Jerome Powell puts inflationary wobbles partially to rest
The inflationary wobbles in global stock markets were partially put to rest overnight, as the Federal Reserve Chairman, Jerome Powell, continued soothing frazzled nerves during his second day of testimony on the Hill. Apart from highlighting something already mentioned here previously, that cost/push inflation as the global recovery gathers pace would be transitory (one-off rises in components of the CPI drop out after a year), Mr Powell emphasised that employment targets were far away and that monetary policy would remain lower for longer.
That was enough for the perpetual circling dip-buyers in multiple asset classes to re-emerge from hiding. Equities abruptly reversed their losses and powered higher. The intra-day rise in US yields also changed course, although they finished slightly higher on the day. The US Dollar also reversed most of its intra-day gains.
Other notable movers were oil, which recorded impressive gains after data released by the EIA showed 10%, or one million barrels per day, of US production had been taken offline by the Texas power cuts. The Reddit zombie army looks to have made a reappearance as well, with GameStop shares rising 100% in the last 90 minutes of trading after it replaced its CFO. As irrational as the behaviour is, and I admire their fortitude at throwing more dumb money after bad, replacing accountants (and lawyers) leaves me with a warm fuzzy feeling on an emotional level as well.
The Hong Kong Government announced that stamp duty would rise on stock transactions for the first time in decades sent local shares into a tailspin. Mainland investors also dumped Hong Kong stocks via the Shanghai and Shenzhen pipes, and the price action on Mainland exchanges suggests some overly leveraged longs also had to cut positions there as well. All seems to have been forgiven today, though, thanks to Mr Powell’s comments, with China markets rising today. Perhaps there is hope for Sino-American relations.
The other major mover this morning was the New Zealand Dollar. The Kiwi defied its flightless bird status in late New York trading, rising 100 points to 0.7440 this morning. The culprit was the New Zealand Government’s decision to insert a new clause into the RBNZ’s Monetary Policy Committee remit requiring it to consider government policy relating to more sustainable house prices. Markets ignored the implications for central bank independence and drew a direct line that points to rates having to rise sooner rather than later.
New Zealand is a tiny economy far from the rest of the world. Still, the moves there this morning at the first hint of monetary policy tightening could be used as a preview episode of the taper-tantrum to potentially come later in 2022 when the big dogs of the central bank world start down the same path.
As a Kiwi and a New Zealand homeowner from distant and wet Jakarta, I have a much better explanation for the Kiwi’s rise this morning. It only partially relates to New Zealand’s dysfunctional housing market. I was about to buy some New Zealand Dollars to pay the last part of the eye-watering bill for the renovation of the wooden floors, and next month’s mortgage payment. As a natural Kiwi short, I too, am receiving another lesson in what a cruel mistress the financial markets can be.
A somewhat overlooked reason to be generally positive today comes from Johnson and Johnson, whose one-shot Covid-19 vaccine was pronounced as effective by the US FDA. That paves its way for emergency authorisation. I have written about the game-changing qualities of the J&J vaccine before. Needless to say, a slightly chilled one-shot vaccine is a logistical boon to vaccination efforts everywhere. J&J’s problem, like other vaccine manufacturers, is producing enough of it.
Given that the first vaccines only appeared three months ago, I have been disappointed, but not surprised, at the entitlement volumes of so many in this Amazon Prime I want it within the one-hour world. It is, though, another strong reason to believe that better times lie ahead. To paraphrase Axel Rose, all we need is a little patience.
In Asia today, the data calendar is very light. South Korea left rates unchanged at 0.50% this morning, with the BoK resisting the temptation to cut once again. With rates at records lows, the BoK probably feels that monetary policy has reached its limits in stimulating domestic consumption, even as the industrial and export machine fires on all cylinders. In this respect, I cannot disagree; with the property market on fire like New Zealand, the inequality distortions of unconventional monetary policy far outweigh the benefits at this stage. An unmoved BoK should be positive for the Won at the periphery.
US Durable Goods should be another reason for markets to cheer this evening, outshining US Q4 GDP Growth 2nd estimate. US Durable Goods ex Transport is expected to have recovered to pre-pandemic levels, reassuring markets that the US recovery remains on track despite the virus lockdowns and inclement weather.
Retail armies pile back into Asian equities.
Wall Street abruptly reversed its early selloffs overnight on uber-dovish Powell comments, with the leading indices recovering impressive finishes. The S7P 500 rising 1.13%, the Nasdaq added 0.99%, and the Dow Jones powering to a 1.36% gain and a new record close. Notably, in the last week, both the S&P 500 and Nasdaq tested the bottom of their one-year upward channels and recovered handsomely. Buying the dip continues to remain a sound strategy if you can sieve out the schizophrenic intra-day noise.
Retail investors, and I’m sure a few institutional ones, are piling back into equities in Asia as well today, as the US fears rapidly recede. FOMO buyers have sent the Nikkei 225 1.70% higher today, with the Kospi leaping 2.05% despite the Bank of Korea holding fast on rates.
China markets have quickly forgiven the Honk Kong stamp duty rise. The Shanghai Composite has rallied 1.55%, with the CSI 300 climbing 1.15%. Hong Kong itself has outshone both, leaping 1.75% this morning.
Singapore is 1.30% higher, with Kuala Lumpur rising 0.65% and Jakarta rallying 0.85%. Taipei has climbed 1.05%. Australian markets are powering ahead with the ASX 200 and All Ordinaries increasing 1.0%, while New Zealand’s RBNZ fright has sent the NZX50 0.65% lower.
If nothing else, today’s price action emphasises just how much capital remains on the side-lines, ready to deploy on any material market dips. The global recovery and FOMO trump all once the day-to-day noise is stripped out. With central banks globally keeping the monetary spigots open, I, for one, won’t disagree.
Currency markets get back to recovery rotation.
Evidence continues to pile up that the US Dollar short squeeze in the latter part of January has reached an endgame, with the dollar index closing at 90.17 overnight, just above support at 90.00 for the third day in a row. With Mr Powell getting the buy-everything, inflation be-damned, global recovery trade back on track, currency markets resumed their rotation out of more defensive US Dollar positioning.
The chief beneficiaries were the developed market growth-centric commodity currencies. The New Zealand Dollar was rising even before the RBNZ surprise this morning, but the Australian Dollar also recorded at 0.70% gain, and the Canadian Dollar rose 0.60%. Notably, USD/CAD took out monthly support at 1.2585 overnight, on its way to a 1.2515 close, where it finds interim support today. A daily close below 1.2500 signals more Canadian Dollar strength, with USD/CAD targeting 1.2250 in the coming week. The story is much the same on the Australian and New Zealand Dollars, which should target 0.8050 and 0.7550 in the short-term.
The story was less pronounced, but still positive, for other major currencies. EUR/USD has risen to 1.2160, just below resistance at 1.2185. Once 1.2185 is cleared, EUR/USD should target 1.2350. GBP/USD has a sideways day overnight, trading at 1.4135 today. It, however, had already staged an impressive vaccination powered breakout of its multi-month channel previously. Having probed 1.4250 overnight, Sterling remains on track to rally towards 1.4400 in the coming days.
The PBOC set the USD/CNY fix at 6.4522 this morning, the stronger Yuan reflecting the positive moves by other components in the fixing basket, and US Dollar weakness overnight. Although the fixing was stronger, it was not markedly so, meaning that Asian currencies did not rally to the same extent as seen in the DM space overnight. The Euro will need to strengthen markedly to shift the basket, but more Yuan strength seems inevitable once it does, and as the PBOC keeps liquidity tight.
In Asia, the Korean Won is this morning’s outperformer, USD/KRW falling 0.25% to 1109.50 as the BoK held rates unchanged. More strength seems inevitable, although I expect the BoK to be “smoothing” as it approaches 1100.00 again.
Overall, the US Dollar weakness is reflected primarily through the growth-centric developed market commodity currencies at this time. It seems to a matter of when, and not if, the rest of the DM space and EM starts to play catch-up with US Dollar weakness.
Oil prices explode higher as US production falls.
Data released by the US EIA overnight said that US oil production had suffered a 10% (1 million bpd) fall due to the Texas power cuts. Combined with a dovish Jerome Powell and an already tight physical market, oil prices exploded higher. Brent crude rose 3.40% to $67.25 a barrel. WTI, meanwhile, leapt 3.70% higher to $63.45 a barrel. In Asia this morning, both contracts have held on to those gains with no signs of profit-taking selling, implying that regional buyers are no longer in buy-the-dip mode.
With both the prompt and longer-dated futures curves in strong backwardation, and US weakness looking increasingly likely, it is hard to argue that oil prices are frothy, even at these levels. The technical indicators have moved back into overbought territory, but not markedly so, and it is clear that tight physical supplies are driving prices. If prices remain at these levels, the March 4th OPEC+ technical meeting will become more interesting. However, they do not appear overly concerned about either producer hedging or a resurgence in US shale.
Brent crude now has no technical resistance until $71.25 a barrel, the January 2020 high. Pullbacks should be limited to $64.50, and only a failure of $62.50 a barrel suggests a more extended correction. WTI has resistance at $65.80, the Jan 2020 high, followed by $$66.80 a barrel. Initial support lies at $60.50, followed by $58.50 a barrel.
Gold treads water once again.
Gold finished almost unchanged overnight at $1805.50 an ounce. That belied what was quite a volatile day, gold trading as low as $1784.00 an ounce, and as high as $1814.00 an ounce. Gold can thank Jerome Powell’s dovish outlook for its late session comeback, but nagging doubts still persist over the yellow metal at these levels.
Despite a weaker US Dollar and the heat coming of US yields, gold remains unable to stage a meaningful recovery. With the global recovery trade back in full flight, it seems only a matter of time before US yields move higher once again. That will once again put gold under pressure. Its role as an inflation hedge is seemingly now confined to wage/price spiral inflation, not cost/push transient inflation.
Gold has resistance at $1817.00, followed by the $1830.00 an ounce area. The region between $1848.00 and $1860.00 an ounce remains a formidable barrier for gold, containing the 50, 100 and 200-day moving averages. Initial support is at $1784.00 an ounce, with the double-bottom 50% Fibonacci at $1760.00 an ounce gold’s must-hold critical support. Failure dooms gold to further losses deep into the $1600’s area.
This commentary is kindly contributed by Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA