The return of the FOMO headless chickens

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

I really should not have been surprised by the overnight price action. If there is one thing the last 15 months has taught us, it is the power of the buy the dip strategy as central banks continue pouring free money into the world's financial system. Last night was a classic case in point, as the great post-FOMC/Bullard unwind of the global reflation trade abruptly halted and reversed. All it took was a transitory inflation comment from Fed Chairman Powell at prepared congressional testimony and a dovish comment from Fed President Williams, to swamp pseudo hawkish comments from Fed Presidents Bullard and Kaplan. As a result, the 5-minute macros (seemingly every "macro" fund these days) and the FOMO headless chickens of the investor/retail flocks piled onto positioning they couldn't get out of fast enough on Thursday and Friday. The US Dollar fell overnight, stocks, notably the unloved S&P and Dow Jones, rallied, gold picked up, and the US yield curve steepened as yields on the long-dated bonds rose once again. So, has the global reflation trade unwind run its course? We don't really know. Is inflation transitory or sticky? Again, we don't know, and I am not sure it really matters, but no one is listening to me on that point. I have said it before, and I will say it again, if the post-GFC world is going to implode if interest rates rise to 1.0 to 1.50%, we really are stuffed as that's still effectively free money. Does the Federal Reserve know? Well, given the divergence in comments overnight and the market spoof (which I thought was illegal these days?) on "guidance" into the FOMC, they clearly don't either. The headless chicken volatility is exacerbated by this week being exceptionally light on tier-1 data, something I alluded to yesterday. Potentially, softer US Personal Consumption, Durable Goods or Initial Jobless Claims could see the global reflation trade unwind start once more. Or maybe not. You can cut the cake whichever way you want if you are a headless chicken these days. Rather than a Gangsta's Paradise, I expect financial markets to be a day-trading Headless Chicken's paradise. "Everybody's runnin', but half of them ain't looking (possibly more than half) It's goin' on in the kitchen, but I don't know what's cookin' Been spendin' most of their lives livin' in a headless chickn' day tradin' paradise" 1 I may well be cut pasting that paragraph for the rest of the week. You know it is a strange day when I comment on Bitcoin for the second time in a week. But its price behaviour looks almost reasoned and logical when contrasted with the herd-like mediocrity described above. Fresh from bashing domestic Bitcoin miners on Friday, China ordered financial institutions, including Alipay, to "investigate and identify" crypto-related bank accounts, and block crypto-related transactions. The list of China financial institutions hitting the wires promising to comply this morning is a veritable who's who. That was enough to pummel Bitcoin yesterday, which fell by just over 11.0%. However, it has clawed by some losses, rising 3.60% to $32,760.00 this morning in Asia. However, the chart picture still looks grim with the support line resting around $31,300.00, but the $30,000.00 area is the one ring to rule them all. Failure of $30,000.00 will open the trapdoor to a sub-$20,000.00 move. Having said that, I am not so sure that's the digital day of reckoning will be today. Bitcoin's technical indicators are nearing oversold territory. Additionally, the press is filled with doom and gloom "death cross" stories, caused by the 50-day moving average crossing below the 200-day moving average. That is not to diss' the press or the technical picture, but my experience of death crosses (30-years plus) is that they are a leading reverse indicator in the short-term, which is why I never mention them. It is as good a reason to be digitally long the beast of blockchain as any today. Asian equities bounce Asian markets have jumped on the FOMO headless chicken global recovery trade, Wall Street rebound with vigour today. Nowhere more so than yesterday's biggest losers, Japan and Australia, who have more headless chickens than most in the region. A dovish Jerome Powell lifted Wall Street from its taper malaise with the S&P 500 jumping by 1.40%, the Dow Jones pole vaulting 1.76% higher, and the Nasdaq rising a relatively pedestrian 0.79%. Futures on all three indices have tracked around 0.20% higher this morning. Having slumped yesterday as panicked short-term traders rushed for the exit, the Nikkei 225 has leapt 3.30% higher today, unwinding most of those losses. Similarly, the herd has reversed course in Australia, with the All Ordinaries climbing by 1.50%, and the ASX 200 rallying by 1.60%. The South Korean Kospi, meanwhile, has moved 0.70% higher. In China, the government continues to make noises about pushing commodity prices lower. Today, iron ore futures have slumped, which has helped the Shanghai Composite move 0.65%, while the more tech-heavy CSI 300 is up 0.40%. Perhaps with one eye on China's clampdowns for the opposite reasons, Hong Kong is unchanged today. Across regional Asia, Singapore has eased by 0.35%, while Kuala Lumpur has climbed 0.15%, Jakarta by 1.0% and Taipei by 0.50%. With a light data calendar globally this week, the equity market narrative will continue to flip flop to the whims of Wall Street. Headlines and Fed speakers are likely to dominate proceedings, and investors should be prepared for the volatility to continue. US Dollar retreats on transitory Powell In line with other asset classes, the US Dollar finally retraced lower overnight as Fed Chairman stuck to transitory inflation narrative at prepared Congressional testimony. Given that financial markets were panicking over the end of the global reflation trade in the days before, it is impossible to guess whether the Powell comments are merely a temporary pause to the global reflation trade unwind or mark the end to the correction. We will have a clearer view by the week's end, hopefully. The dollar index gave back all of Friday's gains overnight, falling 0.52% to 91.84, edging slightly higher in Asia to 91.91 on intra-day short-covering. The dollar index has traced out support and resistance at 91.80 and 92.40, respectively, and a break of either signals the dollar index's next directional move. The major currencies all rallied in sympathy with the lower US Dollar, with EUR/USD climbing to 1.1910 and GBP/USD to 1.3920. A rise through 1.1925 or 1.3950 could extend their gains, potentially adding another 50 to 75 points. AUD/USD rallied 0.80% to 0.7540 overnight but has fallen 0.35% to 0.7525 today as iron ore prices tumbled. That leaves it mid-range between 0.7460 and 0.7550, and if China's efforts to push iron ore prices lower continue to work, AUD/USD will struggle to hold upside gains, even if the US Dollar retreat continues. USD/JPY rose to 110.35 overnight, gaining another 10 points today, as the US yield curve steepened once again. USD/JPY continues to be a mechanical US/Japan yield differential play. Notably, USD/Asia has ignored the US Dollar pullback elsewhere overnight, with USD/Asia continuing to grind higher today. The PBOC set a slightly firmer Yuan fixing at 6.4613 and left liquidity neutral, but the fix was still higher than yesterday's 6.4546. The Yuan weakness seems to have been enough to keep USD/Asia bid. Offshore USD/CNH continues to flirt with resistance at its 100-DMA at 6.4694, making regional traders wary of further US Dollar strength. Financial markets are heavily invested in long AsiaFX as a global recovery play. It seems that that heavy positioning and the PBOC pushing the CNY lower is tempering further AsiaFX rallies. Overall, given the wild swings in sentiment seen in the past few days, we can expect more of the same as the week progresses. So be nimble or be deep-pocketed. Oil remains unstoppable Oil prices rallied powerfully once again overnight, as the election of a new hard-line President in Iran reduced the possibility of a nuclear agreement and Iranian sanctions would ease. A falling US Dollar aided oil, and with fears of a flood of Iranian oil hitting global markets fading, Brent crude rose 2.20% to $74.80 a barrel, and WTI leapt 2.25% to $73.05 a barrel. Oil markets are continuing higher in Asia, retesting the overnight session highs. Brent crude rising 0.45% to $75.15, and WTI increasing 0.20% to $73.20 a barrel, a 26-month high for Brent and a 31-month high for WTI. Oil's immunity to price volatility in either the commodity or currency markets strongly suggests that demand is high and rising. By default, that indicates that the global recovery in the real world remains on track even as other asset classes chase their tails. Brent crude should now target $77.00 and WTI $76.00 a barrel in the coming sessions, something that will become almost inevitable if the US short-squeeze has indeed run its course. Gold rallies on weaker US Dollar Gold rose overnight as the US Dollar retreated, as investors piled back into the global relation trade, they had been desperate to escape on Friday. It finished the New York session 1.05% higher at $1783.00 an ounce. That sentiment continues in Asia this morning as regional investors hurry to follow New York's overnight lead. Gold has risen 0.30% to $1788.00 an ounce as a result. Market sentiment across asset classes is flip-flopping aggressively this week, and I expect that to continue. Support at $1760.00 has held impressively on Friday, while the $1795.00 to $1800.00 zone, containing the 100-DMA, provides equally firm resistance. I expect gold to continue to range in a very choppy manner between these two levels until financial markets make their minds up about whether the global reflation trade has run its course, or not. Not helping the quest for clarity, is that the week's data calendar is very light. That leaves asset classes, including gold, at the mercy of headlines and intra-day sentiment swings.

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