There were no real surprises from the Federal Reserve FOMC meeting yesterday. The Fed Funds target rate was left at 0.00 to 0.25%. The FOMC promising to keep monetary policy loose to the moon and back, until employment and the economy recovered. By their measure, that will be sometime in 2022.
That left financial markets in active recovery mode as the week’s data highlight passed without incident. Equity and energy markets continued to pause for breath after an energy-sapping sprint higher. However, currency and bond markets opted for a more active recovery. US Treasury yields fell after the FOMC, with investors secure in the knowledge that the Fed has the back of any bond sell-off. Currency markets resumed selling US dollars as the great rotation out of the greenback continues in earnest. The dollar sell-off hasn’t missed a beat this week, and the redeployment of that capital across the world suggests that any stock market sell-off will be short-lived.
The data calendar today is exceptionally light, especially in Asia. Only the US Initial Jobless and Continuing Claims will be of interest. The expectation is that only 1.5 million Americans will lose their jobs this week, with the continuing claims falling to 20 million. In isolation, both are horrific numbers, but are in fact, improvements on the past week and a continuation of improving outlook. Outperformance from either could be enough for equity markets to catch their breath again.
Asian equity markets ease lower after the FOMC
Wall Street had a mixed session with S&P 500 down 0.50%, the NASDAQ adding 0.67%, but the Dow Jones falling 1.04%. The picture is much the same in Asia with the region mostly flat to negative.
The Nikkei 225 is down 1.20% with the Korean KOSPI unchanged. Mainland China’s Shanghai Composite and CSI 300 are 0.25% lower with the Hang Seng down 0.50%. Singapore has fallen 1.35%, Jakarta is down 2.0%. A similar story is painted down under, with the Australian ASX 200 and All Ordinaries both lower by around 2.0%.
The relative underperformance by peripheral Asian markets and Australia and New Zealand is not concerning for now. All of those areas outperformed over the past few weeks as proxies for the global recovery, coat-tailing Wall Street’s buy-everything-rally more closely than most. That is especially true for Australia, where the rally in the banking giants that dominate the leading indices has been quite stunning.
After an impressive rally in recent weeks, the FOMC passing without incident, and record bullish open interest on S&P 500 options, it is no surprise that equities globally needed to stop for breath. Will an unlimited amount of central bank money to refuel on, even a few days of adverse price action will not undermine the structural reasons why asset markets have disengaged from the reality, we the readers, are experiencing in day to day life. This is a thinning of the herd, not a cull.
The rotation out of US dollars continues
Currency markets didn’t pause for any FOMC breath overnight, continuing to sell out of US dollar positioning, with the Dollar Index falling 0.45% to 5.88 against its basket of major currencies. Notably, EUR/USD continued its rally, rising to 1.1420 before settling back to 1.1385, a 0.40% gain for the session. A test of 1.1500 March high continues to look like the most likely outcome.
The Chinese yuan again fixed higher versus the dollar at 7.0608 this morning, from 7.0703 previously. CNY’s 100 and 200-day moving averages (DMA’s) lie just below around 7.0400. If other members of the CNY currency basket remain firm, a test of 7.0400 seems inevitable. Below 7.0200, we could see USD/CNY retrace much further, possibly as far as the 6.9200/6.9500 region.
The USD/IDR fell 1.0% to 13,950.00 yas the Bank of Indonesia (BoI) entered the market aggressively to sell dollars, simultaneously pronouncing that the IDR was very undervalued. The IDR’s recovery from its March lows at 16,800.00 is stunning, to say the least. The Bank of Indonesia may have pushed its luck at these levels though as USSD/IDR has its losses, rising to 14,080.00 today. The BoI may need the general sell-off of US dollar globally to continue further before trying its intervention luck again. The next significant support for USD/IDR is 13,600.00.
The currency bellwether for the global recovery trade, the Australian dollar, also made good all its previous days' losses overnight. Post the FOMC, the AUD/USD rose 100 points to 0.7060, before settling back to finish 0.50% higher at 0.6995. That marks the 4th consecutive trading session, where AUD/USD has probed above 0.7000 but failed to close above this level. It has fallen 25 points this morning to 0.6970 as regional stock markets ease. The price action again, suggests a thinning of the bullish herd, and not a change in sentiment. Losses should be limited to 0.6900, but a more profound correction cannot be ruled out should that level fail. Much will depend on the price action in equity markets for the remainder of the week.
Oil continues to tread water after Crude Inventory data
Oil prices continued their consolidative price action of the last three days, finishing almost unchanged overnight. US official Crude Inventories followed the API data, blowing out to the topside with inventories rising unexpectedly to 5.72 million barrels. That though, was balanced out by a dovish FOMC result, meaning that the extended longs at these heights live to fight another day.
The jump in inventories this week, is likely caused by an armada of Saudi Arabian super tankers arriving and unloading crude booked during the lows of March. As such, the effect should be transitory on pricing. The ability of oil to withstand bearish corrective winds blowing from the equity markets has been impressive. Nevertheless, in the short-term, oil looks vulnerable to a downside correction to thin out weak longs.
Brent crude rose 1.60% to $41.30 a barrel overnight but has sunk today in Asia by 1.80% to 440.60 a barrel. Below $40.00 a barrel with setting up further losses to its 100-DMA at $38.90 a barrel. A fall as far as $36.00 a barrel cannot be ruled out. Resistance is at Monday’s high of $43.50 a barrel.
WTI climbed to $39.95 a barrel overnight, before fading to $39.10 a barrel, a 1.70% gain for the session. Today, however, it too has given back all of those gains, falling 1.40% to $38.50 a barrel. WTI has now twice tested, and failed, at $40.00 a barrel this week, implying that further losses are likely. WTI’s initial downside target is the $36.00 a barrel region. Like Brent, the supply/demand equation for WTI is gradually improving, but with so much speculative long-positioning accumulated over the past month, thinning the herd looks necessary in the near-time.
Gold boosted by several factors overnight
I am certainly glad that I retreated to the side-lines to lick my short-positioning wounds on gold yesterday. A combination of a dovish FOMC, falling equities, lower US Treasury yields, and a lower US dollar, combined in a holy nirvana to boost gold by 1.40% to $1738.50 an ounce overnight. Gold tested the overnight highs at $1740.00 an ounce this morning, but has retreated mildly to $1734.00 an ounce as profit-taking set in.
Overall, my view is unchanged from yesterday. Gold has settled back into its multi-month range between $1660.00 and $1760.00 an ounce, after hinting at a potential breakout last week. If the pattern of the recent months is followed, gold will now look bid for a few days near the highs, just as it looked very offered near the lows last week.
Gold lacks the momentum to attack $1800.00 when we are in a structurally bullish equity market fuelled by unlimited central bank money. For all the talk about inflation – much like during the GFC – it has yet to appear. It likely won’t until the second half of 2021. The most likely outcome for gold near-term, is that it is setting a bull-trap yet again for gold bugs at these elevated levels.