Pre-FOMC shuffle continues

Investors continue to reshuffle exposure ahead of today’s US FOMC meeting, with equities trading sideways, the US Dollar rising modestly, and the long end of the US yield curve steepening. The scale of the shuffle, though, hints at caution and not panic. Assuming that the FOMC stays resolutely “on message,” I expect buy everything business as usual to return shortly thereafter.

US earnings continue to show impressive results, although I note that with so much good news built into equity prices, companies producing results on expectation are being punished in the short term. Tesla suffered that fate yesterday, and Microsoft’s shares have been marked down in after-hours trading following its Q1 earnings release. Conversely, Alphabet’s share price has risen this morning after releasing much higher than expected earnings after the Wall Street close. Despite the short-term noise, however, I suspect that assuming the FOMC contains no hints of a taper, buying the dip will quickly reassert itself.

Apple and Facebook are the two heavyweights in the earnings ring this evening. Apple should surpass expectations boosted by their new iPhone demand. Facebook will also have sold an ocean of ads but may have cloudier future guidance after Apple’s no tracking IOS release, and ongoing litigation and regulatory threats.

Turning to the Asia-Pacific, South Korean Consumer Confidence rose to 102.20 for March, and Japan Retail Sales rose 1.20% MoM in March, both well above expectations. Covid-19 concerns in April may have mollified those numbers, but with domestic consumption lagging the export machine across Asia, both data prints hint that the recovery is becoming more balanced. Nevertheless, as we see in Thailand, the threat of Covid-19’s re-emergence remains the primary obstacle to Asia’s recovery and the world’s.

In Australia today, official Inflation disappointed, printing at 1.10% YoY for Q1 and 0.60% MoM for Q1, both well below expectations. Despite the inflationary noise from locales such as the US, inflation remains a challenge elsewhere, as evidenced by Japan’s data yesterday. I suspect inflation will accelerate in Australia as base effects squeezing global supply chains make themselves felt on Australia’s shores. However, Westpac’s economists have forecast that the RBA will extend its QE programme once again later this year. The Australian Dollar has fallen by nearly 0.50% today to reflect this.

Looking ahead, Malaysian Exports should show a strong recovery later today, led by electronics. That should keep the recent Malaysian Ringgit rally on track despite the caution ahead of tonight’s FOMC. Singapore Unemployment should continue to fall today as well, perhaps touching 3.0%. Still, a full recovery to pre-pandemic levels will likely have to wait until the City-State can reopen its borders to the world.

Looking ahead, the tier-1 data releases continue apace post-FOMC, with US GDP and Initial Jobless Claims tomorrow, followed by Personal Income and Expenditure on Friday. Japan has Preliminary Industrial Production tomorrow, followed by the Jibun PMI Friday. Germany releases Unemployment tomorrow, and finally, China releases official Manufacturing and Non-Manufacturing PMIs on Friday. Markets will have plenty to get their teeth into post-FOMC, but today’s session will likely see sedate range-trading ahead of the meeting.

Asian equities of to a slow start

Wall Street had a sedate day as it moved into wait-and-see mode ahead of the FOMC. Earnings weighed slightly on the Nasdaq, which finished 0.34% lower, but the S&P 500 and Dow Jones finished the day unchanged. Alphabet’s aftermarket rally appears to have shifted sentiments slightly, with Nasdaq and S&P futures rising modestly, which seems to have given Asia a slightly positive bias in early trade.

The Nikkei 225 has climbed 0.31% after the Yen weakened markedly overnight, while the Kospi has retreated by 0.70%. Mainland China’s Shanghai Composite and CSI 300 have advanced 0.15%, with the Hang Seng also 0.15% higher.

Regionally, Singapore has crept 0.15% higher, while Taipei and Kuala Lumpur have retreated by 0.30%. Jakarta and Bangkok are unchanged, with Manilla rising 0.60%.

Australian markets have rallied after weak inflation data left markets pricing a lower for much longer RBA, and with a weaker Australian Dollar boosting exporters. The ASX 200 and All Ordinaries have climbed 0.40%.

Today’s mixed price action reflects pre-FOMC caution and a reshuffling of positions and risk exposure ahead of it. I expect that tone to dominate the session and early European trading where the data calendar is light today.

The US Dollar creeps higher pre-FOMC

The US Dollar advanced unevenly overnight, as positioning gets rejigged ahead of the FOMC meeting, with short US Dollar exposure being trimmed. US 10-year and 30-year yields rose notably overnight for much the same reason, which supported greenback gains. The dollar index rose just 0.05% to 90.89. although the rally has accelerated in Asia, increasing 0.11% to 90.98.

The rise in the dollar index overnight can mainly be attributed to a fall in the Japanese Yen, with other index heavyweights such as the Euro and Sterling almost unchanged. After a dovish BoJ yesterday, the rise in US yields overnight had an immediate impact on USD/JPY, highlighting how sensitive the pair is to the interest rate differential. USD/JPY rose 0.60% to 108.60 overnight, advancing to 108.90 in Asia. USD/JPY has traced out a bottom at 107.50, and a break of 109.00 could see the pair advance to 110.00 once again. Much will depend on the wording of the FOMC statement.

Elsewhere, AUD/USD has fallen 0.35% to 0.7740 today, unwinding its overnight gains after weak inflation data this morning. AUD/USD has strong support at 0.7700, which includes its 100-day moving average (DMA). It is unlikely to be seriously tested unless the FOMC surprises, and I expect advances by AUD/USD and NZD/USD to resume after the meeting.

Notably, the Malaysian Ringgit has outperformed this week, boosted by Brent crude holding around $65.00 a barrel, and in anticipation of impressive export data today. USD/MYR is trading at 6.1000 this morning, having traced out a double bottom at 4.0965 overnight. If MYR strengthens through 4.0965 today, USD/MYR could be on track to retrace the rest of its March losses, with USD/MYR targeting 4.0700 in the first instance.

The US Dollar has advanced versus both G-10 and regional Asian currencies this morning despite the PBOC setting a firmer CNY fix at 6.4853. Without sounding like a broken record, I regard the greenback strength as transitory and reflecting a reduction in short-Dollar risk exposure ahead of the FOMC. Regular service should resume tomorrow, assuming the meeting passes without drama.

Oil prices signal further gains

Oil prices were remarkably firm overnight and are signaling that a test of upside resistance levels could be ahead. Both Brent crude and WTI recorded substantial gains despite higher US yields, a firmer greenback, higher than expected US API Crude Inventories and OPEC+ production increases starting next week. OPEC+ cancelled a ministerial meeting this week, deeming it not necessary ahead of previously decided production increases, in a show of confidence in their forecasts.

Brent crude rose by 1.30% to $66.60 a barrel, with WTI climbing 1.80% to $63.10 a barrel. Both contracts have seen some modest profit-taking in Asia, Brent crude easing to $66.35 and WTI to $62.85 a barrel but have clung on to almost all of their overnight gains.

A benign FOMC and the expectations of impressive US data to come this week and its flow-on impact of US consumption appear to be trumping concerns over Covid-19 in India. US API Crude Inventories rose to 4.5 million barrels overnight, far higher than expected. The fact that the market ignored this entirely suggests that oil prices have seen their medium-term lows for now. A repeat with official US Crude Inventories this evening would almost certainly confirm this premise.

Brent crude and WTI continue to trade in broad ranges between $64.00 to $68.00 and $60.00 and $64.00 a barrel, respectively. Interim resistance lies at $66.30 and $63.30 a barrel and barring an FOMC surprise leading to a massive spike in the US Dollar; it would appear that the higher is the path of least resistance for oil.

Higher US yields erode gold

US yields moved higher in the long end of the curve overnight, which further eroded gold’s recent gains on a modest scale. Gold fell 0.25% overnight to $1776.50 an ounce, falling another 0.25% to $1772.00 an ounce in Asia.

Gold’s rally has clearly lost momentum after tracing out a double top just ahead of $1800.00 an ounce last week, with the 100-day moving average just above at $1801.50 an ounce. Bitcoin’s comeback and more exciting price action in the platinum group metals may have also sapped the interest of bullish investors, especially after the technical failure near $1800.00 an ounce.

Gold needs a suitably dovish FOMC, and a retracement lower by US yields and the US Dollar to regain its bullish momentum. Otherwise, the odds are rising that gold will retest support at the 50.0% Fibonacci pivot level at $1760.00 an ounce. Failure could see another heart-breaking washout to $1720.00 an ounce. Gold still has formidable resistance to overcome each side of $1800.00 an ounce.