Don’t Dream Its Over? | Daily Market Commentary with Jeffrey Halley
Although the buy everything FOMO trade on Wall Street had looked more like a crowded house these past three sessions, the online trading democratisation gnomes refused to dream it’s over. With the news front relatively quiet, the herd could not resist something so strong as buying the dip. Equities bounced overnight, causing inevitable lockstep moves across currency energy and precious metals markets.
As Wall Street basked in the distant sun, the question is was that the correction? In all honesty, I do not have a definitive answer to that one. Guaranteed profits don’t just fall at your feet, and the price action of the past few days has delivered a harsh lesson in that respect. If short-term call spread options volume has indeed been the underlying driver of the equity rally in the US, then all the herd have lost so far is a few recent premiums, not a hole below the balance sheet waterline. I suspect the answer will be more two-way volatility, from now on, in Wall Street’s private universe. The underlying drivers of asset price appreciation remain in place. The rally may be more non-linear going forward, with four seasons in one-day price action becoming more the norm as opposed to the exception.
In Jakarta, the authors own private universe is about to get smaller again. Overnight the Jakarta Governor announced the return of fell scale movement restrictions from this Monday, after two months of semi-freedom. Covid-19 cases have been rampant in the big durian, and the Governor himself said that hospitals are dangerously near full capacity. Local companies recalling their staff to the office, instead of working from home, is allegedly the culprit behind the latest virus surge, and stands as a stark warning to other countries around the world considering the same. The re-imposition of lockdowns in Jakarta is likely to weigh on Indonesian equities and the Rupiah today.
Also, in Asia today, Bank Negara Malaysia announces its latest rate decision at 1500 SGT. Unlike other regional compatriots, Bank Negara still has some easing fuel in the tank, with its reference rate currently at 1.75%. With oil’s recent price fall flowing into Ringgit weakness, and with the threat of removal from the FTSE Russell World Government Bond Index later this month, analysts are split 50/50 on whether the central bank will shave another 25 basis points of rates. My thruppence-worth, is that Bank Negara will keep its powder dry to ride out the near-term event risk and support the currency.
The European Central Bank (ECB) also announces its latest rate decision this evening. The unanimous word on the street is that the Deposit Facility Rate will be left unchanged at -0.50%, and the reference rate at 0.0%. Much more attention will be focused on the press conference at 2030 SGT. Markets will be looking for possible signs of displeasure over the rise of the Euro and the outlook for recovery. Any downward pressure on the Euro caused by the ECB is likely to be transitory though; this is a weak US Dollar story, not a strong Euro one.
US Initial and Continuing Claims, tonight, are expected to fall to 850,000 and 12.9 million respectively. With the newly introduced concept of two-way price risk to equity markets, unimpressive numbers could see the equity rally halt again, with the lockstep reaction across other asset classes. With oil prices wobbling, US Crude Inventory data will assume elevated importance as well. A rise in crude and gasoline inventories could deepen oil’s price correction lower and decouple it from equity markets.
Wall Street rallies, Asia less so.
Wall Street’s army of dip buyers emerged tentatively from hiding overnight, after sheltering for the past three sessions. Led, off course, by big tech, Wall Street finished on a positive note. The S$P 500 rose 2.0%, the NASDAQ jumped by 2.70%, and the Dow Jones rallied by 1.60%.
As is Asia’s want in recent times, regional markets have moved my more circumspectly, even the ever-exuberant Australians. That is a two-way street, with Asia refusing to mirror the Wall Street sell-off in its scale either. It suggests Asia, while happy to buy into the get long everything global recovery rally, are viewing daily price action in New York with some caution. That view has merit, especially when one strips out the big-tech effect from the major indices. All stocks are created equal, but some are more equal than others, to paraphrase George Orwell.
Asia-Pacific’s stock markets are showing a moderately higher to neutral performance today. The Nikkei 225 has risen 0.65% and the Kospi by 0.95%. In China, the Shanghai Composite and CSI 300 are both 1.0% higher, with Hong Kong unchanged. Singapore is down 0.20%, and Kuala Lumpur is down 0.70% ahead of today’s rate decision. Australia’s All Ordinaries and ASX 200 meanwhile, have risen a modest 0.50%.
The day’s big loser is the Jakarta Composite, which has gapped lower and fallen by 5.00% ahead of the re-imposition of lockdown measures on Monday. That fall may also be weighing on its neighbours in Malaysia and Singapore. The JCI is testing its 100-day moving average (DMA) as we speak, with an extended new lockdown in Jakarta negative for Indonesian assets on many levels.
Northern Asian markets are likely to continue in a positive mood for the rest of the session. However, South-East Asian markets are likely to underperform, weighed down by the Jakarta Covid-19 effect.
Equity rally eases the US Dollar short squeeze.
The US Dollar staged a modest retreat overnight as asset markets marched in tune with movements on the major equity indices on Wall Street. The dollar index fell by 0.30% to 93.24 and has edged lower to 93.16 this morning. That has reflected a move higher by the G-10 currency grouping, with EUR/USD reclaiming 1.1800 and other pro-cyclical currencies such as AUD/USD and NZD/USD rising by 1.0%.
GBP/USD has a volatile overnight session as government lawyers, and ex-conservative Prime Ministers railed against the proposed unilateral changes by the UK to the Brexit agreement. GBP/USD fell 100 ticks to 1.2885 at one stage, before rallying as the Dollar weakened, to close slightly higher at 1.3000. With Brexit risk well and truly back on the table, extended rallies above 1.3000 will be hard to sustain unless the UK Government suddenly backs down on its agreement changes.
Amongst regional Asian currencies, the USD/CNY is unchanged at 6.3880 as the PBOC maintains its firm fixing stance. USD/THB has fallen by 0.40%, and other regional currencies have shown modest gains today.
Regional currency traders are likely having one eye on Indonesia’s histrionics this morning, with eh Jakarta Composite Index hitting its limit-down circuit breaker after Jakarta announced it was re-entering COVID-19 lockdown this coming Monday. That has flowed into currency markets with the Indonesian Rupiah falling today, USD/IDR rising to 14,850.00. The Bank of Indonesia (BI) is actively selling US Dollars this morning, to stem the Rupiah fall. Having traced out a triple top at 14,900.00 over the past two months, that appears to be BI’s line in the sand. Further losses cannot be discounted from here although we expect BI to continue intervening heavily. As South-East Asia’s largest economy, extended economic travails in Indonesia will have an inevitable dampening effect on its regional neighbours.
Oil stages an unimpressive rally.
Oil prices recovered modestly overnight, but the rally look artificial, prices moving higher in sympathy with equities and not because of improved oil fundamentals. Brent crude rose 2.20% to $40.60 a barrel, and WTI rose 2.85% to $37.80 a barrel.
Crucially for both contracts, they both traced out lows at their 100-DMA’s before recovering. Brent crude’s 100-DMA at $39.70 a barrel, and WTI’s at $36.80 a barrel, are now critical supports that must hold on a daily closing basis. Failure opens up deeper losses for both contracts as the future markets point to abundant near-term supplies and concerns over OPEC+ compliance persist.
Oil’s near-term fate is tied to equity markets, and as long as they continue moving higher, then oil will also follow. Tonight’s US crude inventories assume much greater importance though than recent times. With oil having fallen hard and fast, a rise in stockpiles by either crude or gasoline could spark another sell-off.
If Brent crude settles for an extended time under $40.00 a barrel in the coming weeks, the ball will move into OPEC+’s court again, with pressure increasing to roll back the recent easing in production cut targets. Achieving robust compliance this time around may prove much harder than previously.
Gold buyers return as equities find support.
Gold rose overnight, climbing 0.77% higher to $1946.50 an ounce as the rally on Wall Street sparked US Dollar weakness. Gold’s critical support zone between $1900.00 and $1920.00 an ounce has weathered the storm and remains solidly intact. Near-term resistance lies just above at $1952.00 an ounce with trend-line resistance today at $1973.00 an ounce.
Gold’s rally overnight was as much about the return of confidence to equity markets as it was a pure gold story. Gold’s immediate direction will continue to be set by moves in equities and the US Dollar, and as such, another sell-ff on Wall Street will see gold’s support zone tested again. That said, investors seem happy to pick up gold on significant prices dips, and gold lacks any notable bearish momentum.
Gold is likely to range trade in a broad $1910.00 to $1970.00 band until the path of the equity markets becomes more evident.