Stuck in a Lifeboat with a Peloton Bike | Daily Market Commentary with Jeffrey Halley
The Covid-19 handwringing is out in force again overnight, North American markets mostly giving back the previous day’s gains across asset classes. Contrast that with Wednesday, where all was light and sunshine, having endured another end of days Covid-19 session on Tuesday.
As the dust settles on this week, I can’t help but feel a little emotionally exhausted. It is quite difficult telling everybody to calm down, when the world’s assembled financial press and the army of commentators insist on charging between hope and destruction on a rolling one-day basis. It is perhaps symbolic of today’s hyper-connected world, with its instant dissemination of information, short attention spans, and the need to try and analyse to death, every last tick movement for implications that are probably not there.
I will, therefore, unveil a seemingly long-forgotten concept to readers today—the sideways market. Over the course of this week, with a lack of new underlying macro drivers, some markets have gone up a bit, some have gone down a bit. Readers may use the word consolidation if that makes them feel better. With some notable exceptions, that is pretty much how history will describe this week.
Consolidations, of course, are usually sideways price action before significant omnidirectional moves. However, consolidations can last quite some time. We’re all going to get very tired, very quickly expending emotional energy seeing conspiracy theories where there are none on a 24-hour rolling basis.
As to which direction equities, that most schizophrenic of financial markets are heading next, I know not. There are plenty of reasons to be bullish stocks and bearish stocks. In the bigger picture, though, one must keep one’s eyes on the prize. The world’s central banks, via bottomless monetary policy easing, have investors backs. The S&P 500 could easily drop 20% from these levels and still be in a bull market. If you are a Fibonacci freak, you would argue that number was 38.2%.
Look at it this way. You are adrift on the ocean in an open-topped lifeboat with only a Peloton Bike and no food or water. As boredom sets in because nothing is happening and you don’t have your phone, you decide to stay fit and bash out a 30-kilometre sprint session with your favourite instructor, Brutus. There are two reasons you shouldn’t do this. One, you don’t have any Wi-Fi, so you can’t connect with Brutus anyway. Secondly, the rescue could be some time away, and you don’t have food or water. Burning up calories and fluids needlessly in this context is, frankly, dumb. You’re going to get skinny and tanned on a diet of hand caught raw fish and unrelenting sun anyway. Push the Peloton over the side and conserve your energy.
That isn’t to say there are no exceptions, and fascinating ones they are as well. Gold has managed to maintain its hold above $1800.00 an ounce this week. A weekly close above this level would be a very positive technical development. This isn’t an inflation hedge as so many are proposing, this is a real negative interest rate hedge.
Chinese eyes are smiling on the Mainland this week as well. No amount of sanctions noise from Washington DC can keep the Chinese retail investor down, when his or her Government, effectively spent last Friday and Monday telling you to get limit long now. The leading China exchanges were all sitting on weekly gains of around 10.0% this morning, and Hong Kong has gained 4.50% over the same period. Vietnam, by association, has also quietly gained over 4.0% this week. The rest of the world, though, mostly sits in a 2.0% range either side of zero. Not earth-shaking at all in volatility terms for 2020.
One exciting development I do note overnight, is that the S&P 500 and Dow Jones fell overnight, but the Nasdaq rose. Much of the China Mainland rally this week has also been concentrated amongst tech companies. The Government is promising to spend mega-big in the coming years on the sector. Are tech stocks – including my favourite gangsta rappers, the M-FAANG+ group – the new safe-havens? With their seemingly Covid-19 and economic cycle immune business models. I will ponder this more as I conserve energy over the weekend.
Asia’s session today is a muted one, with Singapore on holiday for its national election. After steady US Jobs data overnight, the data calendar today is thin in Asia, and strictly second tier in Europe and the US. That leaves the short-term markets vulnerable to sharp headline-driven moves. Just remember what I said about conserving energy.
Equities ease in Asia after a mixed session on Wall Street.
The short-term FOMO herd continued chasing its tail in New York overnight, as they have been doing all week. Yesterday it was the turn of Covid-19 to doom the world again. Interestingly the herd chose a new strategy, sell traditional stocks and hedge via big-tech. That saw the S&P 500 fall 0.58%, the Dow Jones fall 1.38%, and the Nasdaq rose by 0.53%.
With Wall Street’s messages mixed, and no headline or data to sink its teeth into, Asia has chosen to lighten positioning, or sit on its hands today. The Nikkei 225 has fallen 0.30% with the Kospi down 0.80% after the apparent suicide of the Seoul Mayor, a potential Presidential candidate.
The announcement of new US sanctions on China tech companies, and officials associated with repression of China’s minorities, has seen a dose of reality hit the Mainland today. The Shanghai Composite and CSI 300 are down 1.70%, highlighting the perils of central government hijacking the pink tip-sheets. The Hang Seng has fallen 1.0% in sympathy.
Elsewhere, Singapore is closed with Kuala Lumpur and Jakarta flat on the day. It is also a quiet day in Australia with the ASX 200 and All Ordinaries easing by 0.20%, with China relations and Victoria State’s self-isolation hanging over local markets.
The move lower in Mainland stocks reflects the domination of fast-money retail investors in those markets. That partly explains why the fall in China has not been reflected elsewhere across the region. Having told everybody to get long though, I suspect the Chinese Government does not want a one-week bull market on its hands. Expect more exhortations from them to build their wealth and do their duty for the country.
Elsewhere, European and US stock markets are likely to bank a quiet end to the week, with range trading set to continue until next week.
The US Dollar posts modest gains overnight.
Having teased markets earlier this week with the possibility of a downside US Dollar breakout, currency markets have dropped back into range-trading mode. Versus the majors, the US Index rose 0.35% to 96.77 as US stock markets retreated. EUR/USD at 1.1275, GBP/USD at 1.2590 and AUD/USD at 0.6940 leave them all in no-man’s land.
USD/JPY continued to grind lower to 107.05 today, as nagging Covid-19 concerns in Japan saw haven-based buying of the Yen. In the bigger picture though, the fall to 107.05 leaves USD/JPY dead centre of its 106.00/108.00 monthly range.
The Chinese Yuan continues to impress, the onshore USD/CNY fixing lower again at 6.9943. This is CNY’s strongest fix since early March, before the global equity market collapse. Both USD/CNY and USD/CNH toughed 6.9800 overnight, but their direct correlation to the stock market rally on the Mainland this week was laid bare this morning. From the overnight lows, both Yuan’s have faded to 7.0050 in Asia today as China stock markets give back a notable part of their week’s gains. The 7.0250 regions should cap US Dollar rally in the short-term. Overall intra-day moves will continue to be dominated by price action on the Mainland stock markets.
Oil retreats as short-term bullish sentiment fade.
Both Brent crude and WTI retreated overnight as the short-term noise from equity markets spilt over into energy markets. Brent crude fell by 3.15% to $39.60 a barrel. The falls overnight, however, look more to do with position adjustments and short-term tail chasing, rather than a structural change of sentiment. Prices are unchanged in Asia today. In the bigger picture, both contracts have now fallen back to the middle of their one-month trading ranges. For Brent crude, this is $40.00 to 44.00 a barrel, and for WTI, $37.00 to $41.50 a barrel.
With OPEC+ discipline and compliance remaining high, the downside is unlikely to come under sustained pressure in the near-term. OPEC+ will almost certainly, not hesitate to extend the headline production cut number past July if oil prices falter. We may need evidence that the US has brought Covid-19 under control though, to spark a sustained rally beyond the present wider ranges.
Gold consolidates its gains above $1800.00.
Gold traded in a $1795.00 to $1816.00 an ounce range overnight. As stock markets fell and the US Dollar strengthened, gold retreated. It regained part of its setbacks though, to finish above $1800.00 an ounce at $1802.00 an ounce.
A close above $1800.00 an ounce is a pleasing technical development for bullish positioning, suggesting that the move higher continues to have resilience, despite the noise from other markets. Gold has support at $1790.00 an ounce with a break suggesting a deeper correction to $1775.00 an ounce. Above, gold has resistance at $1820.00 an ounce.
A weekly close above the $1800.00 an ounce level will be an extremely positive technical development from a longer-term perspective. With geopolitical tensions still rising, and likely to increase between the US and China over the weekend, gold should find plenty of risk hedging buyers on any dips today.