All Aboard the FOMO Train to Buy Everything | Daily Market Commentary with Jeffrey Halley
The buy everything trade powered ahead with a vengeance overnight, equities, oil and precious metals rising, with the US sell-off gathering pace also. Data releases overnight sent conflicting signals which makes the moves even more confusing. US ADP Employment severely underperformed, whiles US Services PMI rose, even as US Non-Manufacturing Employment eased.
European Services PMI’s also disappointed, but the fall in the Euro was short-lived as the “FOMO-nista’s” happily bought the dip. US short end yields actually rose overnight, which should have been Dollar supportive, as the US Treasury announced a higher borrowing issuance. There is a considerable amount of irony there, as it should have been a surprise to precisely nobody. The US was running trillion Dollar deficits before the pandemic, and they will be running much larger ones now.
On top of this, the follow-on US fiscal stimulus talks remain deadlocked mostly because the Democrats want an actual stimulus package. In contrast, the Republicans want what would effectively be a pay cut package. I am ambivalent regarding either position, content in the knowledge that with an election on the horizon, a deal of some sort will be done.
With so many conflicting signals, there was a certain desperation in the air to find facts that fitted the price action. Something that is all too common these days as “data” has all the answers to everything, allegedly.
The answer, in my view, is very much more straightforward. Financial markets went back to their happy place, with the “FOMO-nistas” catching the first express train out of momentum station. The headless chicken follow the herd price action on show overnight is causing me some concerns today though. Although I believe that US monetary policy is driving a secular rotation out of US Dollars and into equities, G-10 and emerging markets currencies, and most notably, precious metals, things may have got a little out of hand overnight.
Tomorrows Non-Farm Payroll’s data now looms as an acute short-term adverse risk, given the momentum displayed by the buy everything trade in the last 24 hours. The ADP Employment hints that tomorrow number could be well short of the 1.6 million job increase the markets expect. That reckoning could even come sooner if tonight’s US Initial and Continuing Claims disappoints. The risks are rising quickly, that tomorrows Non-Farm Payrolls could dish out some aggressive hard love to the legions of recent passengers aboard the buy everything express. Watch out for potential signal failures and train derailments.
Asia’s data release schedule is modest today, with the highlight being the Bank of India rate decision at 1415 SGT. The RBI is likely to bow to the pressure finally, and shave 25 basis points of the reference rate to 3.75%. A weaker US Dollar, in general, has not flowed through to a much stronger Rupee, as economic activity suffers from one of the world’s highest Covid-19 totals.
India’s economic outlook was not particularly upbeat before the pandemic, and is much worse now, making it one of Asia’s worst performers. The non-bank financial sector, in particular, continues to be a concern, as does a weaker Rupee. India is also suffering price rises in crucial goods, even as growth shrinks, leaving the RBI in an almost stagflationary quandary. The RBI will cut today, but India itself will likely remain an underperformer in the greater Asia region.
The Bank of England announces its rate decision this afternoon at 1400 SGT. With the British Pound a stronger out-performer in recent times, the risks are that the BOE mentions something about negative interest rates. I expect rates to remain unchanged at 0.10%, with the GBP 745 billion QE target also unchanged. My views on negative rates are well known; it is an ineffective policy. However, if the BOE Committee isn’t listening to me, comments on negative rates could spark a short and sharp retreat by the pound.
Asian equities are cautious today.
The buy everything trade was in full flight overnight, with Wall Street enjoying a strong session. That sentiment has not passed into Asia, which appears to be adopting a much more cautious stance, with regional stock markets a mixed picture today.
The Nikkei 225 has eased by 0.40% on disappointing earnings announcements. US rhetoric on banning Chinese apps is weighing on the Mainland today. The Shanghai Composite is 1.10% lower, and the CSI 300 has fallen by 1.30%. A much stronger Yuan is also eroding sentiment.
Regionally, Hong Kong has followed the Mainland, falling 1.45% today. Singapore has rallied 0.80% as bank earnings remain stable, although profits have dropped. Kuala Lumpur and Malaysia are also higher by 0.50% and 0.70% respectively.
Australia is also pausing for breath this morning, as Covid-19 fears in Victoria and New South Wales saps the positive momentum generated by Wall Street’s rise overnight. The ASX 200 and All Ordinaries are modestly higher by 0.25%.
With Asia content to drift on local issues, rather than blindly following Wall Street’s lead, Europe may also strike a cautionary note after outperforming yesterday. That may be no bad thing, with US Jobless Claims and Non-Farm Payroll data tomorrow, looming as more serious risk points than the market is currently pricing.
The US Dollar sell-off momentum grows.
The US Dollar sell-off accelerated overnight, spilling over from major currencies and into a broad swath of developing market currencies as well. The price action looked much more momentum-driven, as opposed to fundamental.
That, in itself, highlights an increasing risk, suggesting that the overnight greenback retreat was powered by fast money. With Jobless Claims tonight, and Non-Farm Payrolls tomorrow in the US, we have two major risk points to negotiate. Disappointing data could see an oversold US Dollar quickly rally as the FOMO herd stampedes back to the safety of the greenback.
Notably, the EUR/USD pair, which rose 0.50% overnight to 1.1875, has traced out a double top at 1.1910. A failure to close above that level this evening sets up a EUR/USD correction that could retrace as far as 1.1700. GBP/USD has now failed ahead of 1.3100 twice in the past week, and although its dips are shallow, it too has the potential to retrace back to the 1.3000 regions. The dollar index fell overnight but has traced out a double bottom at 92.55. Again, a failure to break this level implies a short squeeze back to 94.00 could occur.
Regional South-East Asian currencies outperformed overnight, with SGD, MYR and THB all firming against the greenback. USD/MYR fell 0.70% to 4.1900 as oil prices climbed in overnight trade. The Chinese Yuan also firmed, rising 0.50% to 6.9350 versus the Dollar. USD/CNY carved through support at 6.9650, marking the start of a 300-point fall. Profit-taking has seen USD/CNY climb to 6.9385 this morning. If it weren’t for US event risk over the next 24-hours, my view would be that a test of 6.9000 could come as soon as early next week.
The US Dollar weakness has paused in Asia, with major and regional currencies content to mark time until Europe’s arrival. The sell-off may resume at that stage. However, with the US Dollar now oversold on short-term measures, and important event risk over the next 24-hours, joining the buy everything FOMO-crowd could be a risky business.
Oil jumps more crucial on falling inventories.
US Crude Inventories delivered for oil markets overnight, dropping by 7.40 million barrels. Inventories have now fallen by over 18 million barrels in the past two weeks in the US. With the US Dollar in full retreat, that was enough for both Brent crude and WTI to break out of their one-month ranges. Brent crude traded up to $46.00 a barrel, before settling at $45.30 a barrel for a 2.20% gain for the session. WTI rose to $43.50 a barrel, on its way to a 1.60% gain, closing at $43.40 a barrel.
Although the price action was impressive, continued concerns over the US economy are muting gains. In WTI’s case, it notably failed to close above its 200-day moving average at 42.60. That suggests that oils rise will be more of a slow grind higher, rather than a rapid acceleration. It may turn out to be no bad thing for bullish traders. Neither contract is overbought on its relative strength index, with markets facing serious event risk in the next 24 hours with US employment data points.
The respective overnight highs form initial resistance with support for Brent crude at $45.00 a barrel, and for WTI at $41.60 a barrel. A failure by WTI to close above the 200-day moving average for today’s session increases the odds that the breakout could be a false one.
Precious metals explode higher.
A weaker US Dollar and more than a hint of FOMO saw both gold and silver explode higher in overnight trading. Gold rose 0.95% to $2038.50 an ounce, having touched $2056.00 an ounce earlier in the session. Silver, meanwhile, leapt 3.60% higher to $26.9450 an ounce, very near to its session highs.
Although I do not disagree with the premise of much higher precious metals prices, the reasons I have explained ad nauseum in previous commentaries, the pace of the rise is starting to concern. Both gold and silver are now very overbought on short-term technical indicators. The fast-money price action is also a concern. If a disappointing Non-Farm Payrolls number causes equities to reverse sharply, gold and silver will almost certainly follow suit.
Both gold and silver are modestly higher in Asia today, on light volumes. Asia being content to await the arrival of Europe for further direction. The overnight highs at $2056.00 and $ 27.1400 an ounce form initial resistance. Yesterday’s session lows at $2009.50 and $25.7300 an ounce become initial support. The far distance of gold’s support highlights the dangers and degree of pain; a sudden downward correction could inflict.