Yesterday it was the turn of the Bank of England, Japan, Europe and Australia, I mean the Bank of England, to give markets another hawkishly dovish policy decision. Despite telegraphing future rate hikes pre-meeting, the BOE bottled it on the day, preferring to wait-and-see the effects of employment from the end of the Government's furlough scheme. The BOE did signal hikes were still on the way to their credit, probably starting in December, as did the Norges Bank yesterday. Possums in the headlights and central banks have been muttered a lot by me this week.
There was no doubt long sterling and short UK rates was a crowded trade. And markets reacted appropriately afterwards, GBP/USD collapsing 1.30% overnight and UK yields falling. Having all but promised markets a rate hike next month, assuming UK employment holds up, the BOE will have some serious credibility issues on its hands if it doesn't.
As I have said before, zero per cent rates bother me not; it is QE that has to go, having rapidly reached its use-by date. QE makes those who can afford to belong assets richer, while those who are young and having their future wealth stolen, those on low or fixed salaries, those who rent, are made poorer. The double kidney punch is that "transient" inflation will further erode their spending power. QE-ing into an inflationary environment is economic stupidity that is saving up serious societal problems for the future.
The Bank of England decision sparked a rally in European and US bond markets, and the street swivelled back to lower for longer. I suspect that has as much to do with market positioning than lower for longer, though, as the US dollar continued to power higher yesterday. From my perspective, that is a warning that the drop in US yields may only be temporary. Gold was a significant beneficiary of lower yields, rising 1.25% yesterday. But again, the higher US dollar warns gold's day in the sun may only be temporary.
How temporary, will likely be decided by today's US Nonfarm Payrolls data. Market expectations are hovering around 450,000 jobs added, with another fall in Initial Jobless Claims yesterday suggesting that the job market is finally moving. A print north of 500K likely stirs the inflation, taper, and hiking noise again, and could see that rally in bonds yesterday evaporate along with gold. Conversely, another disappointing number sub-350K is likely to have the opposite effect and will see the US dollar given an end-of-week slapping.
In Asia today, Japanese Household Spending rebounded by 5.0% MoM for September, thanks to a low base in August due to Covid restrictions. The YOY number was still negative, and markets seem more on comments on the news tickers by Japanese officials regarding the makeup of the forthcoming stimulus package. Philippines Inflation rose by 4.60% YoY in October, but thankfully, eased to just 0.20% MoM. That will be a relief to the central bank, whose policy settings are far below inflation but still leaves the country among the more vulnerable in ASEAN to a Fed taper-tantrum, should it occur before the end of the year. Indonesian GDP disappointed, rising only 1.55% QoQ Q3. Still, with life here back to normal in Jakarta (including traffic and flooding) and firm commodity prices, the Q4 data should show an accelerating trend helped by a long-awaited consumer spending rebound.
China nerves appear to be rising into the week's end. Property developer, Kaisa, had its shares in Hong Kong suspended today. Units of Evergrande (OTC:EGRNY) have an offshore bond payment deadline tomorrow. And Caixin is running a story that the regulators have instructed some banks to hold wealth management assets at present levels. China's shared prosperity intervention never went away; they just took a holiday. All I can say, is buyer beware with the Central Committee meeting also running from the 8th to11th next week. That has put Asian markets in a cautious frame of mind today, waiting for the US nonfarm payrolls today and developments in China as well.
Asia ignores US equity rally
A wave of caution is sweeping the North Asia heavyweights today, and as usual, it seems to have spurred a rotation into ASEAN markets further South. That has seen Japan, South Korea and China ignoring yet another rally on Wall Street yesterday. With markets moving into lower-for-longer mode, the rate-sensitive NASDAQ and S&P 500 outperformed, while the Dow Jones suffered. The S&P 500 finished 0.42% higher, with the NASDAQ jumping 0.81%, while the Dow Jones lagged, rising just 0.09%. Futures on all three are steady in Asia.
In Japan, nerves around the makeup of the fiscal stimulus package have spurred profit-taking. The Nikkei 225 has fallen 0.75%, with South Korea's KOSPI down 0.55%. In China, the Shanghai Composite has fallen on wealth management concerns, edging 0.25% lower. The CSI 300, by contrast, has risen by 0.20%. China property nerves are font and centre in Hong Kong, with the Hang Seng retreating by 0.95%. Tech-centric Taipei has increased by 0.25%.
Singapore has climbed by 0.60% in regional markets on strong bank earnings, with Kuala Lumpur edging 0.20% lower as oil prices remain pressured. Bangkok and Jakarta are flat, while Manila has leapt 1.65% higher after benign inflation numbers and a dollop of IPO-mania. Australian markets are also in the green, helped along by a dovish RBA this week and another yesterday's rally on Wall Street. The ASX 200 and ASX All Ordinaries are 0.50% higher.
Europe's data calendar lacks tier-1 releases today and will likely open higher on the back of a strong Wall Street finish. Three Bank of England speakers today will bring some volatility to UK equities after yesterday’s surprise policy decision. Overall, I expect activity to be muted this afternoon in Asia and Europe as the market awaits this evening US jobs print.
US Dollar eases post-FOMC
The Bank of England's surprise call not to hike rates yesterday sparked some volatility in currency markets as it led to a sharp retreat in yields across the US and Europe. Somewhat surprisingly, the US dollar outperformed, with the dollar index rising 0.51% to 94.33, where it remains in Asia. Given the moves in bond yields and gold yesterday, the rise of the US Dollar is perhaps a signal that rallies elsewhere will be temporary.
EUR/USD fell 0.50% to 1.1550 yesterday, and support is at 1.1520 looms. Failure signals more losses to 1.1400. Resistance is well-marked at 1.1615 and 1.1700. Sterling collapsed 1.30% to 1.3500 yesterday post the BOE policy decision, and the street had clearly gone into the meeting long expecting a rate hike. 1.3400 looms as sterling's next significant support, and its fate will likely be decided by the tone of the BOE speakers today.
USD/JPY has fallen to 113.65 as US yields moved lower yesterday. 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 both retreated yesterday as the US dollar staged an impressive rally. AUD/USD is 0 65 lower at 0.739 and is testing its 100-day moving average at these levels' thanks, in part, to the dovish fence-sitting of the RBA. NZD/USD has slumped by 0.80% to 0.7090 as of today. A close below 0.7100 signals a retest of 0.7000.
Asian currencies retreated modestly yesterday before firming slightly today. Asian markets are marking time into tonight's US nonfarm payrolls. The strong US dollar rally in the DM space yesterday is a clear warning, though, that a blowout payroll number to the topside and a consequent rise in US yields could see another wave of selling in Asian FX next week.
OPEC+ declines to hike oil production
OPEC+ refused to bow to international pressure, leaving monthly production increases on an unchanged path. The grouping is blaming movements in the natural gas market for oil's rise. Below the surface, the resumption of US/Iran nuclear talks would have meant zero chance of increased production, with even a remote possibility that the full weight of the Iranian output could return to international markets.
Brent crude and WTI had very volatile trading yesterday, trading in an almost three dollar range, before closing virtually unchanged in New York as the dust settled. A lack of movement from OPEC+ being cancelled out by a much stronger US dollar. In Asia, some physical dip-buyers have pushed Brent crude 0.40% higher to $81.25, while WTI has risen by 0.30% to $79.60 a barrel.
Notably, both contracts have now staged downside breakouts through two-month trendline support, and although both tested those breakouts yesterday, their rallies petered out a negative technical signal. Potentially, oil's correction lower, helped along by lower coal and natural gas prices, could still have some way to go. The absence of heavy Asian buying today on this dip suggests they feel the same.
Brent crude's resistance is distant at $84.50 and $85.00 a barrel, with support at $80.00 a barrel. Failure is likely to another wave of speculative longs exiting. WTI has resistance at $83.50, while support is at $78.00 a barrel. Threats by President Biden to use "tools", including SPR releases, will have only a temporary impact on prices. Oil's fundamentals remain solid, and with the Northern Hemisphere winter approaching, this dip in prices is likely to be volatile but still transitory.
Gold's rallies, but beware the false dawn
Gold had another volatile session, rising by 1.25% to $1791.50 an ounce. The rally was especially surprising given that the US dollar resolutely rallied overnight. I can only surmise that the dovish Bank of England policy meeting and a wave of lower for longer buying in global bond markets supported gold as US real interest rates turned more negative.
Once again, the robust US dollar rally is a warning sign that both the global bond rally, and by default, gold's rally may be luring investors into a false calm. Only an extremely weak US nonfarm payrolls print tomorrow night will give gold a chance to recapture $1800.00 an ounce.
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. Resistance above $1810.00 has been challenging, and only a close today above $1815.00 an ounce will change my bearish outlook. Failure of $1760.00 and $1750.00 should see gold retest $1720.00 an ounce.