Wolves circling equity, energy and precious metals markets
The momentum of the global recovery buy-everything trade looks to be flagging in the near term, nudged along by worse than expected US Jobless Claims data overnight. Some doubts had been noticeable earlier this week, sparked by the significant move higher in US 30-year bond yields. Yields have done nothing since, and in fact, slipped slightly overnight, but that hasn’t stopped the wolves circling equity, energy and precious metals markets.
Interestingly, various asset classes seem to be going their own way now. The US Dollar fell overnight, which in recent times suggested confidence in the global recovery. Bitcoin and other crypto’s remain in tulip-mania heaven near their all-time highs. Base industrial metals are also holding up nicely. An ebbing of the Texas big chill seems to be weighing on energy markets more than a massive fall in official US crude inventories overnight.
Gold has been in trouble for some time, failing to rally whether US yields eased, or the US Dollar fell, but retreating as soon as the opposite occurred. It is perched on the edge of the abyss as the weekend approaches. Gold could fall to near $1600.00 an ounce next week if a failure of $1750.00 sparks a capitulation scenario. I am beginning to wonder if its inflation hedging role has been temporarily usurped by instant gratification, sure thing FOMO gnomes of the crypto world. As I have said, Bitcoin is proving surprisingly resilient in the current climate.
The fall by oil overnight, which is continuing apace in Asia this morning, has surprised me, even though I have been calling for a correction pre-Texas. The US crude inventory data doesn’t capture this week’s massive drop in US extraction, refining and distribution, pointing to an even more significant reduction next week. The news that only 300,000 households with electricity in Texas now, instead of millions, seems to have been enough to spur profit-taking and a washout of very extended speculative long positioning. Brent may well trade below $60.00 a barrel before it finds its mojo again.
Equities markets concern me the least. This week’s slightly adverse price action has all the hallmarks of a loss of momentum temporarily and not a structural turn. This week’s fall is minuscule compared to the scale of the overall rally since the start of the year. The rise in bond yields, and the ensuing inflation scaremongering, an excuse to take some risk off the table. Yield curves may steepen around the world, a pleasing development for the banking sector.
Still, there is not a major central bank in the world thinking about taking their foot off the monetary spigot, except perhaps China. Indonesia cut rates yesterday, and South Korea may well do the same next week. Evidence of two-speed recoveries abounds across the world, and it will remain awash in zero per cent central bank money through all of 2021. That will have to go somewhere, and a lot will head to the equity market. US 10-year yields will need to be approaching 2.0% to shake the foundations of that trade.
South Korean PPI and Japan Inflation rose by more than expected this morning, but much of the gains can be attributed to the rise in energy prices. Australian Manufacturing PMI outperformed, while Services PMI disappointed, as did Retail Sales. A similar story unfolded in Japan, with Jibun Bank Manufacturing PMI exceeding expectations while Services PMI disappointed.
We will receive a plethora of PMI data from Europe and the US today, mixed in with some inflation and manufacturing numbers. It will likely tell the same story—a recovery in manufacturing and export facing sectors, while domestic consumption remains cautious and muted. Inflation is cost-push and not a wage-price spiral, driven by higher energy and base metals and logistics squeezes. The former is transitory in inflation numbers, and with employment enormously lower still, than pre-pandemic, worries about the later are overblown.
We should get more confirmation of that next week with a torrent of pan-Asia CPI prints. Singapore and Malaysia will likely remain negative, with no inflation issues there. China, South Korea and New Zealand announce rate decisions. China will stay unchanged, but New Zealand could surprise on the dovish front in their statement, even if rates don’t move. South Korea may well choose to lop 25 basis points of their reference rate, dropping it to 0.25% as domestic consumption remains in a deep freeze.
Overall, the price action we see this week across various asset classes reflects how crowded the trades are and their respective stomach for risk, and not a sea change. The world is recovering in a two-speed fashion, and ultra-easy monetary policy will continue to be the one ring that rules them all.
Asian equities ease with Wall Street.
Wall Street fall again overnight, as bullish momentum temporarily ebbs, spurring investors to lighten risk. The S&P 500 lost 0.44%, the Nasdaq slipped 0.72%, and the Dow Jones eased by 0.44%. US index futures have continued a downward trajectory this morning, with all three major indices lower by around 0.35%.
The US malaise has spilt over into Asian markets, which are tracking lower today. The Nikkei 225 has fallen 1.25%, with the Kospi down 0.70%. Mainland China’s Shanghai Composite is 0.60% lower, with the CSI 300 falling 0.75%. The Hang Seng is down 1.05%.
Much the same pattern is repeating regionally, with Singapore down 1.30%, Thailand down 0.70% with Jakarta 0.05% lower. Only Malaysia is bucking the trend, climbing 0.15%. Australian markets are enduring a tough day, with the ASX 200 and All Ordinaries down 1,40%.
The ebbing bullish sentiment has coincided with the end of the trading week. That has probably exaggerated the moves lower in Asia as investors reduce3 exposure to weekend headline risk. Overall, today’s falls look like a corrective unwinding of bullish exuberance, which I am sure will return soon enough.
US Dollar edges lower.
The US Dollar lost ground overnight, but overall, currency markets remain in a range-trading mode awaiting more precise signals from other parts of the financial market universe. US yields edged lower overnight, and that appears to have sparked a partial reversal of the short squeeze that had prevailed over the previous two sessions.
The dollar index fell 0.39% to 90.59 overnight, edging up to 90.64 this morning in directionless pre-weekend trade. Support remains in the 90.00 regions, with resistance around the month’s highs at 91.60, also home to its 100-day moving average. A daily close above or below those levels will signal the Dollar’s next directional move.
Sterling allied impressively overnight, against both the Dollar and the Euro. GBP/USD rose from 0.80% to 1.3970, near the top of its multi-month ascending wedge at 1.4010. With Britain’s Covid-19 vaccination programme leaving Europe in the dust, markets are pricing a much faster recovery and rightly so. GBP/USD looks poised to break-out imminently and will target the 1.4400 in the weeks ahead. EUR/GBP support failed at 0.8660 overnight, and the cross looks set to test 0.8600 next week and then 0.8300 in the month ahead.
The PBOC set the Yuan fixing at 6.4624 this morning, with USD/CNY trading at 6.4700. If the PBOC keeps setting USD/CNY at neutral levels around 6.4500, any fallout from a stronger US Dollar on Asian regional currencies will be limited. Most are unchanged in quiet trading this morning. The Indonesian Rupiah has fallen 0.50% to 14,085.00 against the Dollar today, after the Bank of Indonesia cut rates again yesterday. The Rupiah has weathered that storm relatively well, but the slow grind lower by the Rupiah likely means that BI has finished easing unless the US Dollar stages a broad sell-off.
Oil’s long overdue correction begins.
An easing in the severity of the Texas big chill appears to have been the critical factor that set off the tumble in oil prices overnight. With the speculative market long to the eyeballs in recent times, a correction was well overdue. As prices fell overnight, they gained their own momentum as those late to the trade rushed for the exit doors.
The sell-off has continued in Asia, highlighting just how long the speculative market was before last night’s retreat. Brent crude fell 2.0% to $63.60 overnight, continuing 1.15% lower to 62.85 a barrel in Asia. WTI fell 2.35% to $60.25 overnight, and the failure of the $60.00 a barrel mark in Asia saw it plummet another 1.50% to $50.35 as more stop-losses were triggered.
Brent crude has initial support at $62.10, today’s intra-day low, followed by $60.00 a barrel. A failure of $60.00 a barrel is likely to cause another wave of panic selling, although given Brent’s recovery this morning from its lows, I think that scenario remains unlikely. WTI’s intra-day low at $59.35 a barrel is initial support, with failure targeting $57.50 a barrel. A capitulation of $57.50 signals a much deeper correction targeting $53.50 a barrel.
The retreat in prices over the last 24 hours has had the benefit of relieving the very overbought technical picture. With oil futures spreads in backwardation, US production disrupted, and OPEC+ compliance solid, oil remains a buy on dips, and although the sell-off could get ugly, it is unlikely to last very long into next week.
Gold is poised to collapse.
The US Dollar goes up and down; gold goes down. US yields go up and down; gold goes down. That same pattern played out overnight as gold closed on its lows at $1775.00 overnight, only to fall 0.55% to $1765.00 an ounce this morning.
Gold is now testing its critical long-term support region around $1760.00 an ounce, the 50% Fibonacci of the March to August rally last year. Gold has tested $1760.00 an ounce this morning before staging a minuscule recovery. A weekly close below $1760.00 would be a very negative technical development and likely spark the liquidation of longer-term bullish positioning next week.
If support fails, gold will initially target is 61.80% Fibonacci at $1680.00 an ounce, but I can envisage further losses to the $1600.00 an ounce region. Gold’s appeal as an inflation hedge may start to find new friends at that level.
The only positive I can note on gold now is that its Relative Strength Index (RSI) is near to oversold territory on a daily basis. Gold has typically bounced over the past three months when he RSI approaches 30.0, often quite impressively. Gold will struggle to recapture $1800.00 an ounce, even under this optimistic scenario. The best case I can envisage, is for gold to range between $1760.00 to $1800.00 an ounce – hoping that salvation arrives from moves in other asset classes, notably US government bonds.
This commentary is kindly contributed by Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA