Greetings from day four of managed isolation in New Zealand, and no, I’m not a tennis player. All the chatter overnight was about the implosion on tech stocks in New York after a seemingly hawkish FOMC Minutes from the December meeting. The US Dollar reversed intraday losses and US yields firmed once again, but it was tech stocks and Bitcoin that fared worst, the Nasdaq falling by 3.34%, and Bitcoin slumping by 5.50%.
The minutes revealed that committee members felt inflation risks were more persistent and to the upside, and there was general agreement that the taper should be accelerated with three tentative rate hikes pencilled in. So far that’s exactly what we were told in the post-FOMC meeting by Chairman Powell. Nothing to see here. The only surprise, if you can call it that, is that some members felt that the Fed should commence running down its balance sheet soon after its first hike. I.e., selling some of those $8.50 trillion of bonds etc. Nothing else was said in the minutes and the meeting moved on.
Normally the FOMC Minutes is a big yawn-ster, and not market moving. The fact that is spurred a massive rush for the exit in the most QE-driven pimp-up-my-asset classes at a casual mention of possibly thinking about reducing the balance sheet earlier says one thing really. That thing is that markets right through the holiday period had been blissfully pricing in omicron as omi-gone. Given it hasn’t really reached Asia yet, which is mostly vaccinated with traditional vaccines that don’t appear to work against omicron, I hope they are right. Such is the Western RNA-centric flat earth universe the markets live in.
Anyway, the meltdown overnight is more about positioning than anything, because when you look at what the Fed members said in the FOMC Minutes, it wasn’t really anything different than what we already knew. I wouldn’t write off the irresistible power of the buy-the-dippers turning things around once again before the end of the week, especially if the US Non-Farm Payrolls comes in under 400k tomorrow night. Markets have been inflation nervous all week as the reality of the Fed taper peeps over the horizon.
What the price action this week tells us all is what I’ve been saying for a while, the start of monetary normalisation will make price movements a lot more “honest” than the past 18 months. The “buy everything” trade powered by “buy the dip; any dip” is on its last legs. Those most pimped up asset classes valuation wise are the most vulnerable to meaningful downside corrections. And yet another generation of young pups, (and some older ones), nurtured at the central bank pool of eternal QE-driven asset price appreciation life, will have to learn the meaning of the term “two-way price volatility.” It’s about time.
In other developments, both US and European PMIs took a hit last night, mostly down to omicron nerves and restrictions. If all goes to plan with omi-gone, they should rebound quickly. Other evidence of that was the explosion higher of official US Gasoline Inventories to 10.1 million barrels overnight. Still, December US ADP Employment exploded higher, adding 807k jobs versus 400k expected. That should see the US Non-Farm Payrolls revised higher for tomorrow, but the ADP data has been a shocking indicator for the headline number. A sub-400k number should ease the Fed taper nerves of this week, with a 500K plus number having the opposite result.
This morning, both Australian and Japan PMIs eased slightly but remained expansionary, suffering some omicron nerves, but certainly not enough to say the recoveries are in jeopardy. China’s Caixin Service PMI outperformed in fact, rising to 53.1, some good news in a week where good news is thin on the ground with China. The start of debt restructuring talks tomorrow to avoid Evergrande’s bond put-a-geddon this weekend will likely continue to weigh on China markets. https://www.reuters.com/business/china-evergrande-hold-meeting-with-bondholders-jan-7-10-2022-01-05/ The tech sell-off in the US won’t help matters either, especially in Hong Kong.
European Construction PMIs and the UK Services PMIs this afternoon, are likely to have taken a hot from omicron and Christmas holidays. The US releases Initial Jobless Claims, Factory Orders, and the ISM Non-Manufacturing sub-indexes. But I think the most interesting data today will be from our friends in Turkey, thanks to my colleague in New York, Ed Moya, for pointing it out.
At 1930 SGT, Turkey releases Foreign Exchange Reserves for the week ending December 31st. Having engineered a temporary Ponzi scheme to support the currency by backstopping the value of retail savers Lira deposits as long as savers don’t lose nerves and convert to hard currency, Turkey has been intervening heavily in FX markets as well. Reserves have fallen from $89 billion in mid-November to around $72.50 billion as of the 24th. By my reckoning, the Lira has already given back around 35% of its engineered gains in the past week or so, if reserves show a big drop this evening, the Turkish Lira vigilantes will be back out in force me thinks.
Asia follows Wall Street south
Wall Street had a torrid session as a hawk FOMC Minutes highlighted the amount of post-omicron speculative longs positions that were out there. Technology came in for particular attention, the Nasdaq suffering its biggest one day drop in nearly a year. The S&P 500 tumbled 1.94% lower, with the Nasdaq in full retreat, falling by 3.34%. By comparison, the value-centric Dow Jones fell by only 1.05%. US yields ground higher once again overnight, pressuring highly valued technology stocks. In Asia, the story is repeating in the futures market. Nasdaq futures are 0.70% lower, the S&P 500 futures are down 0.40$, and the Dow Jones futures are 0.25% lower.
Asian markets initially held their nerve this morning, but with no short-covering in the US futures, the opposite happening, in fact, Asia’s sell-off quickly accelerated leaving the region sea of red. The Nikkei 225, highly correlated to the Nasdaq these days, have tumbled 2.86% lower. The Kospi has fallen 0.75% with neither Tokyo nor Seoul showing any additional reaction to a hypersonic missile test by North Korea today.
Mainland China sees more virus restrictions being put in place including flights, but the Shanghai Composite is only 0.15% lower. I suspect China’s “national team,” is in “smoothing. The CSI 300, however, home to a much more diverse set of companies than giant SOE’s, has fallen by 0.85%, while the Hang Seng is holding up quite well, down only 0.35%, led by gains by Alibaba and JD.com.
Singapore is also bucking the trend, the Straits Times rising by 0.50%, led by its three mega-banks and consumer discretionary. Taipei has retreated 1.20%, with Jakarta down 0.80% and Kuala Lumpur down by 0.90%. Bangkok is 1.40% lower with Manila falling 0.65%.
Australian markets, facing tighter restrictions once again under a crushing omicron caseload, and with a high beta to US markets, have suffered heavily today. Both the ASX 200 and All Ordinaries have fallen by 3.0% today.
Europe is unlikely to shrug off the negativity that has swept the US and flowed so pointedly into Asia today. Europe will open lower as will London, but I won’t rule out the buy-the-dip gnomes of Wall Street seizing their chance and turning things around on Wall Street this afternoon.
The US Dollar holds steady
The US Dollar spent most of last night under pressure from the omi-gone rally, until the release of the hawkish FOMC Minutes. With US yields rising following that, the US Dollar reversed most of its losses intra-day, leaving it only slightly lower and marking the day as a range trade versus DM and EM FX.
The dollar index eased0.10% overnight to 96.18, where it remains in Asian trading. A break of 95.50 or 96.50 will signal the index’s next directional move, although if US yields stay firm, the greenback looks set to continue to outperform in the major currency space. EUR/USD is steady at 1.1310, USD/JPY at 115.90, and GBP/USD at 1.3530. Euro and Yen look most vulnerable to US Dollar strength, especially if the yield differential widens. Sterling’s fate remains tied to how its omicron wave plays out.
Risk sentiment indicators, the AUD, NZD, and CAD eased post-FOMC-Minutes. That sell-off has accelerated this morning as Asian stock markets and US index futures headed south. AUD/USD and NZD/USD have fallen by 0.55%, testing support at 0.7180 and 0.6750 respectively, while USD/CAD tests resistance at 1.2800. If the buy-the-dip rally does not appear on Wall Street this afternoon, the three amigos could easily move another 100 points lower overnight.
Asian currencies are trading sideways today, but several pairs remain close to line-in-the-sand levels with their respective central banks. USD/KRW is at 1199.00 approaching 1200.00. USD/PHP has risen above 51.00 to 51.20, USD/IDR is at 14,400 approaching 14.500.00 and USD/MYR is testing 4.2000. The Yuan, Baht and Indian Rupee continue to outperform. For the rest, it will be interesting to see if their respective central banks step out of the shadows and start offering US Dollars again.
Oil is bid despite its fall today
Oil prices were almost unchanged overnight, despite a massive 10 million barrel increase in US Gasoline Inventories, distillates rising by 4.4 million barrels and Crude Inventories falling only 2.5 million barrels, with Cushing Stocks climbing by about the same. That should all have been bad news for oil prices, implying that omicron is weighing on mobility and consumption. Even more especially, as US yields rose, and the US Dollar reclaimed intra-day losses. Instead, oil prices hardly budged and this, despite higher OPEC+ production, suggests that oil demand remains very robust indeed.
With the stock market selloff deepening in US futures, sweeping over Asia, and with some new virus restrictions in China, oil has finally moved lower. Brent crude and WTI fell by 0.45% to $79.70 and $78.80 a barrel. Given the sell-off in equity markets though, the move lower in oil is minuscule in comparison and oil prices are constructive.
Brent crude has support at $78.60 and $77.85 barrel, its 100-day moving average (DMA). It has resistance here at $80.00, and then $82.00 a barrel. WTI has support at $75.75 and then $74.90, it’s 100-DMA. It has stout resistance at $77.50, and then $78.50 a barrel.
Gold’s range trade continues
With US yields and the US Dollar holding their gains but trading sideways, gold eased 0.25% overnight to $1810.30 an ounce, edging another 0.25% lower to $1805.75 an ounce in Asia. Given the price action overnight, it appears that gold is still vulnerable to higher US yields and a higher US Dollar. Any rallies should be approached with a great deal of caution and scepticism.
$1790.00 to $1820.00 remains my call for the range this week. Gold has resistance at $1830.00 and $1840.00 an ounce, although it would be a huge surprise if we saw those levels. Support lies at $1798.00, followed by $1790.00 and $1780.00 an ounce.
