Financial markets continued to be in tail-chasing mode overnight, with equities and energy markets rebounding in New York after the previous sessions sell-offs. The late comeback overnight was driven by banks, who celebrated further easings of the Volcker-era rules yesterday, allowing them extra capital to dabble more widely. That overcame the increasing disquiet at a rising pace of COVID-19 cases in America’s Southern and Western states.
The wax-on, wax-off price action this week in North America highlights the increasing desperation of the V-shaped recovery gnomes to keep the "Buy Everything" narrative going. With Texas rolling back its re-opening plans yesterday, another nail was driven into the coffin, only to be loosened by the loosening of US banks' capital requirements. Along the way, the results of the latest Federal Reserve stress test were ignored. The Fed imposed new restrictions on bank share buybacks and dividends, noting that some of them would approach minimum capital levels in a W-shaped recovery scenario.
With momentum waning on the "peak-virus" trade, some back-and-forth price action is inevitable, as the FOMO-fast-money chases its tail on the tone of the daily headlines. Overall, the chances of a material downside correction in equity markets appear to be increasing. A good dose of two-way price action reality would be no bad thing in the bigger picture.
Looking at the S&P 500 bellwether, the 100-day moving average at 3024.00, has so far contained the pullbacks in June. Although tested, no daily closes have been recorded below it thus far, although we’ve come close. The S&P 500 is in a descending triangle formation, and a close below 3000.00 tonight, suggests that a deeper correction to 2750.00 could unfold. Naturally, we would see similar price action spill-over into markets around the world.
As the herds of "buy everything" day traders learn how to spell pain, longer-term investors should not panic. They should ignore the almost certain media “we’re all doomed” handwringing that would inevitably follow such a price move. The Federal Reserve and its coterie of central bank bed-mates still have your back. The ultra-loose monetary policy stands ready to back-stop your portfolio via unlimited free money and bond purchases of even corporate “high yield” debt. Whatever short-term pain may arrive shortly, it is essential to remember that one man’s drop, is another man’s dip.
With Mainland China still on its Dragon Boat Festival holiday today, activity in Asia has been somewhat muted, especially with the news tickers looking equally quiet. Singapore Industrial Production will be the region’s highlight. It is a volatile data series. It was expected to show a MoM drop of -6.0%, but came in at -16.5%.
Far more attention will be paid to the US Personal Consumption Expenditure (PCE), Personal Income and Personal Spending for May data this evening. An underperformance could well be the straw that breaks the camel’s back and unleashes a deeper stock-market correction.
Over the weekend, China releases Industrial Profits YTD on Sunday. Profits in April fell by -27.40%, with May expected to show a slight improvement to -22.0%. Again, a surprising downside, not something one usually associates with Chinese official data, could deepen the negative tone on Monday, if Wall Street has a poor session.
Overall, risks are increasing for a temporary shift in upside momentum that has characterised the past three months. For today, medium and longer-term players should stay away from the noise. Let the FOMO sheep of the day-trading massive charge around heedlessly to their heart’s content, and do their worst.
Asian equities join the 1% club
Stock exchanges around the Asia-Pacific have followed Wall Street’s positive session slavishly, with Japan, South Korea, Singaporeand Australian indices all higher by around 1.0%. Hong Kong was closed yesterday and appear to be catching up with the net change of the past two sessions, falling 0.60% today. The usual weekend protest fears are also weighing on sentiment. Mainland China markets are closed for a national holiday.
Having dutifully followed Wall Street’s lead, regional markets look content to coast into the week’s end, awaiting instructions from other time-zones. The ever-present threat of headline bombs is the only thing likely to break the Friday malaise.
Dollar continues to make slight COVID-19 gains
Currency markets are a less nimble ship than equities, and thus tend to be partially insulated from the noise generated by their loud cousins on the NYSE. That saw the dollar continue to keep its eyes on the prize and record further gains, as fears rise over the rapidly expanding pandemic sweeping the US Southern and Western States. Modest haven buying was the theme of the night, with the dollar index rising 0.22% to 97.36.
Overall though, the ranges on the US Dollar versus G-20 currencies was a modest one, with FX markets content to watch and wait into the week’s end, having unwound some of their short dollar risks.
Oil prices partially rebound overnight
Oil prices rebounded overnight, although by nowhere near what they fell on the previous day. In the absence of any other significant drivers, oil markets coat-tailed the late bounce in equities, ignoring the threats to consumption from the spiralling number of COVID-19 cases in the US and elsewhere. Brent crude 2.85% to $41.50 a barrel, and WTI rose 2.70% to $39.10 a barrel. Prices have been mostly unchanged in Asia.
The price action overnight suggests that intra-day, the short-term FOMO brigade are dominating trading. Longer-term players are wisely, staying out of the noise and waiting for their levels. Given the above, oil is also vulnerable to further downside corrections if the day-trading army head for the exit doors en masse elsewhere.
Gold continues to show solidity at these levels
Gold weathered the comeback by equities, and a slightly stronger dollar, in admiral fashion overnight. Gold finished a tight session 0.10% higher at $1763.70 an ounce. Although not earth-shaking, this marked the 4th day in a row that gold has closed above $1760.00 an ounce.
Although given my track record, I may be playing with fire, gold appears to be comfortably consolidating and girding itself for another test of higher levels. Support lies at $1760.00 and $1745.00 an ounce, with resistance at $1780.00 an ounce, followed by the formidable multi-month $1800.00 an ounce region.
Gold has eased slightly to $1761.00 an ounce in Asia but should find plenty of willing buyers below $1760.00 an ounce in the near-term. Trading is likely to be directionless though, until the arrival of New York later today.