Market insights: Powell Soothes Nerves

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

Fed Chairman Jerome Powell stayed on message overnight, acknowledging the improvements seen in the economy but highlighting that it was “uneven and far from complete.” Mr Powell saw no signs of “bad inflation”. He committed to keeping monetary policy ultra-easy, emphasising the need for employment to recover to pre pandemic levels, which is still some way off by any measures.

That followed similar noises by ECB Chairperson Lagarde on Monday, who went further in saying that the ECB would closely monitor the trajectory of longer-term interest rates. A veiled hint that the ECB will step in if it perceives them to be rising at an uncomfortable pace.

Similarly, the Reserve Bank of New Zealand held rates at record lows of 0.25% this morning. The RBNZ reiterated that monetary policy support would be required for a prolonged period. It also that the OCR rate could be cut again if things take a turn for the worse.

So broadly, the world’s central banks remain “on message” with ultra easy monetary policy set to continue and no intentions to change that outlook. Although yield curves across the globe may steepen as the economic recovery gathers pace, a sign of economic health, short-end rates will remain near zero. The picture may be murkier by the time Q4 arrives, but for now, central bank largesse is more than enough to keep the global asset prices on an appreciation track.

Mr Powell saved the US stock market’s blushes, which had endured a torrid session until his speech, with the Nasdaq down 3.50% at one stage intra-day. All of Wall Street’s loses were reversed by the end of the session, and notably, both the S&P 500 and the Nasdaq tested longer-term support lines once again, bouncing nicely. The buy-the-dip trade remains alive and well, if perhaps a bit less convincingly then seen in 2020, which is no bad thing in the longer-term.

Elsewhere, gold continued to stage a modest recovery after the Powell speech, even as the US Dollar also crept higher, having rallied impressively on risk aversion flows pre-speech, retreating afterwards. Cryptocurrencies had a tough day at the office, with Bitcoin falling nearly 13% overnight. However, the fall in cryptos is due to liquidity
constraints and speculative mania, rather than anything Mr Powell said.

Bitcoin has duly rallied 5.0% this morning as the buy-the-dip mafia return once again.

Australian wage data outperformed this morning, further confirming the lucky country’s rapid recovery domestically. Malaysian inflation data for January is expected to remain firmly in negative territory at -0.80%, highlighting the negative premium not controlling Covid-19 brings. Hong Kong GDP for Q4 QoQ will show an asthmatic 0.20% as domestic demand also remains Covid-crushed. By contrast, Taiwan Exports, Retail Sales and Industrial Production will show impressive gains, benefitting from being the centre of the work-from home tech boom, and having eliminated the virus domestically.

In a relatively quiet week for tier-1 data as the month-end approaches, attention will now turn to the US Q4 GDP and Personal Consumption Expenditure data tomorrow night. Despite the lockdowns and poor weather, the PCE data should outperform, with Q4 GDP expected to show a further rebound from the darkest pandemic lows. That should support US equities at the fringes, although Mr Powell’s efforts to stop the rot could be undone if US longer-term yields resume their upward trajectory.

Asian equity optimism quickly dissipates

Wall Street was saved by a very dovish Jerome Powell overnight, whose testimony managed to reverse the aggressive sell-off that was sweeping US equity markets. The S&P 500 finished 0.13% higher, although the Nasdaq closed 0.50% lower, having been 3.5% lower earlier in the session. The Dow Jones finishing higher by just 0.04%. Inflation fears continue to nag equity markets, coming as they do, with equity investors long to the gunnels, notably in tech.

A modest rally in US futures this morning has been quickly snuffed out, with all three indices now at unchanged levels. That has been enough to reverse sentiment in much of Asia, clearly still nervous about further US pullbacks. The Nikkei 225 has returned from a holiday, playing catchup as it falls 1.15% today. The Kospi, though, is clinging to a 0.25% gain.

Mainland China markets are under pressure, with the Shanghai Composite down 1.15% and the CSI 300 1.20% lower. Fears continue to nag Mainland investors that the OBIOC will continue to withdraw liquidity and erode the implicit stimulus backstop. Ahead of the Hong Kong budget this afternoon, the Hang Seng has retreated by 1.70%, and Taiwan is 0.35% lower.

By contrast, more cyclical ASEAN is doing somewhat better. Singapore has rallied 1.35% on a brighter outlook for the city’s banks in 2021, while Kuala Lumpur and Bangkok have risen 0.50%, and Jakarta has posted modest gains. Australian markets, frothy from recent commodity rallies, are in profit taking mode today as US futures fade in Asia. The ASX 200 has fallen 0.90%, while the All Ordinaries is 0.75% lower.

At the margins, more tech-heavy Asian markets have underperformed today following the Nasdaq price action overnight, rising inflation fears and a vaccine-led recovery reopening offices. By contrast, the much more cyclical based ASEAN markets have outperformed for precisely the same reasons. The connection is tenuous, though when you add Australia in, and much of the divergence today can be laid at the door of price corrections to the previous week’s market movements’ trajectory.

European stocks are unlikely to gain much of a Powell tailwind, given that his comments merely stopped the rot on Wall Street overnight. Further retreats in the short-term by global equities cannot be ruled out as markets remain fixated on inflation. More progress on the Biden stimulus could shift that myopic attention to the positive, and in the longer-term, the central bank environment remains supportive for asset price appreciation. Some two-way price action in the here and now though is no bad thing.

US Dollar rally stopped in its tracks

The US Dollar was catching a higher yield tailwind overnight, with the dollar index rising to 90.26 intra day. That quickly reversed as Mr Powell released the doves, and the dollar index finished just 0.18% higher at 90.16. Asia has continued selling US Dollar, with the index falling to 90.07 this morning, leaving it once again hovering above support at 90.00. A daily close below that level likely signals more Dollar weakness targeting 89.30 initially.

The neutral day for the dollar index left developed markets basically unchanged from the previous day. The Australian and New Zealand Dollars have outperformed this morning, rising by 0.25% to 0.7925 and 0.7360, respectively. Overall, currency markets seem to be chasing their tail in narrow ranges awaiting the next directional move. That state of affairs may well continue into the end of the week with the balance of probabilities suggesting that Dollar weakness is the path of least resistance. A spike in 10 and 30 year yields again would probably be what sets that off.

USD/JPY continues to confound, having traded as high as 106.20 on Monday, before falling as low as 104.92 overnight, before settling at 105.45 this morning. The USD/JPY gyrations around the 200-day moving average (DMA) and multi-month trendline, both at these levels, has left a confusing technical picture now. A 105.00 to 106.00 range looks to be USD/JPY’s fate until we see another move in US bonds.

Asian currencies remain moribund, orbiting the Chinese Yuan’s event horizon as the PBOC’s daily fixing was at an uneventful 6.4615, barely changed from yesterday. Until the Yuan stages a directional move one way or the other, regional currencies are likely to remain in a holding pattern.

Oil edges lower overnight

After the mighty rally of the day before, it was no surprise that some profit taking appeared in oil overnight. Brent crude fell by 1.20% to $65.00 a barrel, and WTI fell by 1.60% to $61.15 a barrel, with both contracts making new highs intra-day before retreating. At the margins, a Fed Chairman comfortable with inflation at these levels, and a gradual reopening of Texas’s oil industry could be blamed. Realistically, the move lower overnight was all about speculative long positioning.

Oil prices are unchanged in Asia, and it is notable that regional buyers do not appear inclined to chase prices higher at these levels for now. However, that likely means that plenty of Asian buyers will reappear on any material dips in prices. Similarly, a move up through yesterdays Brent crude high at $66.80 a barrel will likely test their patience and resolve.

Brent crude has now broken through resistance at $66.00 and directly targets the January 2020 highs at $71.20 a barrel. Support appears at $66.00 initially, followed by $62.20 a barrel. WTI has cleared resistance at $62.00 a barrel, which becomes intra-day support as the Texas deep freeze recovery drags on. WTI’s next target is the January 2020 highs around $65.60 a barrel, and only the failure of $59.00 a barrel calls the rally into doubt.

The RSI technical indicators on both contracts have remained in overbought territory today, but not markedly so. Given that developments in the physical market are driving the rally, oil will continue to find a wall of buyers awaiting any dips in prices.

Gold finds no Powell solace

An uber-dovish Jerome Powell gave no solace to gold, and nor did an easing of the US Dollar and a neutral day for US bonds. Gold fell four dollars to $1806.00 an ounce, before reversing that move in directionless Asian trading this morning.

Gold has now traced out a rough double-bottom near the $1760.00 an ounce Fibonacci region. That highlight its importance as a long-term critical support zone, and failure now almost certainly condemns gold to a move to the low $1600’s an ounce.

Gold has initial resistance at $1830.00 an ounce, but far more formidable resistance remains just above in the shape of its 50,100 and 200-day moving averages. All three are clustered between $1850.50 and $1860.00 an ounce. The 50-DMA crossed below the 200-DMA last week, and the 100 DMA looks set to do the same in the next few days if prices trade sideways from here. Gold is by no means out of the woods yet.

The inability of gold to rally on what should have been a treble of supportive factors overnight suggests that the momentum of the gold recovery is waning quickly. Gold has been unable even to recapture the $1830.00 an ounce region. Another sideways day will have the bears sharpening their claws once again.