Another day, another massive swing in direction driven by an Omicron headline, this time its arrival in the United States aboard a vaccinated traveller from South Africa. An incipient recovery in stock markets was quickly wiped out. The US dollar also staged an uneven rally, even as the US yield curve flattened once again. The process may have been helped along with another round of powerful US data releases, with ISM and Markit Manufacturing PMIs remaining robust, Construction Spending rising, upward revisions in US GDP forecasts and Federal Reserve Cleveland President Mester on the wires in full hawkish mode.
That follows UK CPI hitting 10-year highs in October, with Nationwide House Prices rising by 0.90% in November, far higher than expected. That comes after Eurozone Flash Inflation for November hit 4.90% on Tuesday, the highest since 1991. The inflationary noise continues to rise in volume, and I rather suspect that even without Omicron, growth stocks (especially tech), would be enduring some rather wild price swings anyway. For now, inflationary expectations in the US are being reflected in rising short-dated yields with long-dated yields falling. The five-year forward-forward inflation break evens continue to price in very little long-term inflationary stress, which goes some way to explaining the curve flattening. You wonder how long it will last.
Omicron aside, the upcoming FOMC, Bank of England and European Central Bank meetings will be interesting this morning. The rhetoric from Powell & Co suggests they have not had an Omicron blink this time and will announce a faster taper. The BOE has led markets to water before on rate hikes and could do so again this month. That’s a 50/50 in my mind. The European Central Government Debt Monetizer Bank will have some tougher questions to answer. Keeping European Government and Banking balance sheets afloat has turned into a multi-decade job, and with virus cases surging already over the continent, more movement restrictions, winter energy prices, and now Omicron, I am expecting a euro-fudge disguised as no real action. That leaves me to believe that Q1 will still be the quarter of the US dollar, although I acknowledge that the evolution of Omicron may make the US dollar rally uneven and throw a few banana skins out there.
In Asia today, South Korean GDP growth eased back to mid-2020 levels with QoQ Q3 climbing just 0.30%, led by a fall in services and domestic consumption. Inflation accelerated though to 3.70% YoY for November, well above the 3.10% expected. The next Bank of Korea meeting will be a live one, but dusting of stagflation definitions in South Korea won’t be necessary today, with local markets likely to be fixated on noise that more government social restrictions are on the way.
The Bank of Japan’s Suzuki was upbeat in his forecasts for Japan next year, even suggesting that the BoJ had to be alert to accumulating side-effects of monetary policy easing. I’m guessing he means inflation. Who said the BoJ doesn’t have a sense of humor? I’m not sure his concerns will be necessary though as Japan has shut itself off from the world, with only Japanese citizens now allowed to book flights home, assuming there are any flights now.
Down in the lucky country, Retail Sales in October grew by a robust 4.90% while the Trade Balance held steady at AUD 11.22 billion. That disguised falls in both import and export volumes reflecting lower China demand and lower domestic demand due to lockdowns. However, with China’s energy crunch easing, and Australian states reopening despite the fence going up at the international border, I expect the lucky country to stay lucky and get luckier into the end of the year and Q1 2022.
New Zealand’s Export and Import Prices both rose sharply by 4.60% and 3.80% QoQ for Q3. New Zealand has an inflation problem and the RBNZ is well behind the curve with supply chain bottlenecks and rising prices looking ever less “transitory.” As a Kiwi homeowner getting some landscaping done, today's image is a case in point. Work has only just resumed on my retaining walls after New Zealand ran out of the special screws required. The whole country. Today’s image was my overjoyed builder sending me good news. The wall I am building wouldn’t keep Trump happy, but its cost has escalated by 50% in over a year which is about how long you will wait for tradespeople back home. Maybe Bilbo and Frodo were onto something building underground?
Eurozone PPI this afternoon is likely to give the ECB more headaches and food for thought. US markets will be focused on Initial Jobless Claims after ADP Employment overnight gained 534,000 jobs. Another sub 200k number may give some life to the Fed taper trade again, and tomorrow's Nonfarm Payrolls will if it prints well North of 550k. We also have four Fed speakers later today as well, all of whom may be in a hawkish mood. Of course, all this is caveated by which Omicron headline is on the menu in the “specials of the day” section.
US futures rally eases Asia equity pain
Asian equities are lower today, but only modestly so in the context of this week’s volatility globally. For that, they can thank the after-market buy-the-dip FOMO gang, who have lifted US index futures higher this morning after the overnight Omicron sell-off. In the OTC session, Wall Street took a bath yesterday as the first US Omicron case was detected. The S&P 500 fell by 1.18%, the NASDAQ tumbled by 1.83%, with the Dow Jones retreating 1.38% lower.
In Asia, US index futures have risen sharply. S&P 500 futures are 0.55% higher, NASDAQ futures are up 0.45%, and Dow Jones futures have jumped by 0.65%. I can see no obvious reason for the futures rally, other than Dr Anthony Fauci saying don’t alter travel plans and that he hopes the US Omicron travel restrictions can end soon. As good a reason to turn wildly bullish as any this week I suppose.
That has taken the edge of the potential negativity in Asian markets following the overnight slump by Wall Street. Asian markets are mostly lower, but not drastically so. The Nikkei 225 has fallen by 0.60%. Rising virus cases, new border restrictions, a postponed domestic easing of restrictions and rising inflation hasn’t dented the KOSPI, which has rallied 0.95% today with technology and electronics leading the charge as local investors dust of the work-from-home trade.
Mainland China is sedate with the Shanghai Composite unchanged, while the CSI 300 is up just 0.35%. Hong Kong is just 0.25% higher although property heavyweights are outperforming as companies move to issue more debts domestically, easing liquidity crunch fears.
Around the region, Singapore is 0.17% lower while tech-heavy Taipei is following the KOSPI lead, rallying by 0.75%. Kuala Lumpur is flat with Jakarta 0.70% higher and Bangkok falling by 0.25%, with Manila, dominated by a small number of heavyweights, has leapt 1.25% into the green. Australian markets have unwound some of their earlier losses as South Australia tightened internal border restrictions, following tightened international restrictions. The rally in US indexes has lifted local markets, leaving the All Ordinaries down just 0.30%, while the ASX 200 is just 0.10% lower.
Equity markets continue to play Omicron tennis and traders looking for short-term direction, should just wait for the next virus headline and then act accordingly. As I have said previously, volatility, and not market direction, will be the winner this week.
The US dollar manages an uneven rally
The US dollar staged an uneven rally overnight, recouping some losses in the EM space as the Turkish lira had another horrific session, and maintaining downward pressure on the euro and Commonwealth currencies while losing versus fellow havens, the Japanese yen and the Swiss franc.
The British pound, Canadian, Australian and New Zealand dollars remain under pressure as proxies for the commodity space and investor risk sentiment. Sterling is trading in the middle of a wider 1.3200 to 1.3350 range with USD/CAD looking likely to test 1.2850 this week. Both the Australian and New Zealand dollars continue to threaten their 2021 lows at 0.7100 and 0.6800. The euro rally appears to have run out of steam above 1.1350 as virus fears, looming tighter restrictions, and a divergence in monetary policy direction combine to cap gains. Trading at 1.3130 today, key levels at 1.1370 and 1.1200, with failure of 1.1200 heralding further losses to 1.1000.
A rise in US equity index futures today sees USD/JPY rise 0.25% to 113.25. The yen's rally has been powered by easing long-dated US yields, and Omicron fears spurring huge amounts of yen haven buying. A retest of 112.50 cannot be ruled out, especially if the Omicron news tickers get more negative. Given that the Federal Reserve has tilted notably to the hawkish side, one cannot help but feel that a fall by USD/JPY to between 111.50 and 112.50 could represent very good value for buyers on a medium-term basis. The extreme nature of the Japan border closure could also weigh on the yen over the next few weeks.
Asian currencies gave back some of their gains overnight, as expected, as the Omicron news ticker turner negative. The exception was the Korean won, which seems to be finding support from rising Bank of Korea tightening expectations and a booming export market. Elsewhere, the PBOC set a weaker yuan fixing versus the US dollar today, and that has fed through to more weakness in Asian currencies versus the greenback. The Turkish lira is 1.70% lower in Asia after President Erdogan sacked his finance minister and the central bank intervened to buy lira yesterday. The situation there becomes more farcical by the day, but any spillover into the wider EM space is limited to non-existent. The short-term direction in Asian FX will continue to be driven by Omicron headlines.
Another volatile day for oil
It was another night of wild tail-chasing moves in oil trading with very wide ranges as markets were buffeted by Omicron sentiment and headlines. Oil has become strictly a day traders’ market now. Markets ignored the US official crude inventory data, focusing on the California Omicron case and oil finished lower for the day. Brent crude fell 1.70% to $68.95 a barrel, and WTI retreated 1.90% to $65.70 a barrel.
Today, some soothing comments by Dr Anthony Fauci have lifted US equity futures and seen FOMO buyers emerge in Asian oil markets. Brent crude and WTI rising 1.10% to $69.70 and $66.40 a barrel. We are but one negative headline on Omicron wiping that gain out as quickly as it appeared, though.
With panicked tail-chasing blowing out volatility this week, the full OPEC+ meeting tomorrow has not come soon enough, with oil’s intraday price action now bordering on juvenile, and fair-weather algo “market-maker” liquidity doing what it always does in financial markets when volatility spikes, disappearing. Yesterday’s first day of OPEC+ was a strictly administrative one, with the main event coming later today. I believe that the collapse in oil prices, and the great unknowns surrounding meaningful facts and Omicron, will see OPEC+ call a temporary halt to production increases. That may restore a modicum of stability to oil markets.
Technical levels and indicators are fairly useless in markets such as this, driven by panicked swings in investor sentiment and low liquidity. However, for what it is worth, the relative strength indexes (RSIs) on both Brent and WTI are now heavily oversold, indicating markets are vulnerable to a short squeeze. The week's lows at $67.50 and $64.50 mark the first decent technical support.
Gold has another underwhelming day
Gold’s price action continues to be unimpressive. Despite trading in a $22.0 an ounce range, gold finished the day just 0.40% higher at $1782.00. There are zero signs of any safe-haven bids emerging to shelter from virus volatility, and it is falling despite both US yields and the US dollar also falling. Gold has now recorded its 4th successive daily close below its 50,100 and 200 DMAs clustered between $1791.00 and $1792.20 an ounce, yet another bearish signal.
Gold tested and failed ahead of $1800.00 overnight, with the moving averages and $1815.00 forming plenty of resistance levels. The week’s low at $1770.00 an ounce, has traced out a double bottom support level. Failure of $1770.00 now signals a retest of $1760.00 and $1740.00 an ounce. I do not rule out a move lower to $1720.00 this week, especially if the Nonfarms puts the Fed taper front and centre.