It was another choppy session overnight in equity and currency markets, followed today, by another cautious Asian session on equity markets, with forex markets marching on the spot. In other words, business as usual for the past few days.
Federal Reserve rate hike nerves continue to grow tauter after Friday’s fall in unemployment and rise in employment cost indexes. From three hikes, I am now hearing four hikes could be possible this year. I would have been laughed out of the room for saying as much a month ago. Actually, I was, it's funny how quickly sentiment shifts.
Given how cautious the FOMC has been over the past two years, to the point of appearing snail-like, I am struggling to see them hitting the panic button right now. As such I am struggling to pencil in a March hike just as the Fed taper finishes, although I don’t disagree with three hikes across all of 2022. I am definitely disagreeing with four hikes.
As such, I do believe we may be approaching “peak Fed-fear” for now. That could see a sharp jump for equities, a retreat by US yields and the US Dollar. The first move the market throws the kitchen sink at is usually the wrong one, always fade January.
Wall Street spent much of the evening on the back foot, especially the interest rate sensitive NASDAQ with it's sudden rally into positive territory towards the end of the session. The sudden reversal was put down to “bottom-fishing” and I’ll not disagree with that. But I believe the volatility is being spurred by the US monetary policy outlook. Until just how hawkish, or not, the FOMC will be, becomes clearer, we can expect more days with a lot of intra-day noise, but not change by the close, to be ahead.
Data wise, Asia’s calendar today was fairly quiet. Indonesia and Australian Retail Sales for November outperformed, reflecting the recovery in consumer sentiment in both post-Delta. The arrival of Omicron, particularly in Australia, will likely mean a new year’s hit to consumer demand once again. Apart from that, markets will be awaiting China CPI tomorrow morning and US CPI tomorrow evening as the week’s highlights.
Readers should watch the situation in China as well. Evergrande (HK:3333) dodged another bullet yesterday by engineering a domestic bond extension with creditors. But Evergrande, Shimao, and other private property developers remain in deep trouble, like a slow-moving credit train wreck.
It has the potential to further cut into China’s growth prospects this year. Likewise, the Omicron variant keeps popping up in small numbers across China, even as it and Hong Kong tighten restrictions. The only way for COVID-zero policy countries in 2022 is down, whether by wider outbreaks or social restrictions.
Another mixed day for Asian equities
Wall Street had a schizophrenic session overnight, falling hard for most of the day as markets continued winding themselves up that the Federal Reserve could tighten by as early as March, amid escalating inflation concerns. It is very much a short-term phenomenon though, as US inflation break evens all the way from 1 to 10 years are still pricing in a return to a 2.0% inflation nirvana.
Markets rallied sharply for no apparent reason near the end of the session hinting that fast-money flows are dominating at the moment. The S&P 500 finished 0.14% lower even as the NASDAQ unwound over 2.0% intraday losses to finish 0.05% higher. The Dow Jones suffered a late value to growth rotation, falling 0.46%.
In Asia, it was another mixed day once again with the value-centric ASEAN markets outperforming. With Japan returning from holiday today, the Nikkei 225 played catchup as it fell 0.93%. South Korea’s KOSPI, by contrast, eased just 0.15%, with both Japan and South Korean markets ignoring yet another North Korean missile test this morning.
In China, upward momentum quickly faded and reversed as COVID-19 restrictions were tightened once again in some Chinese cities, notably Zhengzhou today. With China showing no signs of opening the stimulus floodgates, swirling virus nerves and property sector concerns, local markets were struggling to maintain any sort of upward momentum. The Shanghai Composite was 0.45% lower, while the CSI 300 was down 0.75%. Hong Kong has gained a temporary respite from the latest Evergrande debt rollover, but the Hang Seng was still only 0.15% higher.
Singapore was 0.45% higher today as it continued to be a defensive play versus Northern Asia with investors still wanting Asia exposure. Taipei, Jakarta and Kuala Lumpur were 0.25% higher, with Manilla down 0.15% while Bangkok climbed 0.45% higher.
A weak and nervous New York session, and spiraling Omicron cases saw Australian markets sharply lower today. The All Ordinaries and ASX 200 tumbled by 0.80%.
Europe should open neutral this morning and I believe markets there will remain more focused on movements in German Bund yields, than noise from Wall Street.
Currency markets nervously range-trade
The US dollar rallied sharply overnight as US equities headed south, only to give back most of those gains towards the end of the New York session as the NASDAQ recovered.
US Bond markets provided no direction with yields almost unchanged. It all paints a picture of nervous tail-chasing as the dollar index finished 0.22% higher at 95.95, before edging lower to 94.85 in Asia today. In the bigger picture, the dollar index was range trading. I was waiting for 95.50 or 96.50 to break to signal the US dollar’s next directional move.
EUR/USD and GBP/USD both fell intra-session before steadying at the New York close. GBP/USD continued to erode resistance at 1.3600, signaling a further rally to 1.3800 if broken.
EUR/USD was marooned at 1.1340 and only a close above 1.1400 would lessen the bearish outlook. Risks were still skewed towards a retest of 1.1200, especially if German Bund yields stopped rising. USD/JPY eased to 115.25 but remained a bid on dips into 115.00 as long as US yields remained at these levels, targeting 118.00 initially.
AUD/USD and NZD/USD were unmoved at 0.7190 and 0.6190 today. Both continued to be bounced around on RORO (risk-on, risk-off) sentiment swings, but ultimately, were range-trading. Key levels for AUD/USD were 0.7150 and 0.7300, and 0.6700 and 0.6850 for NZD/USD. USD/CAD was trading sideways at 1.2650 and had support at 1.2600, and resistance at 1.2700.
USD/Asia ran into offers overnight and I suspected some regional central banks may have been looking to cap the US dollar’s rally for now. USD/KRW fell to 1195.00, USD/PHP to 51.15, while USD/MYR eased to 4.1940, and USD/THB to 33.520. USD/CNY and USD/CNH remained just below 6.3800 which was becoming a key pivot point. The key directional driver this week will be the US CPI data, especially if a high CPI print lifts Fed hiking expectations, pressuring Asian FX.
Oil consolidates
Oil prices eased slightly overnight in corrective price action consistent with a consolidation of oil’s recent impressive price gains. Brent crude fell by 1.0% to $81.00, rising to $81.30 a barrel in Asia. WTI fell by 0.55% to $78.40, rising slightly to $78.75 in Asian trading.
Despite prices easing again overnight, oil continued to hold onto almost all its gains since the start of December. Omicron had yet to wreak the havoc of the Delta variant and may never do so, keeping the global recovery on track, and OPEC+ compliance meant that spare production capacity was limited. Both factors will continue supporting oil’s bullish outlook.
In the nearer term, Brent crude had support at $79.60 and the 100-day moving average (DMA) at $78.55 a barrel. A rally through $83.00 signals more gains to $86.00 a barrel. WTI had support at $78.00 and $77.50 a barrel, with resistance at $80.50 and 82.00 a barrel.
Gold rallies in Asia
Gold continued range-trading overnight. With US yields moving sideways buyers cautiously pushed gold higher by 0.30% to $1801.75 an ounce overnight. In Asia, the buying momentum continued, perhaps after North Korea’s latest missile test today. Gold rose 0.45% to $1809.50 an ounce.
Gold had resistance here at $1810.00 and $1830.00 an ounce. Support lay at $1785.00, followed by $1780.00 and $1760.00 an ounce. Gold continued to drag in hapless bulls to false rallies, and as such, I believe gold would trade in a $1775.00 to $1815.00 range this week.