Non-Farms is a crowded trade

Friday is finally here, and with it the week’s data highlight, the US Non-Farm Payrolls. It has been a choppy week of trading across most asset classes. As the dust settles, only the commodity sector shows a clear win instead of a nil-all draw.

Market’s overnight were solidly in global recovery mode, with iron ore and copper powering higher along with platinum group and precious metals. The commodity rally saw the US Dollar retreat, notably versus the commodity currencies. That accelerated after robust Initial Jobless Claims data and despite more pseudo hawkish comments from Fed Governor (non-voting) Kaplan. Fellow Governors Bostic and Mesler resolutely stuck to the Fed’s dovish mantra, which dovetailed nicely with what financial markets, in buy-everything mode, wanted to hear.

Recovery expectations once again saw the cyclical Dow Jones outperform the S&P 500 and tech-heavy Nasdaq, although all three indices enjoyed a day in the sun. Not all went to plan, though; oil retreated, as did US yields which continue to confound. It may as well be Star Trek as far as bond markets go, and I have accepted that higher yield resistance is futile, for now.

Depending on who you speak to, tonight’s Non-Farm Payrolls will come in at between 1.0 million and 1.30 million jobs added. That is notably higher than the 900,000 market consensus from Monday morning. My concern is that it is starting to look like a very crowded trade, which always makes me nervous. Especially that despite the noise this week, most markets have just range traded.

The risks shift, I suspect, to a print of 900,000 or less, which will surprise markets. I caveat this by saying that that is not my base case; I am in the 1.0 million club myself. However, readers will know that I hate running with the herd. I am quite capable of running off the edge of the cliff face myself thank you.

Unpicking the price action in such a scenario is a little more complex, and I have long said that one should never trade the markets in the 30 minutes after the Non-Farms; that way lies the dark side. Given the cyclical rotation pumping up the Dow Jones, I would hazard to say the Dow Jones would fall and the Nasdaq would rise. Oil’s overnight retreat would continue. Commodities would also see profit-taking while US bond yields, which seem capped with concrete, would also move lower. Bizarrely, that will probably see the US Dollar rise, notably against the outperforming commodity currencies.

How long will the reversal last? Probably not far into next week. The financial markets global recovery group-think quickly justifying a low Non-Farm Payrolls print as an “anomaly” along the path to post-Covid-19 nirvana. Still, we could be in for a frisky end of the week. You have been warned.

With global recovery price action and the Non-Farm’s dominating investors’ minds, Asia’s data has been somewhat subsumed today. Nevertheless, it contained nothing to dull the recovery narrative. South Korea’s Trade Balance modestly outperformed, coming in at $7.82 billion. Japan’s Jibun Bank Services PMI improved to 49.5, with the street ignoring signals of extended and tightening Covid-19 restrictions in Japan.

Front and centre was China’s Caixin Services PMI, which rose strongly in April to 56.30. It indicated that the directional of travel for China’s domestic recovery continues in the right direction. It has also dampened any negative feedback on the tense geopolitical front between China, and seemingly, the rest of the entire planet this week.

China has just released its Balance of Trade which has printed at $42.86 billion in Dollar terms, well above the $28.1 billion expected. The YoY export and import numbers have leapt massively but are slightly disingenuous, reflecting a shallow Covid-19 base in April last year. Nevertheless, the data is excellent and should be supportive, along with the Caixin PMI for regional equities today.

Germany’s Balance of Trade and pan-Europe industrial production data should tell a similar story, even if European services have suffered a Covid-19 hiccup. That should be enough to maintain the global recovery bid-tone across markets until this evening’s US data.

Asian equities are in the green

Asia-Pacific equities markets are posting solid if unremarkable gains across the region today. Sino geopolitical tensions are being shoved aside as Asia concentrates on the global recovery play, which continues from Wall Street overnight.

Yesterday, Wall Street finished higher, with the Dow Jones making yet another record close. The S&P 500 rose 0.82%, with the Nasdaq edging 0.37% higher and the Dow Jones leaping 0.92%. In Asia, index futures on all three have moved slightly higher, led by Nasdaq futures, up 0.25%.

Improving US jobless claims, various Fed speakers steadying the dovish ship, anticipated robust US labour market data and impressive China numbers this morning, give Asia every reason to be positive today. The Nikkei 225 is 0.10% higher, tempered by Covid-19 concerns. The Kospi is 0.75% higher, China’s Shanghai Composite is 0.40% higher, and the CSI 300 is 0.15% higher. Hong Kong has climbed 0.55%.

Singapore has rallied 0.75%, with the tech-heavy Taiex rallying by 1.0%. Kuala Lumpur is 0.35% higher, with Jakarta up 0.10%. Australian markets have also drifted higher as the commodity rally continues. The ASX 200 and All Ordinaries are rising by 0.30%.

Bullish exuberance is being tempered by the Non-Farm Payroll event risk later this evening. Still, there is no reason why equities, either in Asia or Europe, should retreat before tonight’s main event with expectations so high.

The US Dollar wilts on global recovery flow

The US Dollar abruptly changed direction once again overnight, the dollar index retreating 0.40% to 90.90, easing slightly in Asia today to 90.86. Ongoing global recovery hopes and sky-high Non-Farm Payroll expectations were behind the demise, helped along by US yields unexpectedly reducing as well. The Euro was the primary beneficiary amongst the index components, EUR/USD rising 0.50% to 1.2067, lifting it clear of important support around 1.2000.

The commodity currencies were the primary beneficiaries of the US Dollar rotation as commodity prices continued climbing overnight, notably platinum group metals, iron ore and copper. USD/CAD fell 0.95% to 1.2150, with the Loonie seemingly unstoppable whilst the commodity rally flames burn high. Canadian labour market data could cause the USD/CAD to pause, but it is likely to be just that, a pause.

The AUD/USD and NZD/USD pairs rose 0.48% and 0.25% respectively overnight, with the China concerns of yesterday being quickly forgotten. AUD/USD remains hemmed in a 0.7800 to 0.7900 range despite a choppy week, with NZD/USD bouncing like a pinball between 0.7100 and 0.7300.

The same could also be said of the dollar index, which has not managed to break out of its 90.50 to 91.50 trading range despite the noise. Although the Chinese Yuan has strengthened to 6.4600 today, dragging Asian currencies higher with it overnight, I am hesitant to jump on the bullish bandwagon. That requires a directional breakout of the trading ranges of the dollar index and commodity currencies, ex Canadian Dollar. Hopefully, tonight’s US data will give us more insight.

Oil bucks the trend and retreats

One notable laggard in the commodity rally was oil overnight, with both Brent crude and WTI testing range highs again before retreating. Once again, it appears that speculative fast money has no stomach for the slightest reversal of loss of price momentum, leading to a tail-chasing rush for the door.

With the Brent crude futures curve back in sold bullish backwardation, any fall in prices should be limited. However, the bad news from India keeps getting worse, with record Covid-19 cases recorded yesterday. As the third-largest oil importer globally, India remains the weak link in the oil rally narrative. It appears to be tempering gains, even if oil’s broader technical picture looks strong. The first signs that India’s Covid-19 tragedy is easing is likely to see bullish fast money pile back into long positioning in force.

Brent crude fell 0.40% to $68.25 overnight, reversing those losses by rising to $68.50 a barrel this morning, with post-holiday Asian buyers showing their hand modestly. Brent crude has resistance at $70.00 a barrel, and $68.00 a barrel is now an important pivot point. Failure could see a speculative capitulation which could extend to $66.00 a barrel.

WTI has risen 0.40% to $65.40 in Asia, also reversing its overnight losses. It remains comfortably mid-range in its multi0week upward channel, bordered by $62.50 and $67.00 a barrel. WTI has intra-day resistance at $66.00 a barrel. Support lies at $64.50 a barrel, and failure could spark a two-dollar capitulation by fast money.

Looking ahead to the Non-Farm Payrolls data, predicting the effect of the outcome on oil prices is in the too-hard box. I am content to watch the fireworks from the side-lines.

Gold stages huge break higher

Gold clearly has some surprises left in it as it chose yesterday to play catchup to the commodity rally, after decent us data and dovish Fed comments push the US Dollar and yields lower. Gold staged an impressive 1.60% rally as it rose nearly 30 dollars to $1815.00 an ounce.

In the process, gold has completed a directional breakout by rising and closing above formidable resistance at $1800.00 an ounce, its 100-day moving average (DMA), which now becomes support. Gold’s next target becomes $1850.00 an ounce, its 200-DMA.

It is clear that plenty of technical traders and algorithmic models bought gold on the break of $1800.00 an ounce. Quid pro quo should gold fall back below that point, and equally fast rush for the exit door should occur, pushing gold back to $1780.00 an ounce.

At this stage, only bond markets suddenly deciding tonight that 1 million-plus jobs added, along with US GDP forecast to rise over 7.0% this year, are inconsistent with 10-year yields at 1.50%, threatens the gold rally. Gold has sung more heart-breaking songs to gold bulls than Elvis in his prime, but it would take something special to upset the applecart tonight.