Equity markets vaccinate against losses | Daily Market Commentary with Jeffrey Halley
After a few tough days at the office, US equity markets found their footings overnight, which mechanically flowed through to a slightly lower US Dollar and higher precious metals market. Although the evening was heavy on headlines, notably in the M&A space, it was short on meaningful content. In typical fashion, market participants looked for a story that fitted nicely with the price action and decided that vaccines fitted the bill nicely. Always a go-to when stock markets rise for no reason, then there were more buyers than sellers. AstraZeneca recommencing its Phase 3 trial, and Pfizer expanding theirs fitted the bill nicely.
This state of affairs is likely to continue ahead of the FOMC rate decision and accompanying statement in New York on Wednesday afternoon. We can expect more range trading ahead of the decision, and more fitting of stories to the price action. It would be of no surprise if an expectedly uber-dovish FOMC re-energised the buy everything FOMO trade to some degree, though. Anyone wishing anything different from a central bank anywhere now, should slap themselves repeatedly while saying “lower for longer” over and over again.
Today in Asia, the Reserve Bank of Australia will release its last meeting minutes. There should be no market-moving surprises, and if anyone wants to know what they’re going to say, please re-read the paragraph above.
Of far more interest to Asia will be the China data dump today. China releases Fixed Asset Investment, Retail Sales, Industrial Production and Unemployment for August. The Industrial Production and Retail Sales data will be of most interest to market participants. Industrial Production is expected to rise to 5.1-% YoY, with Retail Sales growth climbing back to 0.00% from -1.10% last month. Markets are looking for continued confirmation that China’s export and domestic recovery remains on track, and that is what we expect to see as well. That should energise equity markets across the region, although, if the data disappoints for some reason, a quick reassessment may be necessary. In this environment, though, it is likely to be quickly dismissed as a mere “hiccup” in the overall improving trend, and then promptly dismissed.
In Japan, Yoshihide Suga was appointed as the new Prime Minister as expected. PM Suga also retained Taro Aso as finance minister and deputy PM. Attention will now turn to whether a new election will be called sooner rather than later. The only notable reaction in markets was USD/JPY falling 50 points to 105.80 overnight.
Ructions are continuing in the United Kingdom over the proposed Internal Markets Bill, which will unilaterally rewrite the Brexit agreement with the European Union. Sterling rose strongly as senior conservatives protested against the bill, but the first reading passed handsomely in the UK Parliament anyway. Given the healthy winning margin, hopes of a sustained Sterling appreciation are likely premature. Financial markets have not fully priced in Brexit risk as the transition period nears its end. Either from the perspective of the implications for Britain of the Internal Markets Bill, or the likelihood of no trade agreement with the European Union. The Sterling rally overnight looks like one to sell, not join.
Germany’s ZEW Economic Sentiment Survey will be the highlight of the European session. The September data is expected to fall slightly to 69.80, but with Covid-19 surging again across the single market, a larger than expected fall could weigh on the Euro and European equities.
Overall, the buy everything FOMO trade is dipping its toes back in the water after being giving a harsh lesson in two-way price action last week. We are likely to continue the gentle ascent for equities ahead of an expectedly dovish FOMC decision, with only occasional headline-driven short-term volatility likely to rock the boat.
Asian stock markets edge higher following Wall Street.
Wall Street equity markets rose overnight as confidence returned to some degree following a previous torrid week. The S&P 500 rose 1.27%, the NASDAQ rose 1.87%, and the Dow Jones rose 1.16%. The impressive overnight session was driven by the return of the herd, as much as it was vaccine news or M&A mania.
Asia is somewhat more circumspect ahead of China’s data releases today; it also being the deadline for TikTok to have divested its US operations. A stronger Yen sees the Nikkei 225 edge 0.70% lower with South Kores Kospi flat for the session so far. In China, the Shanghai Composite and CSI 300 have edged 0.50% higher with Hong King unchanged. Australian markets are flat ahead of the China data.
Singapore has risen 0.65% following the announcement that Tencent has chosen the City-state as its Asia hub. With unemployment at record highs by Singapore standards, this will be seen as a welcome shot of confidence in the local market and follows a series of recent wins on that front by Singapore in recent times.
Asian equity markets appear content to adopt a wait-and-see attitude today, ahead of a heavy data schedule as the week rolls on and plenty of central bank risk.
The US Dollar weakens modestly as equities strengthen.
The overnight session on currency markets was a quiet one, with the rise in US equities flowing through to a modestly weaker US Dollar. The dollar index fell 0.23% to 93.05, leaving it near the middle of its two-month range. The pro-cyclical Euro, Australian and New Zealand Dollars all edged higher, but again, remain mid-range for now. The USD/JPY fell 50 points to 105.70 after Mr Suga’s anointment as the new Japan Prime Minister. However, USD/JPY lacks momentum, and further falls are likely to be limited to the 105.00 area at best.
GBP/USD rose 50 points to 1.2845 overnight, as senior UK Conservatives railed against the first passage of the Internal Markets Bill. Notably, though, GBP/USD tested and failed, at resistance at 1.2905 intra-day. That should be a warning sign that Sterling faces a challenging environment now, with Brexit risks nowhere near priced into currency markets. Rallies look there to be sold in this environment, with critical support formed by the 100 and 200-day moving averages, (DMA’s), at 1.2700 and 1.2730. A daily close below this region is a harbinger of much deeper losses.
On the back of impressive Chinese data, and firm USD/CNY fixings by the PBOC, which is also maintaining tight domestic liquidity, the Chinese Yuan firmed to levels last seen in early 2019 today. USD/CNY has fallen 0.30% this morning to 6.7890, having almost wholly ignored US Dollar strength last week. Although slightly oversold now, USD/CNY’s momentum remains undiminished. Further CNY strength pushing USD/CNY down to the 6.6700/6.7000 regions cannot be ruled out.
Except for the GBP and CNY, currency markets continue to range trade ahead of the FOMC rate decision later this week.
Oil continues to give OPEC+ headaches.
Oil markets traded in a narrow range overnight but remain firmly anchored at the bottom of their recent price ranges. Brent crude fell 0.35% to $39.65 a barrel, and WTI was unchanged at $37.30 a barrel. OPEC revised its consumption forecasts lower, which negated any positive effect on oil from a slightly lower US Dollar overnight.
The OPEC+ monitoring committee meets on Thursday, and although nervousness over Brent prices must have increased, we do not expect any change to the production cut schedule. OEPC+ will take a wait and hope approach for this month at least.
The price action is ominous, though for both Brent and WTI. Brent crude has closed below its 100-DMA at $40.25 a barrel, for the second day in a row. It remains unable to rally off its multi-day bottom between $39.30 and $39.50 a barrel. A daily close below the latter implies further losses to the $37.00 area.
WTI’s 100-DMA, today at $37.45 a barrel, has supported WTI for the past week. However, WTI is consolidating in a narrowing symmetrical triangle, and a close below $37.00 a barrel implies further losses to $34.00 a barrel.
Oil markets are now facing the reality of falling demand and abundant supplies once again. Oil is unable to sustain any meaningful rallies in this environment, and overall, all the signs are suggesting that further price falls lie ahead in the next week.
Gold continues to range trade.
A risk-on equity market and the accompanying lower US Dollar lifted gold prices overnight. Gold rose o.80% to $1956.00 an ounce and has slightly increased again in Asia to $1963.00 an ounce. However, that still leaves gold in range-trading mode, albeit near the higher end of that range.
Gold has trendline resistance at $1970.00 an ounce today, with a daily close above that level suggesting further gains to $2000.00 an ounce initially is possible. However, initiating new long positions at those levels in this environment could turn out to be a painful trade. Gold has well-denoted support between $1900.00 and $1920.00 an ounce, which looks unlikely to be seriously tested again anytime soon.
Gold’s rally overnight is as much a US Dollar weakness story as opposed to a gold story. Gold lacks momentum, and as such, will continue to be buffeted by the direction of the US Dollar in particular. Patience is a virtue in precious metals markets at the moment, although their longer-term bullish fundamentals remain undiminished.