Stocks enjoy a bonding session

Markets continued with their skittish tail-chasing price action overnight, with the Nasdaq leading the charge higher, starkly reversing course after a few tough days at the office. The US Dollar duly fell in militaristic-like lockstep, and even gold found some friends as it rallied strongly.

The sharp reversal of the previous sessions can be laid at the door of good old-fashioned bonding—namely, the US 3-year note auction, which achieved a healthy bid-to-offer ratio. That assuaged inflationist fears for a day, allowing markets to pile back into their 2020 comfort zones.

Of course, the 3-year note auction was just the opening stanza for the week. The action on yields curves has been at the far end of the curve, not the belly. We still have the heavyweight 10-year note and 30-year bond auctions to come tonight and tomorrow. Talk of markets becoming “more comfortable” with inflation after the overnight bill auction are premature.

The increasingly schizophrenic and tail-chasing nature of the price action across numerous asset classes suggests that a sizeable directional move is coming. Having spent the past year buying everything except the US Dollar, the balance of probabilities suggests down and the US Dollar short squeeze continuing. Even meme stocks were back in fashion overnight, with GameStop jumping 40% and Tesla, an S&P 500 component, rallying 20%. When an S&P 500 component stock moves around intraday like GameStop or Bitcoin, you know trouble is coming.

The overnight rally by the Nasdaq, while impressive, has not made a dent in the bearish outlook from a technical charting perspective. If the bid-to-cover ratio is lacking for the 10-year and/or 30-year auctions, or if US CPI prints higher than expected tonight, you can be sure all talk of “comfort with inflation” will disappear in a puff of smoke.

This morning, China’s February Inflation and PPI data eased from January but printed at higher than expected levels. Food inflation continued easing, but healthcare costs ticked up. All-in-all, the China numbers will get a pass mark from local markets, with all attention on the US CPI and bond auctions this evening.

Early equity rallies ease in Asia.

The Nasdaq’s 3.70% rally overnight set the scene for a strong bounce by North Asian markets this morning, heavy in fellow 2020 darling stocks. The cyclical rotation trade was very much in evidence on Wall Street, with the S&P 500 leaping by 1.41%, while the Dow Jones could only rise by 0.09%.

Early advances in North Asia, notably Mainland China, have quickly run out of steam, though, after state-associated investment funds bought heavily yesterday to “steady the ship”. Notably, the futures on all three major US indexes have rolled into negative territory, with Nasdaq futures 0.40% lower.

The loss of momentum so early in the Asian session again reinforces the premise that the main attractions are yet to come from the US bond auctions. Nevertheless, the Nikkei 225 is up slightly by 0.10%. Mainland China’s Shanghai Composite has risen 0.35%, with the more tech-heavy CSI 300 higher by 0.75%. Both, however, have given back much of their early gains. Markets will be on the lookout for more state intervention is they slip into negative territory.

The Kospi is now just 0.20% higher, while Hong Kong is up 0,35%, and Taipei by 0.30%. Singapore has been an outstanding cyclical recovery play this week, but has succumbed to profit-taking this morning, falling by 0.80%. Kuala Lumpur and Jakarta are holding in positive territory, though, both 0.70% higher this morning.

Australian markets have given up their early gains in an ominous sign for the “markets are comfortable with inflation” trade. Both the ASX 200 and All Ordinaries are now 0.30% lower.

Europe, heavy in Dow Jones-like cyclical pre-2020 companies, was as strong outperformer overnight. It is likely to find friends again today now that the tech-recovery momentum is quickly waning in Asia. Today’s price action signals that all eyes are on the US CPI data and the US bond auction tonight. If the Nasdaq’s overnight rally looked more grasping at straws than finding its feet, the risks are definitely weighted towards its retreat resuming this evening.

The US Dollar falls on US 3-year auction results

The US 3-year bill auction achieved a desirable bid-to-cover ratio overnight, which was enough to turn sentiment away from the US Dollar short squeeze temporarily. Equity markets are signaling today that sentiment could be about to pivot as quickly as it started.

The dollar index fell 0.38% to 91.95 overnight, but in Asia, it has recouped some of those losses already, rising 0.20% to 92.15. That has seen EUR/USD fall back below 1.1900 to 1.1880, with USD/JPY climbing 0.30% to 108.80, and GBP/USD falling 0.15% to 1.3865. EUR/USD’s critical support lies around 1.1820, its 200-day moving average. Failure of 1.1800 now makes further losses to 1.1600 likely.

AUD/USD and NZD/USD have given back over half of their overnight gains already. AUD/USD falling 0.50% to 0.7680, and NZD/USD falling 0.40% to 0.7145. Critical supports remain at 0.7600 and 0.7100, respectively. Failure telegraphs 200+ point losses for both.

USD/CNY retreated from resistance at 6.5500 overnight, settling at 6.5130 this morning. With official interest intervening in the stock markets yesterday, it seems unlikely Chinese authorities will tolerate a rapid fall in the Yuan either. USD/CNY should hold between 6.5000 and 6.5500 over the next 24 hours, giving valuable breathing space to under pressure regional Asian currencies.

The Indonesian Rupiah continues to be a concern, with USD/IDR rising to 14,450 today. Further rises by USD/IDR are likely to trigger heavy intervention by Bank Indonesia, with 15,000 likely to be its line in the sand. If USD/IDR rises through 15,000.00, that is likely to signal further weakness elsewhere in Asia.

Overall, the price action overnight appeared to be corrective, with the US Dollar sell-off quickly running out of momentum in Asia. A weak US bond auction will almost certainly trigger more US Dollar strength.

Oil consolidation continues

Oil prices eased overnight, helped lower by a much higher than expected build in US API Crude Inventories. Brent crude fell 1.2% to $67.30 a barrel, while WTI eased by 1.35% to $63.70 a barrel. Both contracts are unchanged in Asia as the region takes a wait and see approach today.

Oil appears to be temporarily running out of upside momentum, and a deeper correction cannot be ruled out as speculative longs unwind trades. Market sentiment seems to be swinging towards reducing production cuts by OPEC+ next month, although OPEC+ has already dished out a harsh lesson on assuming anything.

With that in mind, a deeper retreat by Brent crude, possibly as far as $62.00 a barrel, is possible, having retraced 50% of its last week’s already. A failure of $66.70 will signal a deeper correction. The picture is similar for WTI, with a daily close below $63.40, increasing the likelihood of a deeper sell-off, possibly as far as $60.00 a barrel.

With physical markets in deficit for prompt delivery and the futures curves in backwardation, falls are likely to be short-lived. But such has been the rapidity and scale of oil’s recent rally, that the ensuing corrections lower can replicate both.

Bottom fishers’ bond on gold

The firm bid to cover for the overnight US 3-year bill auction prompted bottom fishers to appear in force on gold. It staged an impressive 1.90% rally to $1716.00 an ounce. The waning momentum in US index futures, and some US Dollar strength, has seen gold beat a modest retreat in Asia to $1711.80 an ounce today.

Gold is by no means out of the woods, and the rally overnight reflects reduced liquidity and no small measure of optimism by badly burnt gold bulls. If the US 10 and 30-year bond auctions, or the US CPI, don’t play the game, gold will almost certainly retest its lows around $1680.00 an ounce seen yesterday morning.

Gold’s nearest support is yesterday’s $1676.00 lows with resistance nearby at $1720.00 and $1740.00 an ounce. That is followed by the $1760.00 an ounce breakout level. Gold has a lot of wood to chop on the upside, and I continue to believe that gold will trade at $1600.00 an ounce, before it trades at $1760.00 an ounce again.