Financial markets limped across the finish line
Whether the end of last week was a bit slow news-wise, an inauguration comedown, or just investors reducing risk exposure in their portfolios, financial markets limped across the finish line. Stocks and commodities eased, and on currency markets, the US Dollar managed to climb for the first time in three days.
A similar tone is pervading Asian markets again this morning with the news wires carrying stories about vaccine delays and possible roadblocks in the Biden $1.9 trillion stimulus plan. Regarding the former, it is an indictment of society in this digital hyper-connected world that issues with vaccines are weighing on sentiment. The arrival of Covid-19 vaccines is not like Amazon Prime, click a mouse, and the order arrives a couple of hours later in enough packaging to deplete the Amazon rain forest.
The entire value-chain is fiendishly complex from manufacturing, to transport to deployment to injection. Doubly so as all vaccines on the market so far are double-shoters. The world is quickly discovering that any hiccups along that chain have knock-on effects along the rest of it. In this respect, a modicum of common sense should highlight that vaccines are not an instant panacea to the world’s ills, and realistically are not likely to be for another six months.
Similarly, the much-mooted Biden $1.9 trillion stimulus package has been naively priced by markets as sailing through the Senate unimpeded. All the while, blissfully ignoring the filibuster, reconciliation and the Byrd Rules. Noises from Washington DC suggest that President Biden’s honeymoon won’t extend to Senate Republican’s handing over ten votes to ease the package though on a 60-40 majority. The 60-vote majority can be slimmed to a 51-vote majority through reconciliation, breaking down the bill’s constituent parts, flushing them through a committee and passing that bit with a simple majority. The Byrd Rule means that state and local government aid, by my interpretation, will need 60 votes regardless.
Financial markets are better than ever at group-think myopia these days, ignoring the story’s parts that don’t fit their chosen narrative. In this case, the stimulus package’s passage, as highlighted by the author previously numerous times, will be longer and more complicated than the street has expected. I highly doubt that the $1.9 trillion headline number will survive the Senate either. That result of this dawning of reality should be the Dollar strength and slightly weaker equity and commodities markets for the first part of this week.
One thing for readers to look out for is the Johnson and Johnson Covid-19 vaccine update. J&J expects to release preliminary data by the end of January regarding the efficacy of their vaccine. If the herd are looking for another reason to load up on the great rotation, global recovery, buy everything trade, positive results from J&J could generate it. Why? Because the J&J vaccine will be a single shot dose logistical game-changer, assuming they can produce enough of it.
This week is a bit more exciting than last on the data front in Asia with South Korean, Taiwan and Philippines GDP and China Industrial Profits and Japan Retail Sales. The US releases Q4 GDP, Durable Goods and Personal Incomes data. Europe releases Consumer Sentiment with Germany releases its IFO Survey and Q4 Flash GDP. We also have earnings from US tech heavyweights Apple, Microsoft and Facebook, as well as Tesla.
The one ring to rule them all though will be this week’s FOMC meeting, with the Federal Reserve expected to leave the Fed Funds rate unchanged between 0.00% and 0.25%. It’s $120 billion per month bond, and MBS buying programme will also remain intact. The decision and press conference occur in the early hours of Thursday for Asia. Among the more hair-brained ideas I read over the weekend, the Fed might signal an early taper to the QE programme and rate normalisation as “vaccines” change the game. That brings us back to instant gratification again, with monetary policy now an Amazon Price one mouse click same-day delivery change away.
Although the Fed should be comfortable with the move higher in US yields, Chairman Powell needs to squash aggressively any such taper thoughts. With the world now more addicted to GFC zero per cent money than ever – realistically, no major central Western central bank “normalised” policy – a taper tantrum now will make the Yellen one look like a kids tea party. With markets fretting about US 10-year yields climbing above 1.0%, still virtually free money, the Fed needs to knock this one on the head and quickly or face some Bitcoin-like volatility.
With the week’s event risk weighted toward the back end of this week, and with no clear direction from Wall Street Friday, Asian asset markets are likely to drift today.
Equities drift higher in Asia.
The news that China has overtaken the US as the biggest destination for Foreign Direct Investment (FDI) appears to have lifted spirits in Asia this morning, with exchanges in Northern Asia mostly higher. The Nikkei 225 has risen 0.43%, while the Kospi has leapt 1.80%. China’s Shanghai Composite has risen 0.55%, with the CSI 300 climbing 0.75%. Chinese retail investors are piling into Hong Kong-listed big-tech stocks today, lifting the Hang Seng by 1.85%.
It appears the China event horizon is not extending to ASEAN markets though, which appear to be following Wall Street’s lead. Singapore and Kuala Lumpur have fallen 0.25%, while Bangkok is down 0.55% and Manila is 0.30% lower. That China beta is lifting Australian stock markets though, with the ASX 200 up 0.25% and the All Ordinaries up 0.45%. With a holiday in Australia tomorrow, volumes are muted.
The FDI story has definitely lifted China and its near neighbours today, blowing an economic recovery tailwind into geographically adjacent markets. Looking ahead, equities will find more meaningful reactions from the progress or not of the Biden stimulus package, and the level of dovishness displayed by the Fed at their FOMC meeting this week.
Improved tone lifts China-beta currencies.
The US Dollar rallied on Friday as investors reduced risk into the week’s end. The dollar index rose 0.12% to 90.24, having tested support in the 90.00 area earlier in the session. With its weighting to non-commodity currencies, the dollar index is drifting today. Along with the Euro, Sterling and Yen, the dollar index is almost unchanged.
Most of the action has been in the Asian regional, and commonwealth commodity currency sectors, boosted by China overtaking the US as the number one recipient of FDI. The Australian, Canadian and New Zealand Dollars are all 0.20% higher versus the greenback this morning, recouping some of their risk aversion losses from Friday. Their trajectory over the week will depend mostly on the dovishness of the FOMC on Thursday Asian time.
Regional currencies are also drifting higher against the Dollar on the FDI story. The Yuan is up 0.15% to 6.4760; the Singapore Dollar has risen 0.16% to 1.3262 with the Thai Baht and Philippine Peso modestly higher. The Indonesian Rupiah and Malaysian Ringgit have eased by 0.20% this morning, as Covid-19 fears weigh on their outlook.
Despite the FDI boosting high China beta currencies, forex markets are ranging on a quiet day. If roadblocks to the Biden stimulus emerge this week, the US Dollar could resume its short squeeze. Conversely, an ultra-dovish FOMC and/or a positive J&J vaccine announcement could see a rotation out of Dollar. For now, we remain in wait-and-see-mode.
US Crude Inventories sparks profit-taking.
Official crude inventories rose by more than expected on Friday, mirroring the rise in API inventories two days earlier. That was enough to spark a modest round of profit-taking in North America with extended long-positioning being trimmed. Brent crude ended the day down 1.80% at $55.10 a barrel, and WTI finished $1.80% lower at $52.10 a barrel.
China’s ascent to the number one position for global FDI has spurred a modest economic recovery rally in Asian trading. Brent crude rising 0.40% to $55.30 a barrel, and WTI edging 0.25% higher to $52.20 a barrel. High LNG prices are persisting in Asia, and that also remains supportive of oil prices for Asian physical buyers.
Today’s rally has lifted both contracts clear of support for now, but any signs of further roadblocks to the Biden $1.9 trillion stimulus programme could spark more trimming of long positions. Brent crude’s critical support at $54.50 a barrel survived a brief test on Friday. Failure of the support targets a deeper correction to $52.50 initially. WTI tested, and briefly cleared, support at$51.60 a barrel on Friday. The sessions low at $51.45 is initial support, and failure signals a deeper correction that could extend to the $50.00 a barrel area.
Like other asset markets, I expect noisy headline-driven trading ahead of the FOMC rate decision and press conference early Thursday morning Asia time.
Gold trader’s chase their tails.
Gold had a volatile Friday session, falling from an open of $1870.00 an ounce to a low of $1837.50 an ounce, before finishing the session 0.76% lower at $1855.00 an ounce. Gold is moribund in Asia this morning, edging slightly lower to $1854.50 an ounce.
The price action on Friday suggests that gold traders lack directional conviction and have a low propensity to hold positions that move even modestly against them. That led to a tail-chasing session on Friday and a lack of interest in getting involved by Asian traders today.
Gold has resistance at $1875.00 an ounce, followed by the 100-day moving average (DMA) at $1883.00 an ounce. Support is at the overnight low at $1837.50 an ounce. Gold continues to flirt with its 200-DMA at $1846.00 an ounce today. A daily close below the 200-DMA likely signals another wash-out of speculative longs down to the $1800.00 an ounce region.
I expect gold to keep chasing its tail this week with an outsized range of $1800.00 to $1880.00 an ounce entirely possible.