Rotational Spin

US markets paused for breath overnight, with Wall Street easing slightly after a frenzied Monday session. Rotational spin was the theme of the day, and yesterday’s lucky recipient was the European Union, with markets delivering the author a slap in the face after yesterday’s note. Having driven US markets to near-record highs, investors seized upon news that the EU expects to have vaccinated 70% of its population by the end of July to pile into a Euro-recovery play. That drove French and German markets to record closes with the Euro rallying hard versus the greenback.

US yields fell overnight despite US JOLTS Job Openings for February outperforming, climbing to nearly 7.40 million jobs. Although backwards-looking in the context of the dynamism of the past 12 months, when one adds in the ISM Services PMI and Non-Farm Payroll prints of recent days, and vaccinations becoming available to any adult American from mid-April, US data seems set to put the pedal to the metal.

It is hard to imagine that that is fully “priced in” by markets, despite the daily spin, and US yields may only be resting before moving higher again. US Dollar weakness may, therefore, only be temporary. This week, though, the rotational, global recovery army has reasserted control, and I shall not fight them.

It is a relatively quiet day on the data front for Asia, which will likely content itself with joining Europe’s rotational recovery party, having declined to join the madness of Wall Street’s manic Monday. Australian Market Services PMI outperformed, climbed to 55.5. With the RBA on hold and ultra-dovish still yesterday, the data-beats by the lucky country should keep on coming. That, along with the imminent commencement of the long-awaited Australia-New Zealand travel bubble, should keep the Australian and New Zealand Dollars purring along after being lifted overnight as bellwethers to global risk sentiment.

Asia’s highlight will be the latest Reserve Bank of India rate decision this afternoon. Despite the resurgence of Covid-19 threatening the Indian recovery, the RBI will remain unchanged at 4.0%, although a hike of the Cash Reserve Ratio is probably off the table. With inflation near 5.0%, and lockdowns likely to nudge food inflation higher now, the RBI has little room to move in this stagflationary environment. The Indian Rupee was one of the few currencies to weaken overnight, but an unchanged RBI, along with lower oil prices, should be supportive at the margins, as it will be for local equities.

Looking ahead, the US trade Balance will be of marginal interest. The week’s highlights will be the FOMC Minutes released in the wee hours of Thursday Asian time, with markets looking for divergence amongst the governors regarding future monetary tightening. That is followed by Federal Reserve Chairman Jerome Powell making a speech at midnight on Thursday/Friday SGT. As ever, the street will be hanging off every word, looking for the slightest hint that Mr Powell is wavering on his ultra-dovish forever commitments. Expect bond prices and equities to fall if one misplaced word emerges.

For now, though, global recovery risk sentiment rules the waves. Recovery rotational spin will likely continue to increase until investors get dizzy enough to pause.

Asian equities set for a positive day

Wall Street had a sideways day overnight after the breathless Monday session. Asian markets are likely to take their cues from Europe instead, where the cyclical recovery rotation flows lifted local markets. That is a much more comfortable space for ASEAN markets than the wild tech-led exuberance of the US.

On Wall Street overnight, the buy everything gnomes paused for breath despite US bond yields easing. The S&P 500 edged 0.10% lower, the Nasdaq was almost unchanged, closing 0.05% lower, and the Dow Jones slipped 0.30%. US futures on all three have edged higher in Asia this morning, confirming the marching on the spot continues as the action occurs elsewhere.

The Nikkei 225 has risen 0.30%, with the Kospi 0.55% higher after Samsung lifted earnings guidance. Mainland and Hong Kong markets open shortly and should move tentatively higher initially. Singapore and Taiwan have risen 0.25%, with Kuala Lumpur rising 0.45% after underperforming yesterday. Australia’s ASX 200 and All Ordinaries have climbed 0.55%, with solid data, travel bubbles, firm commodity prices and travel bubbles giving local investors no reason to be negative.

The US Dollar in full retreat

The global recovery sentiment was on full display in currency markets overnight, with the US Dollar in a broad retreat led by the rally in the previously unloved Euro. The dollar index fell 0.30% to 92.30, breaking support at 92.50. It has edged lower in Asia to 92.26, with its next support around the 92.00 regions. The dollar retreat was assisted by US yields easing across the curve, particularly in the longer tenors.

EUR/USD led the charge, rising 0.55% to 1.1875 overnight, just below its 200-day moving average. (DMA) Sterling retreated 0.50% to 1.3835 as EUR/GBP buyers piled back into the cross after the EU announced an improved Eurozone vaccination outlook. Both the Euro and Sterling have broken out of falling wedge formations, and if the sentiment overnight continues, both should make gains over the coming days.

USD/JPY fell through 110.00 on its way to 109.60, a 0.40% decline. A fall through 109.35 could see the cross retreat to 108.50 in the sessions ahead, assuming recovery sentiment remains intact.

Notably, risk sentiment bellwethers, the Australian and New Zealand Dollars, both finished the session almost unchanged at 0.7665 and 0.7060, respectively. Both have staged recoveries over the past week, and it may be that investors felt that better value lay elsewhere, in Euros, for example. Both remain deep in retracement territory and maybe a warning that the US Dollar weakness may only be temporary.

Oil trades sideways overnight

Oil prices finished modestly higher overnight as US API Crude Inventories fell by 2.6 million barrels, although both Brent and WTI traded in wide intra-day ranges. The sentiment was negative in Asia, but global recovery sentiment, helped by EU vaccination outlooks and upgraded IMF growth forecasts, lifted oil intraday. The supply overhang, though, stopped the rally in its tracks.

Brent crude and WTI finished the day 0.70% higher at $62.70 and $59.20 a barrel, respectively, although the intraday gyrations suggest that oil traders remain confused about the oil’s next directional move. Both contracts have added 20 cents a barrel in early Asia, in line with the recovery sentiment lifting asset classes elsewhere.

With growth and recovery on one side, balanced by US/Iran talks and an impending increase in production by OPEC+ on the other, oil is likely to continue vacillating aggressively in a wide range. In the broader picture, Brent crude’s critical levels at $60.00 and $65.00 a barrel. WTI’s are $57.50 and $62.50 a barrel. Investors and traders can choose their poison on an intraday basis in between, with intraday sentiment and flows dominating proceedings.

US yields lift gold

Gold continues to take its cues from the direction of US long yields and not the US Dollar at the moment. Overnight, as US yields eased, gold staged another impressive rally, powering 0.90% higher to $1743.50 an ounce. Some overnight profit-taking in Asia has pushed gold lower to $1737.50 an ounce.

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.