By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
The FOMC Minutes passed without incident overnight. The committee felt that risks were balanced but that the economy remained far from the FOMC’s longer-term goals. Additionally, they expressed comfort that the recent rise in US bond yields reflected an improving economy and economic outlook. Once again, they emphasised that labour markets remain far from pre-Covid levels and seemingly, this forms the centre of FOMC thoughts and rightly so.
The nil-all draw from the FOMC minutes left stock markets drifting, although, in currency markets, the US Dollar firmed as US long yields edged higher. Notably, the Australian and New Zealand Dollars were amongst the worst performers, emphasising the currency markets (and probably stocks) are being bounced around by fast money flows.
US Initial Jobless Claims should drop below 700,000 this evening, but most of the attention will be on Federal Reserve Chairman Jerome Powell, who is making a speech at midnight SGT. As ever, markets will be hanging off every word Mr Powell utters, searching for signs of a change in Fed guidance since March’s FOMC meeting.
With the US economic risks weighted to the upside as their recovery gathers momentum, a slip of the tongue, deliberate or not, will likely see bonds and equities punished and the US Dollar rally. Even more so as it is clear that despite equity market gains this week, financial markets, in general, are being dominated by schizophrenic fast-money flows looking for the next big thing as they chase their tails.
The European Central Bank releases their last policy meeting minutes this evening, although markets are well conditioned to some members’ perpetual inflation fears. They are not nearly as flammable as the FOMC minutes, however, and no fireworks should ensue. Overnight, German, French and Italian Services PMI’s for March all surprised to the upside. Covid-19 may hurt those numbers in April, but the readings overnight were enough to allow the Euro to cling to its gains versus the US Dollar.
Sterling was pummelled overnight after both European and British medical agencies highlighted blood-clot risks from the AstraZeneca Covid-19 vaccine. Spain banned persons under 60 years old from receiving it, but it was the British recommendation that alternative vaccines should be used, if possible, for those under 30 years old that did the damage. That unwound some of the UK’s recent vaccine premium with GBP/USD falling 90 points to 1.3740 overnight on fears that the UK’s recovery would be delayed. British equities will probably feel the heat this afternoon as well.
Yesterday, the Reserve Bank of India left interest rates unchanged, but announced its formal intention to buy INR 1 trillion ($13.50 bio) of government securities over the next quarter to cap borrowing costs. Although not called quantitative easing, yield curve control or debt monetisation by the RBI, it certainly resembled them, and the markets treated it as such. Equities rallied, but the Indian Rupee tumbled 1.30% to 74.450 versus the Dollar.
With Covid-19 cases soaring, threatening new national lockdowns and the trajectory of its already weak recovery, Indian asset markets may find themselves in the naughty corner in the weeks ahead. At least India’s vaccination efforts are also ramping up impressively, and unlike Brazil, it is the largest vaccine manufacturer in the world and is led by competent leaders. India’s travails are unlikely to spark a deeper rout in emerging markets, a task usually allocated to the US bond market.
The Asian data calendar today is nondescript, dominated by second-tier data. Japan’s trade balance rose slightly above expectations, in line with the regions continued strength in export facing sectors. The Philippine’s trade balance deteriorated, and Industrial Production plunged YoY as the country struggles to get to grips with its Covid-19 situation. The Philippine Peso came under pressure yesterday but quickly reversed course, hinting that the central bank may have been around “smoothing.”
Both Japan and the Philippines will continue to be dominated by Covid-19, with Japanese authorities apparently assessing whether to widen movement restriction outside Tokyo. Otherwise, all remains quiet on the Eastern front. Asia is likely to content itself by adopting a wait-and-see stance today, awaiting directional inputs from North American markets.
Asian equities are mixed
Asian equities are mixed today after a non-descript session on Wall Street that provided no concrete direction for local markets. The S&P 500 rose just 0.15%, while the Nasdaq and Dow Jones closed almost unchanged. US index futures have risen this morning, but that has translated to an uneven performance across Asia.
The Nikkei 225 is 0.30% lower as Japanese authorities weigh widened Covid-19 restrictions. The Kospi has risen just 0.15%, while Mainland China’s Shanghai Composite and CSI 300 have drifted 0.10% higher. A suitably dovish FOMC minutes has boosted the Hang Seng by 0.80%, with cyclical sectors outperforming at the expense of tech giants.
Singapore has risen by 0.10%, with Taiwan climbing 0.20%, Kuala Lumpur increasing 0.30% and Jakarta by 0.25%. Australian markets lead the charge higher today, with rising base metal prices boosting the resource sector heavyweights in particular. That has seen the ASX 200 and All Ordinaries climb by 1.0% today, helped along by no hawkish surprises in the FOMC minutes.
Australia aside, Asian markets are very much in watching from the side-lines mode ahead of the Powell speech this evening. The refusal to get tugged along by the two-way noise on Wall Street this week is very much evident, reflecting perhaps lingering concerns about US bond yields as American data continues to surprise across the board to the upside.
United Kingdom equities may get a dose of AstraZeneca blues this afternoon. Eurozone markets may also suffer, but not to the same extent as AstraZeneca vaccine alternatives start arriving in greater numbers this morning.
The US Dollar rises slightly
The FOMC Minutes “balanced risk” comments were enough to move US yields slightly higher overnight, which also lifted the US Dollar. The dollar index climbed 0.13% to 92.43 in a forgettable session with gains limited as the Euro held its gains from the previous day. Currency markets continue to range trade and are being dominated by tail-chasing fast money flows in a week where direction from hard data has been minimal. Both the Australian and New Zealand Dollars fell overnight by 0.70% on no particular information,
EUR/USD remains unchanged at 1.1870 today, with the single currency holding its previous day gains, likely boosted by EUR/GBP buying. Sterling fell after British authorities recommended that the AstraZeneca shot not be used on under-30’s, and the EMA noted blood clot risks. Sterling fell 0.63% to 1.3740 overnight, recovering some of those losses to 1.3760 in Asia. GBP/USD has once again rallied and failed at channel resistance, today at 1.3900, suggesting that a retest of 1.3680 is on the cards, particularly if doubts arise over Britain’s vaccination pace.
The Indian Rupee plummeted yesterday after the Reserve Bank announced a bond-buying programme for this quarter, and India’s Covid-19 woes deepened. USD/INR rose by 1.30% to 74.450, taking out its 200-day moving average at 73.660 and its one-year resistance line at 73.944 in the process. These are bearish technical developments, and with things set to get worse before they get better in India, USD/INR looks set to test 75.000 in the days ahead potentially.
Oil trades sideways
With no real fireworks from the FOMC Minutes and no new emerging drivers for prices, oil markets contented themselves to trade sideways overnight, with the rise in US gasoline inventories acting a modest brake on price rises. Brent crude edged 0.35% higher to $62.90 overnight with WTI climbing 0.65% to $59.50 a barrel.
Both contracts have added 20 cents in Asia as oil markets continue to monitor developments in the US/Iran talks in Vienna. Although the chances of a breakthrough are low, any signs that one may occur is likely to send oil lower in the short term.
Brent crude’s critical levels at $60.00 and $65.00 a barrel. WTI’s are $57.50 and $62.50 a barrel. Intraday sentiment and flows continue to dominate proceedings.
Gold edges lower on US yield rise
Gold prices remain connected at the hip to movements in the US 10-year bond yields. Overnight, US 10-years rose slightly which pushed gold 0.33% lower to $1737.70 an ounce, with gold rising slightly to $1738.70 an ounce in a moribund Asian session.
Although the rally has halted temporarily at the $1745.00 an ounce resistance level, gold’s overall performance remains impressive, notably because it has formed a series of daily lows at the 61.60% Fibonacci leave near $1685.00 an ounce. That keeps the premise that gold is creating a longer-term base firmly in place, and a rise through the 50.0% Fibonacci at $1760.00 an ounce will confirm the technical picture.
Gold’s true test will come if US yields stage another sharp rise. If gold hangs on to its gains in that scenario, my confidence will rise even further.
In the near term, gold has support at $1727.00 and $1720.00 an ounce, followed by $1705.00 an ounce. Gold has resistance at $1745.50 and $1755.00 an ounce, followed by the previously mentioned $1760.00 an ounce area.