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The Dust Settles

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Egyptian Stock Exchange in Cairo

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

The dust is settling on central bank week, with the Bank of Japan leaving policy rates and its 10-year JGB yield target of 0.0% unchanged. It has announced it will scale back its pandemic bond and commercial buying programmes in 2022 while extending the SME relief programme. USD/JPY is sharply unchanged, unsurprising given that the US/Japan yield differential is its key driver.

The BOJ’s announcement follows in a similar vein to the ECB’s “the lady is not for tapering” tapering not tapering announcement yesterday. Policy rates remained unchanged, but a tapering of the PEPP was announced, although it replaced that by that with, you guessed it, more QE under the old APP scheme, as well as continuing with the TLTRO’s. A very European compromise overall with the ECB acknowledging inflationary pressures, but well and truly hedging its bets. Overall, the QE forever family of the BOJ and ECB made plenty of noise but did very little tinkering under the bonnet. Both the Yen and the Euro are likely to have a tough Q1 versus the US Dollar.

Elsewhere, it was a mixed result. Norway and Britain have hiked modestly, while Australia and Southeast Asia remain cemented to unchanged, inflation be damned. Latin America, Eastern Europe and Russia have seen a series of hikes continuing and this will spare them the worst of the ravages of a stronger US Dollar in H1 2022. Turkey, meanwhile, cut rates under Erdoganomics. President Erdogan also fired a couple of people, and the Turkish Lira looks to have lost another 12% while I have been away this week. I might have to pencil in USD/TRY at 20.000 by early January at this rate. It would be comical if it wasn’t so sad for the people of Turkey.

The FOMC has swung to hawkish, as per the hints from Jerome Powell pre-FOMC. A faster taper and three rate hikes “dot-plotted” into 2022 are the new reality now. I wasn’t the least surprised at the equity and bond market reaction. The “buy everything” story rules the roost and annoying things like reality won’t get in the way of it. The FOMC flip was interpreted by the perpetual mega-bulls as proactively anchoring future inflation expectations, something long-dated bond markets have been pricing in forever, so buy big-tech, I mean growth. How bonds and equities will weather the Fed not buying billions of bonds each month remains to be seen. The story looks to be running out of steam already looking at equity markets overnight. The US yield curve will maintain a healthy attraction if you are a fund manager in QE-forever Europe or Japan, so I am not expecting long-dated yields to explode higher. It does, however, reinforce my thoughts that the US Dollar will be the winner in H1 2022.

I will reiterate once again, however, that V for Volatility, and not directional trends, will continue to be the winner in December. I am also quietly hoping that the US Dollar falls, and equities rise in January as well. The new budget year usually brings a group-think kitchen-sink rush in a particular thematic trade. Unfortunately, bitter experience tells me that the first big move of the year in January is usually the wrong one. So, keep going on the “buy-everything” trade, it’s all part of my cunning plan, and I love it when a plan comes together.

In Asia today, Singapore posted robust non-oil exports. Overall, omicron has not caused the global economy to blink yet it seems, but that appears to be because the world is fed up with lockdowns and restrictions, rather than the virus itself. The news from China continues to concern, however. The bottom-pickers buy recommendations are flowing thick and fast on China property companies. As I said last week, there’s never just one cockroach.

Having vaccinated its population with Sinovac, which doesn’t appear to work against omicron, we can safely assume China won’t be opening borders in 2022. That, along with the still-developing property sector woes will crimp growth. Additionally, the US has added another 34 Chinese entities to its blacklist, so US/China relations are going nowhere in a hurry. Hopefully, the rest of the world can pick up some of the slack in 2022.

I note that the YouTuber’s tool of choice, drone maker DJI, is one of those entities. Are YouTubers about to suffer a Christmas Black Swan? Hit the like and subscribe buttons to see.

A mixed day for Asian equities.

The post-FOMC “inflation expectations are now anchored” rally has petered out. Technology, or growth, took a bath overnight as the Nasdaq plummeted by 2.47%, while the S&P 500 fell 0.87%, with the “value-heavy” Dow Jones easing just 0.09%. In Asia, futures on all three indexes continue to ease, shedding around 0.30%. With multiple expires on equity instruments occurring this evening in the US, some distortion because of that could be in play, as could end of yearbook squaring etc. I expect the choppy price action to continue to spoof fast-money players into the year-end, both in the US and elsewhere.

The Wall Street tech retreat overnight has had a similar effect on Asian markets with similar weightings, with the US addition of another swath of Chinese companies to their entity lists also weighing on sentiment. The Nikkei 225 is 1.55% lower, with markets completely ignoring the Bank of Japan. South Korea’s Kospi has eased by 0.25%. Mainland China is also lower, the Shanghai Composite falling by 0.95%, and the CSI 300 has retreated by 0.70%. Meanwhile, the Hang Seng is 1.25% in the red.

Regionally, Singapore has eased 0.30% lower while Kuala Lumpur has climbed 0.30%. Jakarta has retreated 0.40%, with Taipei easing just 0.15%. Bangkok and Manila have fallen by 0.40%. Australia is bucking the trend with local markets rising. The All Ordinaries has risen 0.25%, while the ASX has rallied by 0.35%.

Softer post-FOMC US Dollar continues.

The US Dollar fell after the FOMC meeting as investors priced in lower longer-term inflation expectations thanks to a pro-active FOMC. Longer-dated yields continue to trade on the softer side, although volatility remains at the shorter end of the curve. There is also likely to be some end of year book-squaring flows that will weigh on the greenback over the next two weeks. It will be interesting to see if we get the usual squeeze on overnight offshore dollar funding rates over the New Year turn this year, which should be greenback supportive next week.

Also weighing on sentiment is the failure of the Biden Build Back Better Bill to make it through the US Congress this year; if it ever does. Technically, that should mean less government borrowing, and less upward pressure on US bond yields and thus, less upward pressure on the US Dollar. Risk sentiment is also steadier in currency versus equity markets right now, particularly6 regarding omicron. Currency markets are pricing in no virus dip from the new variant, most notable in strength in Asian EM and the commonwealths.

The dollar index fell sharply again overnight by 0.34% to 96.00, easing to 95.92 in Asia. Support at 95.50 could well be tested into the year-end, and I would not be surprised to see that continue into January before the FOMC monetary reality hits markets. EUR/USD rose sharply overnight to 1.1340 after a taper, not taper, announcement from the ECB. The rally remains asthmatic though, unable to reclaim 1.1350, and the Euro, along with the Yen, remain highly vulnerable to US Dollar strength and rate differentials going forward.

A 10 basis point hike from the Bank of England overnight has lifted GBP/USD to 1.3330 today with the street pricing in future hikes after yesterday’s surprise. However, until we close above 1.3500, Sterling remains in a technical downtrend and the UK could yet suffer an omicron upset. AUD, CAD and NZD all outperformed overnight thanks to steady risk sentiment, much like Asian FX.

Asian currencies have had a mixed performance. The Yuan continues to strengthen despite weaker fixes from the PBOC. With China borders likely closed for all of 2022, the trade surplus flows will continue underpinning Yuan strength. The SGD, THB, PHP, and IDR have all performed well post-FOMC, most likely because omicron has been discounted as a risk factor by investors. Although the INR and KRW have failed to rally, they are still holding steady. Both currencies are likely to feel the heat of fast-money outflows into the year-end, limiting gains.

Oil searches for equilibrium.

Oil prices have endured another choppy range-trading week, although, by the standards of early December, the volatility remains modest. A continuing recovery ex-China and the threat of OPEC+ moving suddenly, is offset by an easing energy crunch in China and omicron growth fears. That has left oil markets looking for a more settled equilibrium price until the narrative convincingly changes one way or the other.

Brent crude rose 0.40% to $74.60 overnight, easing to $74.30 in Asia. It looks set to trade between its 100 and 200-day moving averages (DMAs) at $76.80 and $73.20 into the year-end. WTI climbed by 0.70% to $71.95 overnight, easing to $71.60 in Asia. It has clearly denoted resistance above $73.00 a barrel, followed by its 100-DMA at $74.00. Its 200-DMA at $70.50, and technical support at $69.50 a barrel, should contain any sell-offs.

Gold’s recovery continues.

Gold spiked higher overnight, continues its post-FOMC recovery. Gold finished 1.25% higher at $1799.00 an ounce, an impressive rally in two days from its post-FOMC lows around $1753.00 an ounce. In Asia, the rally has continued, with gold rising 0.30% to $1805.00 an ounce as local investors put on risk insurance for the weekend.

Gold has now cleared and closed above its 50, 100 and 200-DMAs at $1789.00, $1795.00 and $1786.50, an ostensibly bullish technical move. As ever, though, the rally overnight has more than a small hint of desperate fast-money to it. Gold bulls have been led to water before, only to find a massive Nile crocodile awaiting them in the watering hole.

The jury is still out on whether the rally is sustainable, although is US Dollar weakness continues, combined with year-end risk hedging, there may still be juice left in it. Gold has resistance at $1810.00 and $1820.00 an ounce and that could possibly extend to $1840.00 an ounce. Readers should tread with extreme caution if we see that level before the month-end.

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Fed Must Not Fail on Inflation AGAIN With Too Many Hikes

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Inflation - Investors King

The U.S. Federal Reserve has already failed on inflation, they must not do so again by “hitting the brakes too hard with too many rate hikes,” affirms the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The comments from deVere Group’s Nigel Green follow the world’s most influential central bank on Wednesday refusing to rule out an aggressive run of interest rate rises as he all but confirmed the first increase would be implemented in March.

He says: “As was widely expected by the markets, the Fed –  now in hawkish mode – has practically green-lit a rate rise for the first time in three years in March as it tries to take on surging inflation, which is running at its hottest in 40 years.

“The Fed admitted that inflation may not drop toward its pre-pandemic levels any time soon, and that the rise in prices could, in fact, speed-up.

“Why, then, did the world’s most powerful central bank not act sooner to stem this off quicker?

“This grand scale inaction must be the biggest miscalculation in the Fed’s history.”

He continues: “However, now the debate is focusing on how fast the U.S. central bank will move toward policy normalization.”

Some leading experts on Wall Street are saying there could be up to five rate hikes in 2022, others are now suggesting even more than this.

“I would urge the Fed not to fail on inflation again by hitting the brakes with too many rate hikes,” says Nigel Green.

“The excess money in the system will come out fast. There’s a real risk that numerous interest rate hikes would cause a recession and may not even slow inflation as the soaring prices are triggered by supply chain issues which the Fed’s hikes will not solve.”

At Wednesday’s meeting, the Chair Jerome Powell swerved a question about whether the Federal Open Market Committee (FOMC) would raise rates at all subsequent meetings this year, which would mean seven increases in 2022.

The deVere CEO concludes: “With booming demand, snarled supply chains and high levels of wage growth, the Fed might be tempted to act too fast with rate hikes this year.

“But such moves could turn out to be a masterclass in the law of unintended consequences.”

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Markets Today – Earnings, Fed, BoC, Oil, Gold, Bitcoin

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gold bars - Investors King

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

We’re seeing a strong start to trading on Wednesday after what has been a very turbulent start to the week.

We’ve seen some sharp sell-offs already this week but investors appear to be encouraged by just how quickly and strong markets have bounced back. Monday looked like it was going to be a bloodbath in equity markets but rather than panic, investors poured back in and seized upon the lower valuations.

We saw this again after the close on Tuesday, when Microsoft earnings caused another wobble but reassurances around decelerating cloud growth were enough to trigger another wave of bargain hunting and we’re seeing that carry through to Europe today. US futures also look very healthy ahead of a crucial Fed decision later.

Fed misstep could have severe consequences

The Fed could have a big role to play in whether stock markets will build on these encouraging signs. As ever, every word will be poured over so I expect the central bank will take a very careful approach in its communication later on.

They need to be careful to find the right balance between taking inflation seriously and not overdoing it. These markets will be easily spooked so today is all about finding just the right balance. That means sending a clear signal about a March hike and alluding to discussions around balance sheet reduction towards the middle of the year.

We probably won’t get any specifics from Powell on when that will start or how fast it will happen, nor on how many hikes we’ll get this year. He will probably be keen to stress how seriously they’re taking it though and how they’ll do whatever is necessary. Ultimately, we may learn very little but the important thing is we don’t see a misstep as the consequences could be severe.

BoC expected to start aggressive tightening cycle

The Bank of Canada is unlikely to wait until March, with markets quite heavily pricing in a rate hike today and as much as six this year. This comes as inflation has risen to the highest level in 30 years and far above its 1-3% target range. With the labour market also tightening following a strong recovery from the pandemic, the time has arrived for accommodation to be removed.

The only question now is just how fast they’ll move and whether they’ll look to reduce their balance sheet, rather than just aggressively raise rates. The loonie has performed well recently, buoyed by very hawkish rate expectations and we could get more clarity on how accurate they are today.

Oil eyeing triple figures after brief pullback

Oil prices are continuing to edge higher after a brief pullback last week. The move followed some turbulence at the start of the week and came as API reported an 872,000 barrel draw which exceeded expectations. Crude prices are once again closing in on $90 and at this point, it doesn’t look like we’ll be waiting long.

So immediately it becomes a question how long we’ll be waiting for triple figures. The supply/demand dynamics remain favourable and the potential for conflict in Ukraine can only be supportive, as additional risk premiums are priced in. It’s still unlikely that oil and gas will be used as a weapon any time soon but if it was, it could lead to a serious surge in prices given how tight the markets are.

Gold awaits Fed decision

Gold is continuing to hold up ahead of the Fed meeting, close to $1,850 where it has seen some resistance recently. The central bank will have a big role to play on whether the yellow metal breaks above here or below $1,830 support.

It has been rising recently even as the market has priced in four hikes and balance sheet reduction which may suggest we’re seeing some inflation hedging in case more tightening is needed. Risk aversion may also be supporting the gold price. Either way, we should have more clarity later today.

Cause for optimism?

The recovery in bitcoin over the last couple of days has been really encouraging. After falling to around $33,000, more than 50% from its highs, the cryptocurrency has performed extremely well and finds itself 4% higher on the day around $38,000. It’s not out of the woods yet though and if broader risk appetite takes a hit, I’d expect bitcoin to suffer more. Whether that will see it test the crucial $30,000 region, only time will tell, but traders will be very relieved at what they’ve seen this week. The key test above is $40,000, a break of which could see momentum accelerate to the upside.

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Markets Today – Rollercoaster Ride, Fed, Earnings, Ukraine, Oil, Gold, Bitcoin

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

It’s been a rollercoaster start to what was always going to be a massive week in the markets and there’s little reason to expect that to change in the coming days.

The turnaround on Monday was incredible. From eye-watering losses to ending the day in the green; it’s not often you see that kind of action. Investors will no doubt be relieved but that could prove to be short-lived. US futures are back in negative territory ahead of the open – albeit to a much lesser degree at the moment – and even at the close on Monday, the Nasdaq was more than 13% off its highs.

The next couple of days will be huge. So much could hang on the communication from the Fed tomorrow and whether they strike the right balance between taking inflation seriously and not raising rates too aggressively. It’s a tightrope situation but if the central bank can find the right balance, more may be tempted by these levels.

It’s not just on the Fed, of course. On Monday, it was geopolitics that appeared to tip investors over the edge. The reaction looked over the top but that is indicative of the level of underlying anxiety in the markets at the moment. And if things don’t improve this week, we may see more episodes like that.

Which brings us to earnings season and a week in which numerous companies release fourth-quarter results, including a number of big tech names. A disappointing start to the season hasn’t helped to lift the mood but that could change this week. If not, the January blues could turn into something far more unsettling.

Fundamentals remain bullish for oil

Oil got caught up in the sell-everything panic at the start of the week, sliding more than 3% at one stage before recovering a little. There wasn’t much sense behind the move, but the fact that the dollar was strengthening and crude was already seeing profit-taking after peaking just shy of $90, probably contributed to it.

The market remains fundamentally bullish and conflict with Russia does nothing to alleviate supply-side pressures. If anything, the risks are tilted in the other direction, not that I think it will come to that. Nor does the market at this point, it seems.

Still, it was only likely to be a matter of time until oil bulls poured back in and prices are up again today. The correction from the peak was less than 5% so that may be a little premature, but then the market is very tight so perhaps not.

Conditions remain favourable for gold

Gold continues to be well supported at the start of the week, following some turbulent trading conditions and dollar strength. It continued to hold over the last couple of sessions around $1,830 and has pushed higher with $1,850 now in its sights.

The yellow metal is pulling back a little today, off a few dollars, but it remains in a good position. There still appears to be momentum behind the rally which could continue to take it higher. A move through yesterday’s lows could see that slip but at this point in time, conditions continue to look favourable. Of course, the Fed tomorrow could have a huge role to play in whether that continues to be the case which may explain the consolidation in recent days.

A strong recovery for bitcoin

Bitcoin rebounded strongly on Monday, alongside other risk assets that had also been pummelled earlier in the day. It’s trading a little lower today but that won’t be a major concern at this stage as broader risk appetite is holding up so far. Whether that is sustainable will determine how bitcoin responds and that may depend on the Fed tomorrow.

Bitcoin found support at $33,000 on Monday which isn’t far from a hugely important support zone around $30,000. If risk appetite takes a turn for the worse again, we could see that come under severe pressure. If the price can hold above here in the short term, it could be a very positive sign.

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