The Herd Refuses To Be Corralled | Daily Market Commentary with Jeffrey Halley
Asia managed to dodge the worst of the risk-off move overnight, heading home before the panic set in during European hours. As countries queued up to close borders with Britain over its mutated strain of Covid-19, investors hit the panic button. Equity markets were slammed, along with energy and precious metals as investors flocked to the safety of the US Dollar and US treasuries.
US markets started off in much the same tone. However, the emergence of the US stimulus bill and government funding bills proved just too juicy a morsel for the dip-buying FOMO herd to ignore. By the end of the session, US equities had recovered most of their losses, as had precious metals and currency markets. The charts show massive ranges across almost every asset class, but very little directional substance.
If nothing else, it reinforces the notion that in a zero per cent world flooded with free central bank money, back-stopping even the dumbest of investment decisions, asset price inflation continues unchallenged. Any dip is one to buy; until it isn’t. That is unlikely to come anytime soon in 2021. From a short-term perspective, quite a few late to the party speculative positions in markets such as precious metal and energy, have been flushed out. That will be positive for their underlying upward trends.
Asian markets appear to be playing a little bit of catch-up today. The US Dollar has strengthened, notably against the Dollars down under, while equities and energy are modestly negative, and precious metals are slightly higher. Asia’s investors have probably looked at the whipsaw price action overnight and chosen discretion over valour and taken some risk of the board ahead of the holidays. That is a sensible move with empty data calendars, lots of headline risk and deteriorating liquidity into the new year.
Reuters is reporting that Apple plans to release a self-driving electric car in 2024. I thought this project was dead and buried, as Apple concentrates on selling expensive services and computers. My 2020 iMac is both expensive, and the worst Apple computer I have ever owned after 25 years of product loyalty. I hope the iCar works better than my iMac, which leaves me I’m-annoyed every day. Markets though, will look at Apple and tech and go iWant, for sure. Nasdaq futures are higher, and I have no doubt the S&P will receive iLove from the story as well. Tesla’s uninspiring index debut yesterday should be quickly unwound.
The data calendar is bare in Asia today. Australia recorded a massive 7.0% jump in November Retail Sales after Victorians were released from their Covid-19 lockdown and went shopping. Even stripping out Victoria though, the number was impressive, confirming Australia’s almost China-like recovery. In Sydney, the local outbreak’s Covid-19 cases have fallen today, which should calm investors frayed nerves.
Both the United Kingdom and the United States release final Q3 GDP this afternoon. Both will show impressive rebounds, but quite frankly, are old news in the context of 2020. A lot has happened in both countries since. US Existing Home Sales will be of passing interest, but the focus will really be on the US data dump tomorrow. Personal Income and Expenditure will remain in negative territory, for apparent reasons. US Initial Jobless Claims may spike well over 900,000, although the Fed-watched Core PCE Price Index will remain positive at 1.50%, and Consumer Sentiment for December is forecast to rise to 81.5.
Thankfully, with the US Senate and US President due to pass and sign the 5,600-page omnibus stimulus and funding bill into law today, any fallout from tomorrow’s US data-dump will be limited. Markets will be at the mercy of headline-driven risk as liquidity dries up into the holidays. But as last night showed, no matter how hard markets try to silence the FOMO-lambs, they cannot be silenced.
Having found a lamb supplier here in Jakarta, I will be doing my bit, by silencing two racks of lamb for Mrs Halley and some worthy recipients on Christmas Day. Any other herd culling, I will leave to the markets, over to you Hannibal.
Asia equities in gentle retreat.
After a frantic sell-off, US equities made an impressive comeback as the dip-buying herd emerged and the US stimulus and omnibus funding bill started its journey through Congress. The S&P 500 finished the day 0.39% lower, the Nasdaq fell just 0.10%, and the Dow Jones finished in positive territory. The Dow rose 0.12%, boosted by US banks being allowed to restart dividends and share buybacks.
In Asia, the volatility seen overnight has prompted regional investors to lighten risk into the holiday period, with most equity markets lower in an orderly fashion today. The Nikkei 225 has fallen 0.80%, with the Kospi down 0.55%. Mainland China’s Shanghai Composite and CSI 300 continue to defy the noise elsewhere, both up 0.10%, with Hong Kong easing by just 0.15%.
Singapore has fallen 0.25%, with Kuala Lumpur down 1.0% and Taipei 0.25% lower. Jakarta has declined 0.85% ahead of a Presidential cabinet reschedule being announced today. Australian stocks have also retreated as commodities fell overnight in the general rout. The ASX 200 has declined 1.25%, with the All Ordinaries 1.20% lower.
The beleaguered UK and European stock markets may receive a boost this afternoon as Britain offered a fishing fig leaf in Brexit trade negotiations. It is unlikely to be enough to materially impact yesterday’s ugly session, with Brexit fears, border closures and Covid-19 concerns sure to continue weighing on sentiment.
US markets will probably be lifted by Apple’s electric car news, as reported by Reuters. However, with the holiday season upon us, with the ensuing drop in institutional liquidity, the session is likely to be dominated by investors reducing risk exposure as well.
Exciting times in FX markets.
The US dollar index rose 80 points to 91.00 at one stage overnight, as panicked investors rushed for safe havens. However, as order was restored in New York, it retreated, finishing the day 0.10% lower at 91.04, cunningly disguising the day’s volatility. EUR/USD spiked as low as 1.2130 before rallying to finish almost unchanged at 1.2240. GBP/USD traded both sides of 1.3200 and 1.3500 in a Covid-19/Brexit induced sell-off. The UK’s fishing fig-leaf though, saw it close only 0.45% lower for the day at 1.3460. The story was much the same for AUD/USD, NZD/USD and USD/JPY, all suffering 1.0% plus sell-offs, before recovering all of those losses.
Having missed the worst of the currency market fireworks yesterday, Asia in risk aversion mode today. The dollar index has risen 0.25% to 90.25, well above critical support at 89.75. The commodity currencies have come in for particular attention as risk bellwethers. The NZD/USD has fallen 0.80% to 0.7055 in thin liquidity. The Kiwi held support perfectly at 0.7000 yesterday, and any move lower should still be regarded as corrective unless we have a daily close under 0.7000. By contrast, the AUD/USD has fallen only 0.35% to 0.7560 today, well above yesterday’s panic sell-off lows at 0.7460. Support at 0.7500 should contain losses.
Asian regional currencies are all on the back foot as investors reduce exposures ahead of the holidays. USD/CNY has risen 0.10% to 6.5520. But across regional Asia, the USD/SGD, USD/IDR, USD/MYR and USD/THB are all higher by between 0.25 and 0.40%. The price action looks corrective and not a structural turn in sentiment. Although I expect Asian currencies to outperform right through 2021, the next week or so may well see a choppy range-trading market.
Sterling continues to be emotional as the Brexit December 31st cut-off nears and European countries close their borders to UK travellers over the new strain of Covid-19. GBP/USD has fallen 0.50% to 1.3390 today after PM Johnson said the Brexit outlook looked negative still. The BBC reports that the UK and France have agreed a plan to restart freight through the now Covid-closed border, which may give some support to Sterling.
As previously said, Sterling remains at the whims of Brexit, and now Covid-19, with a very noisy 1.3200 to 1.3500 range likely. That was pretty much how it played out yesterday and getting involved anywhere in between is likely to be hazardous to one PnL. GBP/USD has a lovely support trend-line extending back to June this year. Depending on the thickness of the line you draw on the chart, it comes in today around 1.3100, also the home of the 100-day moving average (DMA) at 1.3120. Unless GBP/USD closes under 1.3080, for charting inaccuracy sake, Sterling remains in an uptrend versus the Dollar. Failure likely means Brexit failure as well, in which case the chart hints that Sterling’s initial target is 1.2700. You have been warned.
Speculative long-oil positions get culled.
Brent crude and WTI endured a torrid session overnight, with both falling by over 5.0% intra-day at one stage as panicked investors headed for the Covid-recovery exit door. Although both contracts recouped some of their losses, both ended the day well and truly in the red. Brent crude fell 2.85% to $50.80 a barrel, and WTI fell 2.45% to $47.85 a barrel.
A general mood of caution in Asian markets has seen both contracts retreat once again, Brent crude is 1.05% lower at $50.530 a barrel, and WTI is 1.20% lower at $47.30 a barrel. Quite a lot of speculative long positioning would have been culled overnight. Still, given the scale of oil’s two-month rally, a deeper correction cannot be ruled out as the environment remains decidedly risk-averse.
Brent crude’s overnight low at $49.25 a barrel forms initial support, followed by $48.00 and $47.00 a barrel. Only a failure of $47.00 a barrel signals that the oil rally since November has run its course for now. Similarly, WTI’s overnight low at $46.30 a barrel is an initial support. That is followed by $45.00 and $44.00 a barrel. Again, the longer-term uptrend remains intact, as long as $44.00 a barrel holds.
Gold weathers equity sell-off.
Gold traded in a $62.0 an ounce range overnight between $1855.00 and $1907.00 an ounce. Gold wilted in the face of the initial equity sell-off in Europe, but New York markets’ recovery allowed gold to finish only 0.25% lower at $1876.00 an ounce. Today in Asia, gold and silver are being buffeted by risk reduction, and stronger US Dollar flows, resulting in both metals being unchanged from their New York closes.
Both gold and silver will likely continue to trade in noisy ranges as investors tweak portfolios ahead of the holiday break. Gold held resistance at its 100-DMA, today at $1903.00 an ounce, almost perfectly overnight. Support lies at its $1855.00 an ounce overnight low. Failure likely sees gold’s losses extend to $1820.00 an ounce.
In all likelihood, the $1855.00 to $1900.00 an ounce range will contain gold today, albeit noisily. Silver is trading at $26.0000 an ounce this morning, and only a move lower through its 100-DMA at $25.1600 and the overnight low at $24.9600 an ounce, will signal a deeper correction.
The gold/silver ratio finished the day 1.65% lower at 71.60 overnight. Longer-term support lies not too far distant at 68.85, and a move lower through that level will be a strong bullish signal for both precious metals.