Variable side effects

The response by the markets to the FOMC dot plot shock has been variable, to say the least, and not a little surprising to me. Equities did their duty and eased, but not, thankfully, with any sign of panic. Much of that is being laid at the door of the quadruple “witching hour” of option a and futures expiries today, but we shall see.

The US Dollar posted another strong performance overnight, with the most prominent casualty being gold, which slumped through $1800.00 an ounce as investors booked a weekend stay at the Heartbreak Hotel. Commodities, in general, didn’t have a good night. China’s price control measures added to the woes from a stronger US Dollar with Copper’s selloff continuing. Its overnight tumble saw it close below its 200-day moving average (DMA), suggesting more pain ahead for the fast-money gnomes still long.

Oil continued to ease, spiking lower intra-day before recovering some poise. That move continues to look like an unwind of the overbought short-term technical picture, which is well on the way to running its course now. Some blame can be laid at the US dollar’s feet, and some at the surprise rise in Initial Jobless Claims. The latter, I believe, is only a temporary blip in an improving trend and the mass culling of speculative longs seen elsewhere is the likely reason. Oil is approaching appealing levels now, given the recoveries remain on track in the Northern Hemisphere giants, and the futures curves remain heavily backwardationated. (Or is that backwardated? It’s Friday, a fine day for new words.)

The bond market continues to be my nemesis, as it is for so many who look at real US interest rates and scratch their heads waiting for the bond market version of the French Revolution. The US bond market continues to eat cake instead of guillotines, with US yields falling overnight, plunging, in fact, if you look at the 30-year tenor. The US yield curve seriously flattened overnight, which I am sure delighted the FOMC as they removed the kevlar plates from under their tapering tee-shirts.

Some talk suggests that a disorderly unwinding of pre-FOMC curve steepeners was happening. There is merit to this thesis, although given how dovish Fed officials were in the weeks leading up to this week’s FOMC, I am not sure it is all the answer. I suspect that a large part lies in the recent TICS data, which shows foreigners are still piling into the US securities market, and the rise of the US Dollar this overnight. Foreigners are still piling into the US bond market, where US nominal yields look spectacular compared to European or Japanese ones. Swapping those negative yield bonds into US ones with at least a positive headline number involves buying a lot of US Dollars. Hence the greenback’s strength. Many of those flows may have found their way into the long end of the US curve overnight. There may also be some rotation out of the high yield corners of the market, which have been pimped up by global central bank largesse.

Those are the best reasons I can come up with to explain the divergence. Until the FOMC starts saying the word taper, it is likely to be the state of affairs going forward, famous last words. That’s my story, its Friday, and I’m sticking to it.

You know it’s a strange day when I say inflation rose in Japan, but I am saying just that. Before we get all excited after 30 years, I need to put it in context. Inflation this morning rose to -0.10% YoY for May, versus -0.40% expected. Inflation for May MoM rose by 0.30% versus 0.10% expected. However, strip out energy and food, and the YoY number moves back to -0.20%, right on forecasts. Nothing to see here, move along, ladies and gentlemen. It certainly won’t move the dial of the Bank of Japan policy decision due any time now. The policy rate will remain unchanged at -0.10%, and the only tweaks might be an extension to the pandemic-relief scheme. Quick update-BoJ is out, and that is exactly was has happened.

The rest of the day’s global data calendar is a yawn-fest with only UK Retail Sales of passing interest. However, Monday’s Australian Retail Sales and China’s one and five-year Loan Prime Rate decisions may raise temperatures slightly. Otherwise, markets today will be driven by headlines with more than a few eyes watching how US equities finish the week.

Asian equities regain their poise

Wall Street was mixed overnight with the Dow Jones, whose components probably have the highest beta to a stronger US Dollar, falling commodity prices, and Fed tapering, being the worst performer. It finished the day 0.62% lower, with the S&P 500 almost unchanged. By contrast, the Nasdaq powered higher to gain 0.87%, and it seems Wall Street’s response to a much-changed FOMC tone and dot plot is to reverse out of the global recovery trade for now.

With today being futures and options expiry day on Wall Street, the aftermarkets futures have been quiet, but all three indexes have managed to rise by around 0.10% in Asian trading. That, combined with an unchanged BoJ, has calmed any nerves in Asia, with markets loosely following the tech/cyclical recovery rotation seen on Wall Street overnight.

That sees Nikkei 225 and Kospi are up by 0.20%, while Taipei is unchanged. Mainland China’s Shanghai Composite and CSI 300 have fallen by 0.45% after being unusually steady yesterday, but Hong Kong, heavy with China-tech heavyweights, has climbed by 0.50%.

Unsurprisingly, cyclical ASEAN is mostly lower with the Dow Jones. Singapore has fallen 0.25%, Bangkok by 0.30%, and Jakarta by 0.90%, while Kuala Lumpur bucks the trend, rising 0.15%. Tech and medical names are leading Australian markets higher today, even as miners sag, with the ASX 200 and All Ordinaries both 0.45% higher.

An inconclusive Wall Street session has left Asia to its own devices on a local basis, where the cyclical rotation seen overnight has prevailed to a lesser degree. That rotation probably sets Europe up for a slightly weaker opening with little data in that region to rock the boat today.

The US Dollar rally continues

The US Dollar recorded another impressive rally overnight. The dollar index rose through its 200-DMA at 91.50 on its way to a close at 91.90, a 0.55% gain for the day. Although the short-term technical indicators say the index is moving near to overbought territory, any dips to 91.50 should find support now as the close above the 200-DMA is significant. Resistance is nearby at 92.00, followed by 92.50. A less-dovish FOMC, foreign inflows into the US bond market, and a speculative market that was well short of US Dollars into the FOMC, should see the US Dollar rally continue into next week.

A firm US Dollar has left a number of the major currencies at a critical juncture technically, with the potential for more losses ahead, compounded in some cases, by the fall in commodity prices. EUR/USD fell through support at 1.2000, and its 200-DMA at 1.1993 overnight, finishing 0.73% lower at 1.1910. With the ECB showing no sign of using the taper word, the implicit divergence between it and the Fed will continue to weigh on the single currency. The 1.2000 region is a formidable barrier to any recovery, and its correction lower has the potential to extend to 1.1700 in the days ahead.

GBP/USD remained under critical support at 1.4000 overnight, falling 0.44% to 1.3925, taking out its 100-DMA at 1.3940. Rising delta-variant Covid-19 cases are causing some nerves in UK markets, and GBP/USD will find rallying through 1.3940 and 1.4000 challenging now. The overnight low at 1.3895 forms initial support, but GBP/USD can retrace to the 1.3700 regions now.

AUD/USD and NZD/USD also suffered overnight, both promptly reversing data-driven gains with heightened risk sentiment and falling commodity prices, sending them sharply lower once again. AUD/USD fell 0.77% to 0.7545, its 200-DMA, where it remains this morning. Failure of 0.7600 implies further losses to the 0.7400 area. NZD.USD fell by 0.62% through its 200-DMA at 0.7038 to 0.7010 overnight. That now becomes resistance and failure of support at 0.7000 and 0.6950 could see Kiwi retreat to 0.6700 regions.

The PBOC set a weaker Yuan fixing at 6.4361 versus the US Dollar today, weaker than market expectations at 6.4330. USD/CNY is trading well higher at 6.4455 today and USD/CNH at 6.4525. That will keep USD/Asia bid and regional currencies on the back foot. The Indonesian Rupiah and Indian Rupee were notable losers yesterday. The pressure is likely to remain on them and Asia FX as a whole next week, especially those countries which have been cyclical recovery plays, namely ASEAN.

Oil’s speculative long culling continues

Oil markets retreated sharply overnight as a stronger US Dollar and falling commodity prices elsewhere, saw the overbought technical correction continue. Brent crude fell 1.15% to $73.00 a barrel, having tested $72.00 intra-day. WTI fell by 0.85% to $71.05 a barrel, having tested $70.00 intraday.

The technical picture, notably the overbought RSI’s, now looks much more balanced, although the culling of speculative long positions continues in Asia, with both contracts easing by 0.50% to $72.50 and $70.50, respectively. We may well see another day or two of oil weakness, but I expect oils underlyingly bullish fundamentals to reassert themselves. Oil futures curves remain in backwardation and the global recovery, notably in key economies, remains on track. The change in language by the FOMC is an endorsement of that view.

Brent crude has initial support at $72.00 a barrel, the overnight low followed by $70.50, with resistance at $73.00 and $74.50 a barrel. WTI has support at $70.00 and $68.50 a barrel, with resistance at $71.10 and $72.30 a barrel.

Gold’s week of pain continues

Gold had another grim session overnight as US Dollar strength squeezed out more speculative long positions and saw gold break more critical support levels. Gold fell 2.13% to $1778.00 an ounce, carving through technical support at $1800.00 and then its 100-DMA at $1798.00 an ounce. This zone should now cap gold gains into the end of the week.

Gold has managed to rally 0.55% to $1783.00 an ounce on short-covering in Asia, but the bounce looks corrective and lacks momentum. Some solace for bullish investors might be on the horizon though, the Relative Strength Index (RSI) has plummeted from overbought levels. It is now flirting with oversold territory, and a move towards support at $1760.00 an ounce would send it into extreme oversold territory.

With that in mind, gold will likely find more sturdy support going forward if it moves towards $1760.00 an ounce. Any further falls below that likely represent an attractive shorter-term buying opportunity. In the bigger picture, golds correlation to the US Dollar is undeniable, and rallies will be limited to the $1840.00 region into next week unless the US Dollar abruptly changes direction.