Just in Case…

The buy everything gnomes were out in force overnight, with US stocks markets closing at or near record highs despite Durable Goods missing. The main culprit was transport, with the automotive sector’s chip-shortage woes appearing in the numbers. Financial markets, though, quickly put it behind them as transitory.

With US yields remaining benign, the US 10-year comfortably nestled in its 1.55% happy place; there was no reason not to keep buying equities. The heavyweight earnings calendar this week expected to reaffirm that the US recovery, and parts elsewhere, is solidly on track. Notably, the US Dollar crept higher overnight, and I suspect that the reason is tomorrows FOMC rate decision. Nobody really believes that the Fed will change its forward guidance, but “just in case”, investors appear to be loading up on US Dollar as a hedge. The greenback is likely to resume its gentle retreat if the FOMC passes without incident.

US GDP is looming on the horizon this week as well, with plenty of pundits suggesting that an annualised 7.0% growth rate isn’t out of the question. I’ll not disagree with that premise, but I am struggling to see how US 10-years can stay anchored around 1.55% in that scenario. For now, the market is telling me I am wrong, and the market is always correct until it changes its mind and decides it isn’t. King Canute, I am not, although sometimes I do feel like an island.

Germany’s IFO rose overnight, shrugging off vaccine concerns. That is in line with the solidity of last week’s pan-Europe PMI data, and Europe has become the street’s favourite cyclical recovery place. With 25% of Europeans now jabbed and its vaccination programme set to accelerate in the next two months, the premise has merit. Only a sudden steepening of the US yield curve will likely knock that off track.

South Korean Adv GDP for Q1 QoQ outperformed this morning, rising by 1.60%. It gives markets more evidence that the global recovery is on track, even if it will be a K-shaped one with a capital K. Electronics, unsurprisingly, led the way, but evidence of increased activity was noted across most sectors, including domestic consumption.

China Industrial Profits for March rose 92.30% YoY. Although the baseline effects of last year’s Covid-19 lockdowns flatter the headline, the data reinforces that the factory of the world’s growth remains steadfast. With some economics saying that the pace of recovery is slowing behind the headline data, that underlying premise will receive a more vigorous examination from the official PMI data released on Friday.

The tragic Covid-19 situation in India is world news, and rightly so. However, data emerging yesterday suggests that new cases are peaking in Mumbai and New Delhi. Both the Indian Rupee and Indian equities have made recoveries over the past two sessions, and one expects this news to account for much of those gains. Although the Indian situation remains dire, the nascent recovery by local financial markets is a reminder that a seemingly bottomless ocean of investor money is looking for a home in a zero per cent world. Only a rapidly steepening US yield curve will upset the buy-the-dip applecart that has served the world so well over the past year.

US earnings session hits top gear this evening, with a who’s who of corporate heavyweights announcing Q1 results. Most attention, though with be on the technology titans Microsoft and Alphabet. Apart from the headline numbers, which should be spectacular, most attention will be focused on their growth outlooks and whether those expectations are reined in as the world reopens in key economies. With such rich valuations, any revised downward guidance will likely be punished by investors. For the same reason, earnings at or near expectations will probably be punished as well but do remember what I said about buying the dip.

Turning to cryptos, one of the world’s largest Bitcoin traders, Tesla Motor Inc, announced quarterly earnings yesterday. Its share price fell yesterday in a classic “buy the rumour, sell the fact” scenario, something big-tech may also face this week. It made its usual money from selling environmental credits and sold some electric cars, charged by clean electricity produced in coal-fuelled power stations. Notably, it booked over $100 million on Bitcoin, and its CFO reiterated their faith in the crypto. (he/she had 100 million reasons to, I guess) That was enough to turbo-charge Bitcoin’s rally yesterday, the “mainstream asset” finishing 5.30% higher at $53,250.00 of US fiat currency back by US taxpayer revenues.

As I had pondered yesterday, Tesla’s CFO had indeed tweeted something that had sparked the recovery. Mr. Musk tweeted, “What does the future hodl?” I have not had a chance to consult with my millennial daughters, but apparently, that means buying as much of every crypto as you can, as quickly as you can. The market has answered the call, of course. For my part, the Bitcoin chart shows that Bitcoin had fallen out of a rising wedge at $56,000.00; despite the noise, the technical target remains $42,000.00 or thereabouts. The wedge base is at $58,000.00 today, so a daily close above there will tell me I am wrong, although it will be behind a long queue of crypto believers.

Finally, the Bank of Japan has announced its latest policy decision just now. In an 8-1 decision, the Board held its policy rate unchanged at -0/10%, with no change to its yield curve control programme, entirely as expected. GDP forecasts rose ever so slightly to 4.0% for 2021, although Core CPI guidance was revised downwards to 0.10% from 0.50%. BOJ President Kuroda said the 2.0% inflation target would not be achieved during his term. The quarterly report forecast only a moderate recovery. Combined with the Covid-19 states of emergency around the country, Japanese investors have given the uninspiring quarterly report and comments a thumbs down, with Japanese equities retreating.

Asian equities mixed ahead of FOMC

Asia Pacific markets are taking a cautious approach today, notably, as cyclical stocks underperformed in the US overnight and ahead of the FOMC decision tomorrow. On Wall Street, a weaker durable goods headline and expectations of impressive technology earnings this week saw a rotation into the Nasdaq, which powered 0.87% to a new record high. The more balanced S&P 500 rose just 0.18%, while the non-zoom-boom-heavy Dow Jones edged 0.18% lower.

With US index futures unchanged in Asian trading and thus, providing little direction other than to march on the spot, Asian markets have mostly edged lower in sympathy with the Dow Jones. A non-descript Bank of Japan meeting, and Covid-19 worries sees the Nikkei 225 0.20% lower, while the Kospi has fallen 0.30%. In Mainland China, the Shanghai Composite and CSI 300 have lost 0.40%, while Hong Kong is 0.15% lower.

Regionally, Singapore is 0.30% higher on local heavyweights’ earnings releases. Taiwan and Bangkok are unchanged, Kuala Lumpur is falling 0.60%, while Jakarta has risen by 0.15%. In Australia, local markets are weighed down by comments from iron ore heavyweight Vale, which said global iron ore supplies would increase in H2 while demand may soften. That offset multi-year highs in copper with the ASX 200 and All Ordinaries falling 0.35%.

Directionally, there is little to go on with today’s price action in Asia. If anything, it suggests investors are taking some exposure off the table ahead of the FOMC, and thus, we can expect a similarly slightly negative open in Europe.

The US Dollar receives a pre-FOMC tailwind

The US Dollar had a mixed session overnight, falling against the risk-sensitive Commonwealth currencies but rising mostly versus the majors, with the dollar index creeping slightly higher to 90.84 overnight. Gains were most notable versus the Euro and the Japanese Yen.

In Asia today, the US Dollar has strengthened more broadly across the board against the majors, Commonwealths and Asian regional currencies. Like equity markets, it would appear that Asian investors are happy to reduce exposure ahead of the FOMC as a precaution against any unexpected surprises in Fed guidance. That means unwinding some of the previous US Dollar shorts the world has put on through April. In all likelihood, and assuming no Fed surprises or a move higher in US yields, the US Dollar should resume its retreat on Thursday.

The Indian Rupee continues to make a comeback despite the dire Covid-19 situation, which sent the currency spiralling lower last week. Having risen to near 76.00 last week, USD/INR has fallen to 74.812 this morning. Indications that cases may be peaking in Mumbai and New Delhi has spurred a rush of hot money back into the India recovery play. Whether this is premature optimism helped along by some subtle intervention by the central bank, it is too soon to tell.

In the bigger picture, USD/INR staged a massive upward breakout of its one-year downtrend line at 74.00 in early April, after the Reserve Bank of India announced a formal quantitative easing programme. USD/INR had fallen back to 74.30 before Covid-19 exploded in India, which remains a crucial pivot level, even if India’s situation improves rapidly. Investor’s risk appetite will have to accelerate notably from present levels to unwind the QE discount they built into the INR price after the RBI announcement.

India’s travails aside, I expect Asian currencies to trade modestly to the weaker side ahead of the FOMC meeting. That weakness could accelerate if the Covid-19 situation in Thailand, South Korea or Japan takes a sudden turn for the worse.

Oil marks time

Oil continued its volatile but range-bound trading overnight, with Brent crude finishing just 0.30% lower at %65.75 a barrel and WTI falling 0.25% to $61.95 a barrel. The directionless trading continues with Asian markets unwinding those overnight losses as both contracts added 25 cents a barrel.

The OPEC+ joint technical committee (JTC) maintained their guidance on oil demand overnight, although they noted the downside risks to it due to Covid-19 and India in particular. That sent oil one dollar lowly briefly, but it quickly regained its poise.

In the meantime, Brent crude has formed short-term support at $64.50, and resistance at $66.20 a barrel. Similarly, WTI has formed support at $60.70, and resistance at $62.70 a barrel. The charts suggest that the topside is the weaker side of the equation in the near term.

In the bigger picture, Brent crude is trading in a broad $64.00 to $68.00 a barrel range. WTI between $60.00 and $64.00 a barrel. I await a break of either side of those ranges to signal oil’s next significant directional move. In the meantime, I expect both contracts to bounce around noisily between those broader support/resistance levels.

Gold marches on the spot

Gold has a non-descript session overnight after a platinum group metal bruising over the previous sessions. Gold rose 0.25% to $1781.00 an ounce overnight, retreating slightly to $1780.00 in Asia this morning. Gold seems to content to range each side of $1780.00 an ounce as investors’ eyes are trained elsewhere into the FOMC.

Gold has initial support at $1769.00 and $1763.00 an ounce, followed by the 50% Fibonacci at $1760.00 an ounce. The triple top formed between $1796.00 and $1798.00, the $1800.00 level, and then the 100-DMA at $1802.00 an ounce forms a formable layer of resistance to gold’s advance. US Dollar strength as shorts are covered pre-FOMC, could see gold longs washed out and a retest of $1760.00 an ounce.