowing the slow sell-off in weakness Malaysian ringgit, Thai baht, Indian rupee, and Indonesian rupiah as US yields continued to rise.
Oil gives Biden a bashing
Oil delivered a resounding slap to the face of President Biden overnight after he finally announced his well-telegraphed intention to release oil from the SPR onto open markets. Totaling some 70 to 80 million barrels, if you include international partners joining the US, the releases will be spread over several months.
With President Biden using most of his discretionary quota available last night from the SPR, the amounts released over the time frame will not be enough to materially impact oil prices, and clearly, markets also thought the same. European COVID-19 lockdown concerns may act as a cap to prices in the short-term, but again, will not structurally upset the bullish dynamics underpinning oil and energy prices. Additionally, OPEC+ does not have the capacity to radically increase production, even if they wanted to, which they don’t.
After the announcement, Brent crude leapt 3.50% higher, finishing at $82.25 a barrel. WTI jumped 2.65% higher, closing at $78.50 a barrel. In Asia, prices on both contracts crept another 25 cents a barrel higher, with physical buyers perhaps ruing a missed opportunity earlier this week. Both contracts bottomed out above their 100-day moving averages and yesterday’s move likely signals the correction lower for oil was over.
Brent crude was testing resistance at $82.50 this morning which was followed by $83.25 a barrel. Support was distant at $78.60 and 477.60 a barrel with the 100-DMA lurking at $76.85. WTI had nearby resistance at $79.30 a barrel followed by $80.00 and $82.00 a barrel. Support was at $75.30 and $77.70 a barrel, followed by the 100-DMA at $74.30. A larger than 1 million barrel fall by US official Crude Inventories this evening could spark and jump in prices.
Gold’s bond torment continues
Gold’s awful week continued to go from bad to work, thanks to another jump higher by US 10-year, and especially, 30-year bond yields overnight. Combined with a rock-solid US dollar, gold was pummeled once again, falling 0.87% to $1789.00 an ounce, having tested the 50, 100 and 200 DMAs intraday. Some short-covering once again lifted gold in Asia, climbing 0.35% to $1795.00 an ounce. The rally, however, looked strictly corrective.
Having been burnt so badly, even if US yields corrected lower tonight ahead of the Thanksgiving holiday, investors were likely to be much more cautious at re-entering long positions. Momentum would be muted and that meant that the $1835.00 to $1850.00 region would cap gains this week, although I would be surprised if we even get as far as $1810.00 an ounce.
If US yields were to remain firm this week, gold would be vulnerable to further losses. The 50-day, 100-day, and 200-day moving averages were clumped together between $1789.30 and $1793,50 an ounce. A daily close below this zone would signal deeper losses targeting $1760.00 an ounce with interim support at $1780.00.