Modest markets mask Fed fears

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,

US bonds stabilised overnight, allowing the FOMO buy-everything crowd to dip their toes back into the magical healing waters of technology stocks. Buy everything really did mean buy everything, though, with all three major Wall Street indexes closing higher. Unusually, that same premise saw the US Dollar and precious metals, notably gold, rise as well, a deviation from the mechanical correlation playbook of late. The relief that Friday's US bond tantrum did not result in another trip to the naughty corner was palpable. However, the US Dollar and gold rising even as technology stocks rose hints that all is not quite right. One must respect the linkages of late, sell bonds, sell technology, buy cyclical, buy oil every day, buy US Dollar, buy gold, oh wait, its gold, sell it anyway no matter what is going on. Bitcoin has also given up all its "we're Sleepless on Saturday what shall we do, buy Bitcoin," rally as well. Thankfully, the nonsensical noise about it being the inflation hedge of a new generation has ebbed as well, although, like McArthur, I am sure it will be back. Nothing in the background has changed other than US bonds had a quiet night. The Astra/Zeneca blood-clot-gate story is not enough to derail the global recovery story, with most of the countries halting its use (read Europe and Indonesia), only just out of the vaccination starting gates and sprinting on one leg anyway. With financial markets more Fo-mechanical and less FOMO of late, the price action across asset classes yesterday and Friday hint some sort of breakout is imminent. The answer to just what will probably be answered by the FOMC statement and the dot plots on Thursday morning. (Asian time) One senses that some bond complacency has crept into markets overnight and that they are assuming that the Federal Reserve will calm the inflationary waters. There is a genuine danger that the Fed disappoints the street. A procession of governors, including the Chairman, has made it quite clear they are comfortable with inflation and a steepening yield curve. Let us also not forget another $1.9 trillion of the stimulus, with potentially another couple of trillion of "new deal" money later in the year. The refusal of the US Dollar, and more importantly gold, to roll over as calm returned overnight suggests lingering concerns in some asset classes. Gold finding its inflation-hedging mojo will be a massive indicator that darker times lie ahead for 2020-darlings. Despite the rise in equities overnight and today, the technical picture for the Nasdaq and CSI 300 show technical breakouts of year-long ascending support lines, and ensuing failures to recapture them. A similar view is playing out on the Nikkei 225 and Taiex and ASX 200. One of long-term support lines rapidly rising to meet lofty valuations, leaving them little room to manoeuvre. If the FOMC doesn't play ball this week, another US yield spike is on the way; the Dollar will rise, Asian currencies with dirty Dollar pegs will break into a cold sweat, and richly priced 2020 equity darlings may join them. A higher-than-expected US retail Sales tonight will make an excellent pre-match opener. In a pseudo-globalised world, the US treasury market, and the 10-year bond, remain the globe's deepest and liquid capital market. What happens there affects us all directly or indirectly. To paraphrase Grace Jones (google her Millennials), we are all slaves to its rhythm. The day in Asia is quiet on the data front. The RBA Minutes contained no surprises, with the committee focused on employment and wage expectations. They reiterated no rate rises before 2024 when they finally expect wage pressure to climb over their 3% target. I suspect markets will test the RBA's assumption and mettle by pushing 3 and 10-year yields higher again in Australia. Even if the RBA intervenes once again to cap the 3-years, a steeper yield curve seems inevitable, especially if the FOMC this week doesn't play ball. Asia equities drift higher Wall Street finished on a higher note overnight, the Dow Jones and S&P 500 at record highs. A quiet day on the US bond market was enough to tempt the herd back into action, with the S&P 500 rising 0.65%, the Nasdaq jumping 1.05%, and the Dow Jones climbing 0.53%. US futures on the Nasdaq have advanced 0.30% in Asia, with the other indexes unchanged. The overnight price action has greenlighted a positive day in Asia, albeit a relatively calm one, with Asian markets content to wallow in wait-and-see-mode. The Nikkei 225 and Kospi are 0.55% higher, with the Shanghai Composite and CSI 300 rising 0.30%. Hong Kong has risen 0.65%, while Singapore, Kuala Lumpur, and Jakarta see profit-taking, leaving them unchanged after previous solid sessions. The ever-optimistic Australian markets are the region's outperformers; both the ASX 200 and All ordinaries are 1.0% higher after the RBA minutes were suitably dovish. Asia's positive session will set European markets up for a positive start. However, the suspension of the AstraZeneca vaccinations across the Bloc, and a resurgence of new infections in parts will temper the gains. Overall, equity markets seem content to follow Wall Street's lead cautiously ahead of the FOMC meeting outcome. The US Dollar rises The US Dollar strengthened overnight, despite a slight easing in US yields and a strong US stock market. The dollar index finished the day 0.16% higher at 91.69 and remains unchanged in Asia. EUR/USD eased to 1.1935 overnight on Covid-19 issues and looked set to retest 1.1900 as the G-7's weakest performer overnight. The US Dollar strength in the face of previously mechanical correlations to US yields is interesting. It may suggest that currency markets more deeply feel worries about the FOMC now. That makes sense, given the world spent all of 2020 selling the greenback and is still structurally short. Given that the US Dollar did not fall with yields overnight, it is not unreasonable to think that it will therefore rise if the US yields spike, the upside being the weakest side right now. Asian markets are in suspended animation today, with both regional and major currencies almost unchanged from their overnight closes. A lack of new directional pushes leaves Asia content to watch developments in other time zones. Oil markets drifting Oil markets moved slightly lower overnight and today as a lack of new drivers prompted more profit-takers into the market ahead of the FOMC. Brent crude eased 0.55% lower to $69.15 a barrel, and WTI lost 0.65% to $65.15 a barrel. That has continued in Asia, both contracts edging another 40 cents lower to $68.35 and $64.75 a barrel, respectively. Although oils underlying bullish case remains as constructive as ever, the loss of upward momentum could see both contracts weed out more speculative longs as the week goes on. Brent crude has support at $66.50 a barrel, and WTI has support at $63.15 a barrel. Failure sets up markets for a deeper correction ahead of the FOMC, although I expect that plenty of physical buyers will emerge in force on any dip. On the topside, Brent crude has resistance at $70.00 and $71.50 a barrel. WTI has resistance at $66.50 and $68.00 a barrel. Gold remains firm Gold continues to whether firmer US yields and a stronger US Dollar, shrugging of greenback strength overnight to record a 0.28% gain to $1732.00 an ounce. That has continued in Asia, with the yellow metal edging higher to $1735.00 an ounce. Gold is now $55.00 an ounce higher than last week's lows, a quiet but impressive comeback. Despite the gains in recent days being modest in scope, it is significant they have come against a backdrop of moves elsewhere that have sent gold lower in recent times. That hints that underlying strength may be returning to markets. Of course, gold has made a career of disappointing bullish outlooks of late. But if it negotiates the FOMC, where I expect the Fed to disappoint markets on holding down yields, it may well be time to call a longer-term low for gold. Gold has support at $1720.00 and $1700.00 an ounce initially. Resistance lies nearby at $1740.00 an ounce, with the Fibonacci breakout at $1760.00 an ounce it's largest obstacle. A daily close above $1760.00 an ounce will signal further gains to $1800.00 an ounce.

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