Yellen Found Taxing

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA, The Janet Yellen Jerome Powell double act did not entertain markets overnight. Mr Powell stuck to his inflation is temporary, nothing to see here move along mantra. Ms Yellen talked about the follow-on stimulus and paying for it with higher taxes, corporate and higher earners. Unsurprisingly, it did not sit well with financial markets. The small-cap Russell 2000 coming in for particularly negative attention. I suspect, though, that both Ms Yellen and Mr Powell's comments about some asset prices looking high or overvalued at the moment may have been the excuse investors needed to hit the sell button. US yields also headed lower again overnight, with short-term note auctions achieving a good bid to cover ratio. We have 5-year and 7-year note auctions to come this week as well, and once again, the bid to cover ratio will be closely watched, despite most of the action being in the long end of the curve. Rather surprisingly, the US Dollar rallied quite strongly overnight, despite its recent correlation to US yields. The deteriorating Covid-19 situation in Europe, with new or extended lockdowns delaying the European recovery and spiralling cases in Michigan, as well as in India, seems to have sparked some risk aversion. Circling back to equity markets, it may also explain some of Wall Street's underperformance, as I search for facts to back up my narrative. (I am not immune to it either) Oil markets certainly felt the spectre of Covid-19 in Europe and India, with prices tanking overnight. Signs of increasing Iranian exports may also be adding to prompt supplies despite the "complicated" logistical chain. Although I had signalled that we could see another leg lower, the scale has caught me by surprise. Clearly, there were still a large amount of speculative long positions awaiting culling out there. Notably, that has removed the backwardation in the M1-M7 futures, and it seems likely that oil will remain soggy until OPEC+'s April production decision. I would rate the chances of a further unwinding of production cuts by OPEC+ or Saudi Arabia as zero at this stage. The data calendar has been mixed in Asia today. New Zealand's Balance of Trade disappointed, likely putting more pressure on the under-fire New Zealand Dollar. The new government regulations to temper property prices announced yesterday saw the Kiwi fall by 1.0% as markets took future RBNZ rate hikes of the board. Australia's Manufacturing and Services PMI's outperformed as the lucky country continues to fire on all cylinders. I expect AUD/NZD to outperform over the next few weeks. In Asia, South Korean PPI rose more than expected, and Japan's Market Manufacturing and Services PMI's outperformed. The success of each country's export rebound is well-documented, but domestic demand remains muted. A situation reflected across much of Asia, notably in the Philippines and Indonesia. Any talk of rate hikes from the record lows across Asia is, therefore, premature, something the Bank of Korea Head stated in not so many words today. Thailand will also leave rates unchanged at 0.50% later today. Asia's test will come if US yields resume their upward path, something I expect once the Biden infrastructure package takes shape next week, which will challenge the region's plethora of dirty US Dollar pegs. European area, German and French manufacturing and services PMIs are released this afternoon, along with UK inflation data. With Europe squarely back in Covid-watch, soggy numbers could pressure a wavering Euro, which is testing its 200-day moving average (DMA) this morning. Although UK CPI and PPI should be robust, Sterling broke powerfully lower overnight to 1.3750, crashing out of its 5-month rising wedge. Its vaccine spat, and potential knock-on effects to the impressive vaccination programme are the centre of Sterling's woes. Soft inflation numbers won't help its cause. US Durable Goods will take a February weather hit this evening, although that is well priced in. Markit PMI's have plenty of room to outperform, though, and could see Wall Street's animal spirits' return. Official crude inventories are expected to fall slightly and will be closely monitored after the overnight carnage in oil markets. More likely, however, Wall Street's direction will be dictated by the plethora of Federal Reserve Governors speaking tonight. All-in-all, markets remain choppy. Asia and Europe's coat-tailing of US markets recently now hints that the news feed is thin outside of New York. The tail-chasing nature of price movements across asset classes recently is likely to remain the theme of the week. I suspect the bond tantrum has merely taken a vacation. It will return, and with it will follow more US Dollar strength and some tough days ahead for a number of major stock indices around the world, including the Nasdaq. Asian stocks slide. Asian markets are in defensive mode today, as concerns rise that Covid-19 may delay the global economic recovery. With a lack of other drivers in financial markets at the moment, intra-day sentiment is driving price movements, and today's theme is definitely Covid-19. News that a giant container ship is aground and blocking the Suez Canal will not be helping sentiment in export-sensitive Asian markets. The Nikkei 225 has fallen by 1.60% today, with every sector of the index in negative territory, suggesting that retail investors are moving to cash defensive positioning en masse. The Nikkei 225 is not far from support at 28,300.00, having broken its 5-month uptrend last Friday. Elsewhere, the Kospi has fallen by 0.60%, partially supported by dovish central bank comments. China is having another torrid day as retail investors also take fright. The Shanghai Composite and CSI 300 have fallen 0.90%. Both indices have broken multi-month rising support lines in the past two weeks, leaving them vulnerable to deteriorating sentiment. The Hang Seng is also seeing an investor flight, falling 1.60% today. In contrast, and in keeping with recent weeks, the more cyclical ASEAN markets are rather calmer, if still lower on the day. Singapore is just 0.15% lower, Kuala Lumpur has eased 0.30%, with Jakarta falling 0.50%. Bangkok is 0.45% lower, and Manilla just 0.20% lower. With a much lower beta to the tech-driven speculative mania of 2020 then North Asia, I expect ASEAN markets to continue outperforming. By contrast, firm commodity prices have allowed Australia to buck the trend, with flooding causing supply disruption fears, notably coal. That has allowed resources to rise, lifting the ASX 200 0.75% higher and the All Ordinaries higher by 0.85%. Overall, price action remains choppy, but there is no denying that North Asian markets appear much more vulnerable to negative sentiments right now, reflecting their juicy valuations after the 2020 rally. That has left them poised for a deeper correction from a technical perspective if the international outlook darkens. All-in-all though, equity markets appear to be chasing their tail a bit, with investor fear sentiments driving short-term direction making for a lot of noise, but little substance. The Dollar thrives in nervous Covid markets. Some degree of safe-haven flows appears to be emerging in the US Dollar as it rallied impressively overnight. The strong bid-to-cover ratios in the short US -note auctions overnight hinting at where much of those haven flows are being parked. That had the effect of pushing US yields lower, leading to some divergence from the past few weeks' asset correlation playbooks. With Covid-19 economic recovery delays at the forefront of investors' minds, the US dollar index powered 0.65% higher to 92.33 overnight, threatening 3-month resistance, and also the 200-DMA, at 92.50. As is Asia's want recently, G-& trading has been directionless today as the region takes its cues from New York, with the index almost unchanged. Amongst the majors, EUR/USD and GBP/USD were notable losers overnight. Lockdowns, vaccine nationalism and spiralling cases in key economies saw the EUR/USD fall 0.70% to 1.1850. That leaves the single currency perched on critical support at 1.1840, with the 200-DMA also here. A daily close lower tonight signals more losses targeting 1.1800 initially, but potentially reaching as far as 1.1600 in the days ahead. GBP/USD fell 0.85% to 1.3745 overnight, as European threats to block AstraZeneca vaccine exports to them escalated fears that their economic recovery could be scuttled. Sterling broke out of its multi-month rising wedge on Friday, and the sell-off overnight darkens the technical picture. GBP/USD has fallen to 1.3730 in Asia. It now targets 1.3600, with the possibility of falling to sub-1.3400 if the Euro-spat deepens. The Antipodeans were crushed overnight, as risk sentiment turned sour, and in Kiwi's case, was helped along by new government property measures. AUD/USD has fallen 1.80% in the past day to 0.7605 this morning. The 100-DMA at this level provides temporary support, but having broken 5-month support two weeks ago, the charts suggest AUD/USD faces further losses to 0.7450 initially. The NZD/USD has fared even worse, falling 2.60% overnight to 0.6980 in Asia trading. The Kiwi also broke 5-month support in the past fortnight and has taken out critical support at 0.7100 overnight. It now has the potential to extend losses, possibly as far as 0.6700 in the days ahead. The PBOC set the USD/CNY fixing 200 points higher at 6.5232 today, reflecting weakness in the non-Dollar components of its basket. Although USD/CNY remains stable at 6.5225 this morning, Asian regional currencies were in full retreat overnight as investor sentiment soured. With interest rates cut to the bone across much of Asia and little appetite to hike them, further US Dollar strength will put more downward pressure on regional currencies. Those with current account challenges and/or high levels of foreign-denominated debt will be amongst the most vulnerable, namely the Indian Rupee and Indonesian Rupiah. The Malaysian Ringgit may also suffer more if oil prices continue moving lower. Oil prices collapse overnight. A souring outlook for the global recovery as Covid-19 fears resurface, and it appears; still plenty of speculative long positioning out there, contributed to another rout for oil markets overnight. Brent crude fell 6.0% to $60.40 a barrel, and WTI fell by 6.40% to $57.30 a barrel. Oil has gained a reprieve in Asia with news that a ship has run aground and is blocking the Suez Canal. The potential disruption to supplies has lifted prices on both contracts by 1.0% today. The reprieve seems temporary, though, as the spot price fall overnight has completely removed the backwardation in the oil futures market for prompt deliveries. With speculative markets still long, it seems, oil is likely to be a sell on rallies until Covid-19 and economic recovery sentiment swings back into the black. The falls overnight will put paid to any chance that OPEC+ will trim production cut targets, and their next meeting in April will seem like an age away. Overall, I regard the fall as a very deep correction, and remain optimistic that both the economic recovery, and by default, oil's longer-term rally remains on track. There may well be more pain in the short-term to endure, however. Brent crude has support at $60.30 and $60.00 a barrel. Failure opens deeper losses to $57.50 a barrel. Resistance is now far distant at $65.00 a barrel. WTI has a triple bottom at $57.35, and failure sets the scene for deeper losses to $55.00 a barrel. Resistance is at $60.00 and $62.50 a barrel. Gold ranges quietly. Gold appears to be off most investors' radars at the moment, the US Dollar strength overnight pushing it slightly lower by 0.70% to $1727.00 an ounce. The risk aversion sweeping Asian markets has seen it regain most of those losses, rising 0.40% to $1733.00 an ounce. With gold seemingly immune to higher US yields, lower US yields, and US Dollar strength, it seems set to continue ranging between $1720.00 and $1750.00 an ounce, as part of a broader longer-term bottoming pattern. It will be interesting to see if it has recovered some of its forgotten risk-aversion mojo in the days ahead. Gold's overall price action remains construction, though, and the yellow metal is attempting to form a longer-term base, between its 61.80% and 50.0% Fibonacci retracements, setting the scene for a move back above $1800.00 an ounce if all goes to plan. Gold has support at $1720.00 and $1700.00 an ounce, followed by the 61.80%retracement in the $1685.00 area. It has initial resistance at $1755.00 an ounce, followed by the 50.0% retracement at $1760.00 an ounce.

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