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Markets Stay Booster’ed

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By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

US markets managed to maintain omicron is weak, buy everything rally overnight, albeit at a much less frenzied pace than the day before. That sits nicely with my V for Volatility outlook for December and readers should not be fooled into thinking the risks of whipsaw price have now disappeared. I’ll say it again, volatility will be the winner in December, not directional plays.

Having said that, I am not calling for the end of days for the 21-month stock market rally, merely that we can now expect a lot more two-way volatility going forward. A case in point is the Nasdaq, which has once again bounced off its mighty March 2020 trendline support and will probably be a classical technical analysis case study for years to come. Here’s what CFD from OANDA looks like, the actual physical chart is even sexier, and I’ll leave readers to draw the lines on that one themselves.

Another sign that we may need to wait for next week’s FOMC meeting to climb aboard the taper trade again comes from currency and bond markets. The Australian Dollar, the risk sentiment indicator to rule them all, rallied powerfully overnight. Even the Euro managed to recover, and the US Dollar generally, had a tough day at the office. That came as US 10-year yields rose back above 1.50% to 1.53%.

The divergence in price action is a warning sign for tomorrow nights US CPI. It suggests that the street is positioned for a “risk-off” taper move. With the US 10-year rising around 20 basis points over the last few sessions, reversing recent losses, there may not be much juice in the tank at a 7.0% CPI print. Quid pro quo, US Dollar selling and equity buying hint that a 7.0% CPI is increasingly priced in. We likely need to see a print much higher than 7.0% to revive the taper trade in the near term and it wouldn’t surprise me if an on expectation CPI release sees US yields fall, the US Dollar fall, and equities jump once again. Remember what I said about V for Volatility and whipsaw price action?

Helping things along, although with a gentler market impact, were comments from Pfizer and Moderna suggesting a third shoot would do the job against omicron. Given that the US and Europe can’t even get 65% of their populations to have even two shots, let alone a third, we can assume two things. Omicron will yet have a role to play in surging cases over the winter, and vaccine hoarding by rich countries will continue until 35% of their populations stop taking advice from social media and saying me, me, me, instead of we, we, we. That means that the poor in the rest of the world will be waiting longer, thus allowing a higher chance of more nasty variants to arise. And thus, the cycle continues, sigh…

Today’s data calendar in Asia is thin. New Zealand Manufacturing Sales in Q3 fell a dismal 6.20%, suffering from the Auckland covid lockdown hangover. You can’t buy anything in New Zealand these days anyway, it’s either too expensive thanks to the RBNZ, or there’s none of it left thanks to Covid-19. The New Zealand Dollar continues to underperform its Australian cousin, thanks to being another 2,250 kilometres (1,400 statute miles for non-decimal dinosaurs) east of Australia, and the RBNZ hitting the W for Wimp button at its last policy meeting.

On a brighter note, Japan’s Large Manufacturing Index QoQ for Q4 outperformed, rising by 7.90%. Some Q3 baseline effects are in there, but overall, it bodes well for next week’s Tankan survey and suggests that Japan is recovering after it Q3 delta wave. Services may have a more difficult time as the country shut its borders to Johnny Foreigner again this month.

China’s Inflation data has proved benign as well, giving regional markets a small sigh of relief. YoY Inflation for November rose to 2.30% (2.50% exp), while MoM Inflation rose by 0.40% (0.70% exp), giving markets a nil-all draw. That should provide more relief to local equity markets which despite the bad news pouring in from the property developer space this week, is taking their pleas for debt restructuring as meaning the government will facilitate “something.” At least Kaisa suspended trading of their stock in Hong Kong, I’m surprised Evergrande still is. A debt restructuring is not usually good for stock prices, even if they have already fallen by 90%.

The rest of the day’s calendar globally is second-tier. Some regional inflation measures from Europe and Germany’s Balance of Trade. The focus will be on US Initial Jobless Claim with markets hoping for sub-200k prints to resume. Overnight, US Jolts Job Openings for October jumped to 11 million unfilled jobs. That doesn’t really compute with US Non-Farms falling to 210,000, or even a Household Survey suggesting 1.1 million jobs, or unemployment falling to 4.20% with a 61.80% participation rate.

The Federal Reserve may have shot itself in the foot with its unlimited free money we’ll backstop the dumbest investment decisions monetary stimulus which should have been a short term “shock and awe,” and not a monetary Vietnam. Macroeconomics is a beautiful thing when the orchestra all plays in tune, but too often, sticking your finger in one leak sees another pop up nearby. By enriching substantially, any American who owns a home, crypto, a meme or any other stock, they have created a situation where people don’t have to go back to work or have retired. The inflation trade may waver this week, but don’t put it to bed just yet. If James Bond can return from his most diverse and politically correct movie ever (the end credits said he would), inflation sure can as well.

Asian equities are in a positive mood.

Overnight US equities continued to rally, although the gains were modest compared to the fast-money FOMO stampede of the day before. Comments from pharmaceutical heavyweights that boosters were the answer kept the omicron-is-mild trade alive. The S&P 500 rose 0.31%, with the Nasdaq rising by 0.64% as the growth rebound continued, while the Dow Jones eked out a minuscule 0.09% gain. In Asia, futures on all three indexes have climbed by around 0.10%.

The solid, if an unspectacular day on Wall Street, has bolstered sentiment in Asia, where regional investors are also buying into the China property developer debt-restructuring story. Japan is seeing profit-taking after the rally yesterday with eh Nikkei 225 unchanged. The Kospi is 0.55% higher. In Mainland China, benign inflation, property sector restructuring, and stimulus hopes continue to drive gains. The Shanghai Composite and CSI 300 have rallied 0.90% today and Hong Kong has recovered its poise to rally by 1.10%.

Regionally, Singapore is 0.30% higher, with Kuala Lumpur rising 0.20%, and Taipei by 0.10%. Jakarta is 0.40% higher, with Bangkok adding 0.70%, with Manila unchanged. After some impressive gains this week, Australian markets are taking a breather today, perhaps watching the Ashes cricket. The All Ordinaries and ASX 200 have moved 0.15% higher.

European equities should open higher today after a positive overnight session. I expect gains to be limited though, as Eurozone and UK markets are crimped by the spectre of tighter Covid-19 restrictions, omicron or not.

US Dollar is vulnerable to a deeper downside correction.

The US Dollar continues moving lower overnight, despite longer-dated US yields firming once again, a sign that short-term upward momentum is fading. The dollar index fell by 0.35% to 95.96, climbing modestly in Asia to 96.03. The fall overnight was led by gains in EUR/USD, which rose 0.65% to 1.1330, another warning sign that US Dollar momentum is fading as crowded positions are trimmed into tomorrow’s US CPI release. A 7.0% print is looking priced in now, and the index could trade as low as 95.50 on an on expectation print.

EUR/USD is steady at 1.1330 today and could retest the top of its range at 1.1375 into the US CPI. The single currency is likely to struggle at that level though, as European equities show signs of virus nerves. Sterling sank to 1.3205 overnight after the government reinstated work-from-home guidance. Given the caseloads in major Eurozone countries now, it is hard to see the Euro avoiding the same fate.

USD/JPY rose slightly with US yields to 113.70 overnight and seems to be back to its interest rate differential business-as-usual best. AUD/USD rode sentiment 0.75% higher to 0.7165, and I don’t discount further gains to 0.7250+ into the US CPI data. NZD/USD has risen much more sedately, trading at 0.6810 today, and continues to be weighed down by inflationary pressures and a central bank sitting like a possum in the headlights.

Asian currencies mostly recorded decent gains overnight on recovering sentiment. That has continued this morning with CNH, MYR, SGD, THB, TWD, and INR all rising versus the US Dollar. Only the Indian Rupee has remained unchanged, after the Reserve Bank of India policy meeting yesterday. The RBI quashed any rate hike expectations and reinforced that it remains focused on supporting India’s post-delta recovery.

The price action in US bonds and by the US Dollar suggests that the Fed taper trade has become a little crowded, helped along by omicron fears receding rapidly. It will probably take a print well North of 7.0% to jar nerves into the end of the week and I can see the US Dollar retreat continuing in the week’s end. But the sentiment remains fragile, and I would caution about picking the top of the US Dollar with complacency into the FOMC meeting appearing to be rising.

Oil prices rise once again.

Oil prices rose once again overnight, albeit at a much more modest pace in line with the price action seen in equity markets. Unlike the equity rally, oils recovery is backed by sound supply and demand fundamentals in addition to diminishing omicron concerns. A potential Russia/Ukraine supply crunch is also supportive even if Europe heads back into deeper virus restrictions through the winter.

Brent crude rose by 1.15% to $76.00 overnight, achieving my end of week target early. It has gained another 0.30% to $76.20 a barrel in Asia. WTI leapt 1.30% higher to $72.60 a barrel, gaining another 0.25% to $72.90 in Asia, just short of my target for the week.

Both contracts have recovered above their respective 200-day moving averages (DMAs) at $73.00 and $70.30 respectively, which should provide support on pullbacks. The 100-DMAs at $77.00 and $74.00 form initial resistance, although a weaker US CPI tomorrow could see both contracts rise higher with ease. I continue to believe that the lows of last week will be the lows for possibly all of 2022.

Gold risks remain.

Gold attempted to rise overnight as sentiment continued to attract previously burnt bullish investors back to precious metals. It failed to overcome the clustered 50,100 and 200 DMAs however and ended the session almost unchanged at $1782.80 an ounce. In Asia, it has risen an asthmatic 0.15% to $1785.75 an ounce in moribund trading.

Although I am not ruling out further gains as omicron fears recede and a 7.0% US CPI print is priced into markets, gold’s topside failure overnight is a warning that bullishness is very fragile and that selling will resume at the first sign of trouble. The downside continues to be very clearly, the path of least resistance.

In the bigger picture, gold still looks confined to a $1770.00 to $1800.00 range this week, unable to sustain momentum above or below those levels. The 50,100 and 200-day moving averages (DMAs), clustered between $1790.30 and $1795.50 are capping gains. $1800.00 and $1810.00 will prove equally formidable. Support lies at $1770.00 and $1760.00.

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Markets Today – Earnings, Nasdaq, ECB, CBRT, Oil, Gold, Bitcoin

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New York Stock Exchange

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s turned into a mixed session across Europe with indices giving up earlier gains initially before reversing course once more to tread water as we near the open on Wall Street.

It appeared we could have been heading for a second consecutive positive session when Europe got things underway this morning, something we haven’t been treated to much so far this year. But it wasn’t long until we were back in the red; a further sign of the angst in the markets right now that is proving hard to shake off. Perhaps there’s still hope yet but given what we’ve seen, it won’t be cause for optimism.

The Nasdaq dropping into correction territory won’t be helping lift the mood, and that will turn more downbeat again if it breaks below the 200-day simple moving average for the first time since April 2020 when the unbelievable tech rally started. It would also take it below 15,000 for the first time since the middle of October. Not a great signal for the markets just as Netflix kicks off earnings season for big tech.

The flipside of that is that earnings could be what helps tech find some form again. There’ll no doubt be some interest around these levels and we’re already seeing futures pointing more than half a percentage point higher ahead of the open. A strong report from Netflix could see dip buyers flood back in.

The key question on investors’ minds though will be whether the tech rout is already behind us after a 10% drop. That will depend on more than just a few stellar earnings reports. The key thing will be whether we see a pause in market interest rate expectations after weeks of aggressively pricing in more hikes and balance sheet reduction.

While there are calls for more than four hikes this year, even a kickstart 50 basis point increase from the Fed in March for the first time in more than 20 years, is that going to be priced in this early? Or could we see a period of relief that could benefit stock markets if earnings season takes a turn for the better? We’ll soon see as big tech dominates the next week on the earnings calendar.

ECB remains in camp transitory

Christine Lagarde launched a strong defence of the ECB’s response to higher inflation on Thursday, warning that markets should not expect a similar approach to that taken by the Fed as the situation doesn’t warrant it. Lagarde pointed to lower inflation, which was confirmed today at 5% in December, and a weaker recovery. While that may be true, markets have been pricing in the possibility of a similar u-turn to that we’ve seen in the US and UK, with a 10 basis point increase expected in October.

The minutes reflected Lagarde’s comments, as we would expect, but that’s unlikely to change investors’ minds. Central banks have repeatedly pushed back against market expectations over the last six months before eventually aligning with them. With the German 10-year moving into positive territory for the first time since mid-2019 on Wednesday, it seems a familiar pattern may be unfolding.

New year, new CBRT?

The CBRT appears to be turning over a new leaf in 2022 after resisting the urge to cut interest rates for a fifth consecutive meeting. The central bank has cut rates from 19% to 14% in that time which has come at great expense in terms of the currency, reserves, and inflation. But it would appear that the easing cycle has run its course, for now.

That said, the explanation for current levels of high inflation and the disregard for it, and in effect its impact on households and businesses, don’t offer much assurance that the CBRT won’t at some point revert back to the damaging approach of recent months. But it may wait until inflation does ease again after reaching 36% last month.

Oil rally finally losing momentum

Oil has been on a remarkable run in recent weeks driven by very bullish fundamentals as disrupted supply struggled to keep up with strong demand. OPEC and the IEA have referenced the resilience of demand since the emergence of omicron in recent weeks and the inability of OPEC+ to hit their production targets, or even come close, has led to the kind of one way price action we’ve been witnessing.

While the fundamentals haven’t changed, it does appear that we’re finally starting to see momentum wane after a more than 30% rally from the omicron lows. That’s coming around $90 where oil has peaked at a seven-year high, seemingly triggering some profit-taking. While I don’t think it’s done there, we could see a minor correction to take some of the frothiness out of the market. That said, I can’t imagine it will be too large unless we see a shift, either in OPEC+ production or slowing demand from a major consumer like China as a result of its zero-Covid policy.

Gold breaks key resistance

Gold has been pushing for a breakout above $1,833 since the start of the year and it finally achieved it on Wednesday, which could potentially help propel it higher in the coming weeks. The move has been building despite yields rising, which may be a sign that traders don’t believe enough is being priced in to counter soaring inflation.

The yellow metal has recovered earlier losses to trade higher today, just as the dollar has lost earlier gains to trade flat. It started to struggle a little shy of $1,850 which may be the next area of resistance, with the November highs around $1,875 above here being the next test. A move lower will see $1,833 tested as support after putting up such a barrier of resistance in recent months.

A big move coming in bitcoin?

Bitcoin remains in consolidation on Thursday, with ranges tighening as the cryptocurrency struggles for any direction. It doesn’t feel like we’ll have to wait long for an aggressive breakout one way or another but at this point, it’s hard to say in which direction that will come. If interest rates are its kryptonite then it could still be in for a rough ride as anxiety around monetary tightening remains heightened. But I’m not convinced that will remain the case and it may just be a case of the cryptocurrency biding its time. I’m sure we’ll soon see which way that will come but once it breaks out of that tight range, the move could be quite substantial.

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Markets Today – Mild Reprieve, UK Inflation, BoE, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Equity markets are recovering some of yesterday’s losses but anxiety and uncertainty continue to dominate after a disappointing start to earnings season.

Inflation and interest rate concerns are going nowhere soon and with traders now increasingly considering the possibility of hikes larger than 25 basis points, the possibility of more pain in stock markets is very real.

The idea that we could go from rock bottom rates and enormous bond-buying to rapid tapering, 50 basis point hikes, and earlier balance sheet reduction is quite alarming. We’re talking about markets that have become very accustomed to extensive support from central banks and very gentle unwinding when appropriate. This is quite a shock to the system.

And so far earnings season is not providing investors the comfort they were hoping for. Significant compensation increases and lower trading revenues hurt JP Morgan and Goldman Sachs, and higher wage demands are likely to be a common theme throughout the next few weeks which will put a dampener on the bottom line and not alleviate concerns about persistent and widespread price pressures.

UK inflation jumps again ahead of Bailey appearance

The CPI data from the UK this morning compounded inflation concerns, hitting a 30-year high and once again surpassing expectations in the process. And it’s highly unlikely we’re seeing the peak, with that potentially coming around April when the cap on energy tariffs is lifted considerably to reflect higher wholesale prices. Other aspects will also contribute to higher levels of inflation at the start of the second quarter, at which point we may have a better idea of how fast it will then decline.

Of course, the Bank of England can’t just turn a blind eye until then. The MPC may be willing to overlook transitory inflationary pressures but the rise in CPI has proven to be neither temporary nor tolerable. Instead, it’s become more widespread and the central bank is being forced to act and may do so again next month after raising interest rates for the first time since the pandemic in December. A few more hikes after that are also priced in for this year but if pressures continue to mount, traders may begin to speculate about the possibility of larger hikes, as we’ve seen starting in the US.

All of this should make Andrew Bailey’s appearance before the Treasury Select Committee later today all the more interesting. The central bank has warned of higher inflation and possible interest rate hikes for months but delayed doing so after initial hints ahead of the November meeting. Given what’s happened since, the decision looks all the more strange. Of course, it’s easy to say that with 20/20 hindsight.

Oil gathering momentum as $100 oil looks increasingly likely

Oil prices are continuing to climb on Wednesday and find themselves only a little shy of $90 a barrel. This happened as IEA confirmed that the market looks tighter than previously anticipated as a result of stronger demand, despite omicron, and the inability of OPEC+ to hit its monthly increased production targets. This imbalance has led to surging prices which will further pressure households and businesses already fighting high inflation.

What’s more, not only does the rally not appear to be losing steam, it may have even generated fresh momentum. While $90 could have triggered some profit-taking and a minor cooling of prices, this suggests they’ll see no reprieve and we could realistically see $100 oil soon.

Can gold break higher as traders speculate about more rate hikes

Gold is marginally higher again after the easing over the course of the last week. The yellow metal is continuing to struggle around $1,833 which has been a surprisingly strong level of resistance over the last six months. But support is returning after it came close to $1,800 so a break to the upside remains a strong possibility.

Given the calls for even more rate hikes this year than markets are pricing in, not to mention larger individual increases than we’ve seen for many years, perhaps we are seeing some inflation hedging from traders that don’t think central banks are doing enough to bring price pressures down.

Consolidation continues

Bitcoin appears to have gotten lost in the noise of the last few weeks. It’s not falling too hard despite risk assets getting pummelled but it’s not recovering to any great extent either. Instead, it’s floating between support at $40,000 and resistance around $45,000 and showing no signs of breaking either at this point.

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Markets Today – Cautiously Higher, China, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European stock markets moved cautiously higher on Monday as investors were tempted back in after a turbulent start to the year.

It’s been a relatively quiet start to the week, with the US bank holiday naturally weighing on activity. With that in mind, I don’t think we can read too much into today’s advances, especially as they’re occurring alongside rising yields which doesn’t seem particularly sustainable at a time of such anxiety in the markets.

It will be interesting to see if investors are tempted back in now that earnings season is underway. The emergence of omicron may mean that many companies don’t enjoy the kind of performance that was expected before but that doesn’t mean there won’t be plenty of positives to take away.

Of course, there are areas that will naturally chip away at that enthusiasm. Whether that’s margins being squeezed, prices increased or staffing costs, for example, there’ll be plenty for investors to get their heads around as they contend with sky-high valuations and a tricky economy this year.

PBOC cuts rates despite strong growth in 2021

A mixed bag of data overnight from China, where GDP growth exceeded expectations but retail sales fell short and the unemployment rate ticked higher. While the economy is still performing well after far exceeding its growth targets for 2021, many challenges remain, not least the crackdown on the property market that has led to firms defaulting on coupon payments and being forced into negotiations with bondholders.

This explains the PBOC decision overnight to cut interest rates and further easing is expected to follow as the central bank looks to support the economy through a turbulent period.

Oil rally continues as output continues to fall short

Oil prices are edging higher again at the start of the week as it continues its remarkable run since bottoming in early December. It’s up more than 30% over that time and there still appears to be momentum in the move. Kazakhstan has seen its output return to pre-unrest levels but that’s done little to slow the rally in recent sessions.

Ultimately it comes down to the ability of OPEC+ to deliver the 400,000 barrel per day increase that it’s vowed to do each month. The evidence suggests it’s not that straightforward and the group is missing the targets by a large margin after a period of underinvestment and outages. That should continue to be supportive for oil and increase talk of triple-figure prices.

Can gold break key resistance?

Gold is marginally higher on the day after pulling back again late last week. The yellow metal has repeatedly struggled at $1,833 and it would appear it’s having the same struggles this time around as well. It did finally break through here in November but it didn’t last and it seems the psychological barrier is as firm as ever.

That said, it’s impossible to ignore gold at the moment as it continues to rally despite more and more rate hikes being priced in around the world and yields rising in tandem. There could be an argument that we’re seeing safe haven or inflation hedge moves due to the current environment which could become more clear over the coming weeks.

Another run at $40,000?

Bitcoin is down a little over 2% at the start of the week and continues to look vulnerable having failed to bounce back strongly off the recent lows. It appeared to be gathering some upside momentum at times last week but it quickly ran into resistance just shy of $45,000 where it had previously seen support. All eyes are now on $40,000 and whether we’re going to see another run at that major support level.

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