On message Fed supports recovery trade

Investors moved back into the global recovery trade overnight as the Federal Reserve stayed “on message” and was suitably dovish at its latest FOMC meeting. While the Fed was suitably dovish, there were a few subtle changes to the language of the FOMC statement and in Chairman Powell’s post-meeting remarks. Notably, the language of the FOMC wound back its risk assessment from the pandemic and acknowledged a strengthening of the labour market.

The effect was most noticeable in currency markets as the US Dollar fell across the board. US bonds firmed only slightly in the middle of the curve, and equities continued to some short-term “buy the rumour, sell the fact” price action. The Euro, Sterling and risk-sensitive Commonwealth all resumed their advances after spending two days in a pre-meeting holding pattern.

Both Apple and Facebook delivered knockout quarterly results overnight. And although US index futures have risen in Asia, Asian markets themselves continue to trade cautiously, a pattern notable for most of the week. Part of the caution in equity markets in North America and Asia could be because the FOMC was a known known. In contrast, this evening’s US quarterly GDP is very much a known unknown. A print above 7.0% could be cut both ways. It might shake the complacency of the US bond market and send yields higher, potentially undermining equities. Or, if US yields remain steady, see equity markets power higher on the US recovery story.

A one million-plus print on next Friday’s Non-Farm Payrolls creates the same binary outcome. The most sensible strategy is to wait for the data and then assess which way the wind is blowing. And that, I suspect, is why equity markets have diverged from the resurgence of the buy-everything trade in other asset classes.

Subtle changes in the FOMC language, a one-million plus Non-Farm Payrolls, or a GDP print above 7.0% make it hard for the author to envisage US 10-years remaining at 1.55%. Nevertheless, from a theoretical point of view, whatever the market is pricing right now is, by default, the correct market price. I shall not argue with the premise or stand as an island against the incoming sea. I do note, however, that the risks of a sudden upward repricing in yields are increasing and may hold some unpleasant surprises for the buy everything gnomes elsewhere.

In a busy week, Asia and Europe’s data calendar is quiet today, partially explaining the morning’s muted session. South Korean Business Confidence rose above expectations, while New Zealand’s Balance of Trade held no drama. Interestingly, Australia’s Export Prices QoQ Q1 rose 11.20%, massively above the 0.90% expected. Similarly, in April, Vietnam’s Inflation Rate rose by 2.80%, above expectations, while its Balance of Trade fell by $1.5 bio. That transitory price inflation is starting to make itself noticed globally. Singapore PPI at 1300 SGT may give more weight to that story.

In Europe, the day’s highlight will be German Unemployment, with German Import and Export prices perhaps gleaning more attention than usual after Asia’s data prints this morning. Otherwise, I expect markets to range ahead of today’s main event, US Advanced GDP Growth QoQ for Q1. Market expectations are around 6.10%, but the risk is that that number prints substantially higher.

Asian equities edge higher

Asian equities continued to trade with a cautiously bullish bias, with one eye on US GDP this evening, after the FOMC stayed on message but was ever so slightly less dovish. Notably, US index futures are rallying powerfully in Asian trading after blow-out Apple and Facebook results and after President Biden’s address to Congress passed without incident. Yet, Asian markets are refusing to join in.

On Wall Street overnight, a slightly less dovish FOMC statement if you looked very closely word-for-word pushed markets lower. The S&P 500 finished almost unchanged at 0.08% lower, the Nasdaq slid 0.28%, while the Dow Jones fell by 0.48%, weighed down by Boeing woes. All has been forgiven in Asia, though, with S&P futures rising 0.60%, Nasdaq futures leaping by 0.95%, and Dow Jones futures rising 0.30%. The US earnings deluge continues today, although all eyes will be on Amazon’s results. If this week’s form continues, a result close to expectations will see Amazon stock fall, while markets will reward a strong earnings beat.

In Asia, the Nikkei 225 and Kospi are 0.30% higher while China’s CSI 300 is up 0.20%, with the Shanghai Composite unchanged. The Hang Seng is 0.65% higher as retail investors pile into China tech listings, while Taipei has climbed 0.40%.

Singapore and Kuala Lumpur have risen 0.15%, with Jakarta 0.25% higher. Australian markets are following US futures higher, the All Ordinaries is increasing 0.45%, while the ASX 200 has climbed 0.30%. This week’s best performer has been India’s Sensex, which is up 3.35% for the week. Both the Indian Rupee and Sensex have benefited from buy-the-dip fast money flows, highlighting the wall of money globally looking for a home. With investors looking past the Covid-19 situation, rightly or wrongly, a dovish FOMC should see that trend continuing this afternoon.

Although Asia is gently bullish as US index futures power higher, I expect the cautious tone to continue ahead of US GDP and China’s Manufacturing and Non-Manufacturing PMI’s tomorrow. Three-day holidays in China and Japan next week are likely to dull activity after the China PMI release. With a tier-2 data calendar in Europe today, I expect markets to remain in US GDP wait-and-see mode also.

FOMC sinks the US Dollar

The US Dollar sell-off resumed with form overnight after the FOMC passed without incident causing US yields to remain almost unchanged. Having reduced short positions into the meeting, investors scrambled to reinstate them afterwards, with the EUR, GBP, AUD, NZD and CAD all rallying.

The dollar index fell 0.32% to 90.55 as G-10 currencies strengthened. The index has tested 90.50 this morning before moving back to 90.55. If US GDP passes without incident this evening, the index will probably continue falling towards 90.00.

EUR/USD rose 0.35% to 1.2130 overnight, and although retreating ahead of 1.2150, maintains a technical target of 1.2250. GBP/USD has risen to 1.3945 today, and a break of 1.4000 resistance signals further gains to 1.4300 in the week ahead. AUD/USD has recovered all of its CPI-related losses from yesterday, climbing to 0.7785 this morning. It has an initial target of 0.8000. NZD/USD rose 0.70% to 0.7245 overnight and initially targets 0.7300, with the technical picture suggesting that further gains above 0.7450 are now possible.

Interestingly, Asia sold the US Dollar this morning versus the majors, only for it to retrace all of those losses leaving the G-10 currencies pretty much unchanged from their New York closes. With all roads leading to the US GDP data this evening, the major currency pairs may be content to join equity markets in wait-and-see mode for the rest of the session.

Asian currencies have played catchup to the overnight price action and are broadly former versus the greenback, with the PBOC setting a stronger CNY fix at 6.4715. The Indian Rupee continues to be the standout performer, USD/INR falling to 74.327 overnight, before easing once again this morning to 74.30. It is hard to believe that USD/INR was nearing 76.000 last week. With the RBI reducing borrowing costs locally this week, equities have soared, and international fast money has followed despite the pandemic situation. The USD/INR sell-off may have more to go, with the one-year trendline if broke after the RBI QE announcement, a reasonable target. Today it lies at 73.800.

Oil powers higher on US recovery target fixation

Oil markets ignored a rise in official US Crude Inventories, as they did with the API numbers the day before, with both Brent crude and WTI recording rallies post a no-surprise FOMC. Brent crude rose 0.60% to $67.00 a barrel overnight, adding another 0.70% to $67.45 a barrel in Asia. WTI, meanwhile, rose 0.95% to $63.70, gaining another 0.50% to $64.00 today in Asia.

It appears that much of the negative news regarding higher OPEC+ output and India’s Covid-19 situation is now baked into prices. The fall of the US Dollar post-FOMC lifted oil markets which are myopically focused on the upside of the US recovery and the start of the US summer driving season.

Brent crude has very obvious resistance at $68.00 a barrel, and support at $64.00 a barrel, while WTI has support and resistance at $60.50 and $64.50 a barrel. I have stated before that a break of these broader levels will signal oil’s next directional move. A blow-out US GDP number tonight should see the resistance levels taken out with Brent crude targeting $70.00 and WTI $66.00 a barrel in the first instance.

FOMC sends gold higher

The Federal Reserve stayed close to its dovish message overnight at its latest FOMC meeting. With this risk point removed, investors rushed back into the global recovery trade, pushing the US Dollar lower, with US bond yields remaining unchanged. That lifted gold prices overnight and continues to support gold in the early Asian session.

Gold has clearly denoted support at its 50% Fibonacci retracement in the $1760.00 area, with equally firm resistance having been traced out near $1800.00 an ounce, just ahead of its 100-day moving average. With the range for gold marked between these two levels, gold’s next directional move will be signaled by one side or the other breaking.

At this stage, post-Fed, the balance of probabilities has shifted to further gold strength. However, if US GDP Q0Q blows out above 7.0% this evening, that may threaten the gold rally as the US Dollar will likely strengthen. Assuming US GDP passes without incident, the path should be clear for a test of resistance at $1800.00 and onto higher levels. Gold will remain well bid on dips towards 1770.00 today.