Monday Morning Wake Up Calls | Daily Market Commentary with Jeffrey Halley

Only masochists or the blindly ambitious look forward to early Monday wake-up calls, but that’s what is being delivered to financial markets this morning. The long-awaited $900 billion follow-on stimulus package in the United States was finally agreed overnight and should pass through Congress and the President’s hands at lightning speed today. The $1.4 trillion funding bill for the US government was also agreed.

Unfortunately, that positive news (although the actual numbers involved leave me somewhat underwhelmed), is being overshadowed by Covid-19 headlines. The return of the virus to Sydney in Australia casts a pall over local markets and the currency today. But it is the emergence of a more contagious version of Covid-19 in the United Kingdom that has spooked markets. As the country struggles under record daily case numbers, the new strain has prompted European countries to close borders with Britain, although I am consistently surprised that people “need” to travel anyway. Meanwhile, the UK government imposed another tier of restrictions on South-East England.

Brexit trade deal talks remain stalled over the weekend, with time running out to approve a deal through by both sides before December 31st. Combined with European border closures and the UK Health Secretary using phrases such as “out of control” to describe the new strain, Sterling is, unsurprisingly, under pressure today, having fallen 160 points to 1.3360 as I write.

Although the new strain does not appear more virulent, its greater ease of transmission has spooked markets, coming after vaccine distribution delays in the United States. Markets have adopted a light at the end of the tunnel approach since Pfizer and Moderna’s vaccines burst onto the stage. However, the weekend’s events have delivered an unceremonious Monday morning wake-up call that negotiating Q1 of 2021 could be a torturous affair.

Although markets have a decidedly rush to safety look about them today, the US Dollar and precious metals have risen, while equities and oil are falling. The scale of the reversal is modest compared to the scope of the moves in the underlying trend. Falls by equities are likely to dips to buy into, and with another $900 billion of US government debt slapped onto the books over the weekend, the US Dollar is unlikely to sustain gains. Once the markets have finished panicking and unwinding recent speculative positioning, the fundamentals of lower for more extended monetary policy, and the search for yield in a zero per cent world, will quickly reassert themselves. Additionally, large directional moves in Asia on a Monday morning, more often than not, are usually red herrings, with an ironic nod to UK-EU Brexit negotiations. This thesis’s only risk is if the more contagious strain of Covid-19 proves to be vaccine-resistant. Then all bets would be off. That does not appear to be the case at this time, though.

In other news, China left it’s one and three-year Loan Prime Rates unchanged this morning. The rate decision was as expected, with the PBOC maintaining a moderately tight stance as it works through targetted deleveraging of specific sectors of China’s economy. The next move for China rates is likely to be up, but before you all get excited, that is unlikely to happen until late 2021.

With the week shortened by the Christmas holidays, China’s LPR was the weeks highlight for the region. The calendar is similarly bereft for Europe this week. Most attention will focus on the US, with a packed calendar of releases before Friday’s holiday. Tomorrow sees Final GDP for Q3, released, likely to be old news in the context of 2021, as will the Core PCE prices for Q3. Wednesday’s Core PCE for November, New Home Sales and Michigan Consumer Sentiment for December will garner more attention. The week’s highlights though will be Thursday’s Durable Goods and particularly, US Initial Jobless Claims which are expected to rise back above 900,000 for the week. Markets will be hoping that Covid-19’s rampage has not dampened the US recovery but will be fearing that it has. Any fall-out will be mollified by the passing of the fiscal stimulus package agreed yesterday though.

The US fiscal package scope highlights the weak negotiating position that the Democrats have, having failed to gain control of the US Senate in the November election. The Democrat’s election performance was poor yet again, highlighting the challenges they will now have ahead enacting their legislative agenda. It also highlights just how vital Georgia’s double Senate-seat seat run-off is to both sides in early January. That is likely to be a story for next week though, with Covid-19 grabbing the pre-Christmas headlines.

China equities buck the trend.

Asian equity markets have a defensive tone today even though an agreement on a follow-on US fiscal stimulus package has been reached. The Covid-19 mutation in the United Kingdom has spooked markets, with Japan, South Korea and Australia among the major markets that are grappling with spiralling cases.

Equity markets are mostly in the red in Asia. However, Mainland China markets have bucked the trend and rallied strongly, despite the US increasing the number of black-listed Chinese companies over the weekend, and the PBOC holding interest rates unchanged. The US stimulus package, the rollout of vaccinations in China, and talk that Jack Ma will pass part of Ant Financial to the government to smooth relations, seems to have trumped Covid-19 fears, with technology, materials and healthcare leading Mainland markets higher. The Shanghai Composite has risen 0.60%, with the CSI 300 rising 0.50%

Elsewhere in the Asia-Pacific, the picture is somewhat glummer, with Covid-19 fears prompting investors to trim vaccine-driven long equity positioning. The Nikkei 225 has fallen 0.60%, with the Kospi down 0.40%. Hong Kong, Kuala Lumpur and Singapore are 0.20% lower, with Jakarta bucking the trend, rising 1.20% on news that e-com giant, Tokopedia, is considering a dual listing IPO.

In Australia, 250,000 Sydneysiders entering a Christmas lockdown to control their most recent Covid-19 outbreak has spooked local markets. The All Ordinaries has fallen 0.15%, and the ASX 200 is 0.35% lower. A 4.70% jump in iron ore prices today should ensure the fall-out is limited in Australian markets.

I do not expect the equity sell-off in Asia to turn into a material rout. The rally in China appears to have put a floor under Asia’s losses, and already most indices are recovering from their initial drops. US index futures are now in the green as well, and one suspects that after the initial Covid-19 panic has passed, the agreement on the US fiscal package will come to the fore and support equity markets. Today’s fall is likely to be about positioning as much as anything else.

The US Dollar rallies in Asia.

With the tone in Asian markets generally defensive today, the US Dollar has rallied on risk-aversion flows, the dollar index climbing 0.35% to 90.45. Like equities, today’s rally is more likely to be about positioning, with the world heavily short the US Dollar versus everything. The dollar index has resistance just above at 90.50, and a rise through that could spur more stop-loss buying of the greenback versus the major currencies. In the bigger picture, today’s US Dollar rally looks corrective though, and not structural.

Asian currencies are lower across the board, with the Thai Baht the regions underperformer. USD/THB has risen 0.60% to 30.0000 after a large Covid-19 outbreak amongst migrant workers in a fish processing and industrial precinct near Bangkok. The Chinese Yuan, Indonesian Rupiah, Singapore Dollar and Malaysian Ringgit are all between 0.20% and 0.35% lower today versus the US Dollar.

The commodity currency grouping has had a tough morning, USD/CAD rising 0.50% to 1.2850. AUD/USD falling 0.65% to 0.7570, and the NZD/USD falling 0.60% to 0.7095. The AUD/USD, in particular, is flirting with support at this level, with further losses possible to 0.7500, especially if the Covid-19 outbreak in Sydney deteriorates. New Zealand authorities have raised the volcano, Mount Ruapehu’s alert level to level two, which may also be weighing on the Kiwi. A major eruption from the mountain where I learnt to ski, would potentially disrupt activity across the country’s most densely populated areas. (yes, I know that’s not very dense) Volcanos and Covid-19 aside, iron ore prices have risen 4.70% today. Copper and other industrial bases holding firm, and gas prices continue racing higher; I suspect the sell-off will be transitory.

Finally, although the Euro has retreated 0.50% in the face of the general US Dollar rally, the UK Sterling has had a torrid morning. With no signs of a Brexit trade agreement, but plenty of negative tones from both side, GBP/USD has fallen 160 points, or 1.50%, to 1.3360 today. European countries have closed their borders to the UK also, as a more contagious Covid-19 strain emerges and the UK wilts under record virus cases and deeper lockdowns. There are not many reasons to buy Sterling this morning, but a sliver of Brexit progress would see all of those losses reversed.

In the bigger picture, long-term support around 1.3100 is the critical pivot level for Sterling. Unless we close, on a daily basis, below that point, being short Sterling under 1.3300 ahead of the Brexit outcome is a dangerous game, no matter how grim the rolling headlines. For what it is worth, my view is that a Brexit agreement sees GBP/USD race to 1.3800 with a multi-year low in place. Equally, a Brexit trade agreement failure, along with the rest of the UK’s present challenges, will see GBP/USD fall almost immediately to 1.2500. Be brave, and stay nimble.

Oil falls on Covid-19 fears.

Covid-19 fears have spooked oil markets today, delivering a harsh dose of reality that even with vaccines arriving, Q1 2021 will not be a linear progression to economic recovery nirvana. With the speculative market limit-long, oil markets were primed for a high sulphur content corrective move lower, and that appears to be what has unfolded this morning.

Brent crude has fallen 3.10% to $50.70 a barrel, and WTI has declined 2.55% to 47.80 a barrel. I note that both contracts are already of their lows for the day, and this morning’s fall has moved the relative strength indexes (RSI) on both out of overbought territory. That implies that positioning has moved back to a more balanced tone.

The massive squeeze in short-term natural gas prices, along with the ensuing rise for heating coal, should limit losses on oil. Asian demand as winter arrives, has seen a massive spike in LNG prices. A fall through $50.00 a barrel by Brent crude could see the correction deepen. But only a loss of $47.00 a barrel will suggest the longer-term uptrend has run its course. WTI could see more losses through $47.00 a barrel, but its line in the sand remains far distant at $44.00 a barrel.

Defensive rotation lifts gold and silver.

With haven buying the day’s theme on mutating Covid-19 concerns, both gold and silver have staged impressive rallies this morning. XAU/USD has risen 0.85% to $1897.35, just shy of resistance at $1900.00 an ounce. Silver has leapt 3.30% to $26.6560 an ounce. That has left the gold/silver (mint) ratio at intriguing levels.

The mint ratio today has fallen through support around 71.35 to 71.15. A daily close at these levels or lower would be a bullish development for precious metals, suggesting further falls and that silver will lead anther spike higher in precious metals prices. One caveat is that today’s rally has left silver’s RSI in overbought territory, and the mint ratio slightly oversold. That implies that today’s gains at these levels for gold and silver may require a period of consolidation for the rest of the session.

Gold itself has resistance at $1900.00 an ounce, which is more psychological than technical. More importantly, the 100-day moving average (DMA) lies just above at $1904.70 an ounce. A daily close above that would be a positive technical development, opening the road ahead to further gains to $1970.00 an ounce over the holiday period.

Both gold and silver are likely to find plenty of willing buyers on dips today in this defensive environment. Gold has support at $1875.00 an ounce, and silver has support at $26.0000 an ounce.