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China Trims Loan Prime Rate

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

China appears to be blinking in the face of slowing growth next year, trimming 5 basis points of its 1-year Loan Prime Rate (LPR) to 3.80%, while leaving the 5-year LPR unchanged. Far more loans are based on the 1-year LPR than the 5-year, so the move is a concrete signal that China is moving into supportive monetary policy. That was reinforced by yet another notably weaker than expected Yuan fixing versus the US Dollar this morning.

Over the weekend S&P moved Evergrande into default joining Fitch, and along with Kaisa, this story, and the wider property sector are not going away anytime soon. Additionally, officials in China said that more work was required on monopolistic behaviour by corporate China, and online brokerages are apparently next in their sights. So, the “shared prosperity” policies are also still fully in play as expected. News that China’s Sinovac vaccine appears to be ineffective against the omicron variant means that China’s Covid-zero policy will keep the gates closed to the outside world for all of 2022.

With all of that in mind, it is no real surprise that China is moving quickly to a targeted supportive monetary policy setting. Challenges remain though and the deluge of articles in the press saying that many China equities are at bargain levels is as big a warning sign of trouble ahead as any. They won’t look so cheap in three months’ time if they’re half of what they are today. In this context, it is unsurprising that the rally in Mainland stocks after the LPR cut, ran out of steam within minutes, as they joined the rest of Asia in the red.

The weekend has been a steady stream of negative headlines, with the Grinch who stole Christmas probably thinking he won’t be needed this year. Omicron dominated the headlines with a UK study suggesting it was no less vicious than delta. Exploding case numbers in the UK and Western Europe had governments on the continent tightening entry restrictions and the Netherlands has gone into full lockdown. Similar warnings about impending case numbers were made by US officials as well.

If that wasn’t enough, Democrat Senator Joe Manchin appears to have blindsided the White House and his own Congressional caucus by announcing he won’t support President Biden’s $2 trillion Build Back Better spending programme. That effectively leaves it dead in the water now and the Biden legislative agenda in disarray. Goldman Sachs has already trimmed next years US growth forecast in response.

Of course, a positive headline regarding omicron could hit the wires and temporarily hand-brake turn sentiment once again. With the holidays nearly upon us, liquidity will sharply reduce anyway, exacerbating intra-day moves. Markets this week and next will be for day traders with steely nerves and deep pockets, not for trend followers. As I have repeatedly said, the winner in December is V for Volatility, nothing has changed on that front. Be careful out there.

Omicron and US Politics send Asia stocks lower.

As outlined above, a combination of increasing omicron nerves, particularly in the UK and Europe, and the failure of President Biden’s spending plan to past must with Senator Manchin, has seen Asian equities head directly South in sympathy with Wall Street’s Friday finish. The China LPR cut rally lasted just minutes in Mainland China, highlighting the path of least resistance in Asia today.

On Friday, hawkish comments from Fed officials and omicron nerves sent Wall Street lower. The S&P 500 fall by 1.03%, with the Nasdaq holding its own, edging just 0.07% lower. Value took a bashing on Friday, the Dow Jones tumbling by 1.48% as the schizophrenic tail-chasing of the FOMO-gnomes showed no sign of waning this month. The Build Back Better failure has torpedoed US index futures today. S&P 500 futures are 1.0% lower, Nasdaq futures have plummeted by 1.15%, while Dow futures have fallen by 0.80%.

That sees Japan’s Nikkei 225 tumbling by 1.85% with South Korea’s Kospi lower by 1.50%. Mainland China’s LPR rally lasted minutes before risk aversion internationally, and fears of more government clampdowns domestically sent equities sharply lower. The Shanghai Composite is just 0.40% lower now, but the CSI 300 is down by 1.0%. China’s “national team” may be “stabilising” today. Hong Kong, by contrast, has recovered some early losses, but is still looking fragile, down 1.10% thus far.

Regional markets look no better. Singapore has fallen by 1.05%, complicated by Singtel losing a taxation case in Australia. Taipei has fallen by 0.85% while Kuala Lumpur is 0.40% lower, and Jakarta has retreated by 0.65%. Manila is 1.30%, also suffering a typhoon discount today after the weekend’s landfall, with Bangkok 1.10% in the red. By contrast, Australian markets are holding their own, helped perhaps by a lower Australian Dollar. The ASX 200 is just 0.15% lower, while the All Ordinaries has fallen a relatively modest 0.35%.

Risk aversion lifts the US Dollar.

There’s something to be said for being the least-ugly horse in the glue factory, and the US Dollar seems to be that horse right now. On Friday, risk aversion saw the dollar index soar by 0.65% to 96.67, before edging lower to 96.60 in Asia. Chief losers were the low yielders, notably the Euro and the Yen. The incipient rally in the world’s most popular sentiment indicators, the Canadian, Australian and New Zealand Dollars, was also quickly snuffed out. US treasury yields are falling in Asia today, indicative of haven flows continuing in US bonds, and that alone should limit US Dollar pullbacks. 96.00 and 97.00 should contain the dollar index nicely this week, with a daily close above or below signalling the US Dollars next directional move.

With virus restrictions ramping up in Europe, EUR/USD’s recovery rally ended as soon as it began on Friday, falling 0.70% to 1.1235, before short-covering lifted it to 1.1248 today. The single currency has failed several times above 1.1360 last week, and weekend developments do not give much reason to change that opinion. Rallies are there to be sold with a failure of 1.1200 opening the downside to 1.1000. EUR/USD has multi-decade support at 1.0700.

USD/JPY has support at 113.00 and with the Bank of Japan reiterating the last 30 years of guidance this morning, that is it is not time to start withdrawing stimulus, the topside remains the weakest link. Having failed ahead of 1.3400, and with virus and political woes mounting, Sterling will be challenged to even rally back to 1.3300 now. The 200-day moving average (DMA) at 1.3145 is immediate support.

As global sentiment barometers, the CAD, AUD, and NZD were stretchered of the field on Friday and have eased further today to 1.2896, 0.7120 and 0.6725 respectively. NZD/USD looks like the ugliest duckling, but all three are now back to approaching 2021 lows. Her Majesty’s Commonwealth Dominions need some good omicron news and fast.

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.

Rather surprisingly, Asian currencies remain mostly resolute in the face of a souring sentiment environment and a strong US Dollar. The main exception is the stagflation-ista Indian Rupee which is also likely suffering fast-money outflows into the year-end, having been the major beneficiary of the shared prosperity clampdowns in China. The main reason for Asian FX fortitude lies with the Chinese Yuan I believe. Despite the PBOC setting weaker Yuan fixes of late, the Yuan is refusing to play ball in open markets. Part of this is the China trade surplus being recycled, and not offset by open borders allowing movement. The solidity of the Yuan has acted as a stabilising influence on regional Asian currencies. Whether this continues, is open for debate.

Oil gets an Omicron/Manchin bath.

Omicron nerves are getting more frazzled by the day, especially in Europe and the UK where the spectre of tighter restrictions loom. Additionally, with Senator Manchin torpedoing the Build Back Better bill, US growth will likely take a small haircut next year. Taken in totality, oil markets are pricing in lower consumption into 2022 and Friday’s sell-off has continued with vigour in Asia this morning.

Brent crude fell by 2.20% on Friday, tumbling another 2.65% in Asia today to $71.00 a barrel. WTI has fared even worse, falling 2.25% on Friday and then dropping another 3.65% to $68.10 a barrel in the Asia session. Ominously, both contracts closed below their respective 200-DMAs on Friday.

Although the short-term outlook for oil is being sunk by negative virus and US legislative sentiment, we should not discount OPEC+ from the equation. OPEC+ left their last meeting open precisely to manage this type of situation. If Brent crude continues to head south from here, I wouldn’t discount OPEC+ stepping in to roll back their recent production increases. Given that compliance is over 100%, this would process would be easy to achieve right now.

Brent crude has resistance at $72.50 and then the 200-DMA at $73.20 a barrel. Support notionally appears at $70.20 a barrel followed by $68.00. WTI has resistance at $69.40 and then the 200-DMA at $70.50 a barrel. Support lies at $66.00 a barrel.

Gold lacks momentum either way.

Gold spiked higher on Friday, touching $1814.00 an ounce intraday, before falling back to an unchanged level at $1798.00 an ounce. In Asia, a slightly softer US Dollar and lower US 10-years have seen gold record a modest 0.23% gain to $1802.20 an ounce.

Gold’s attempts to stage a meaningful recovery do not distil confidence, with traders cutting long positions at the very first sign of trouble intra-day. Gold lacks the momentum, one way or another, to sustain a directional move up or down. In all likelihood, gold will remain a forgotten asset class and face another week of choppy range trading.

Gold has formed a rough double top around the $1815.00 region which will present a formidable barrier t$1840.00.  Support lies at $1790.00, followed by $1780.00 an ounce. $1790.00 to $1815.00 could well be the range for the week.

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

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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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Markets Today – Russia/Ukraine, Fed, Earnings, PMIs, Oil, Gold, Bitcoin

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

Another woeful start to trading on Monday, as heightened geopolitical risk compounds investor anxiety and drags on risk assets.

It could be a make or break week for the markets, with the Fed meeting on Wednesday, big tech earnings, and ongoing tensions on the Ukraine/Russia border. That may sound a bit over the top given how deep a correction we’ve already seen, particularly in the Nasdaq, but it could get much worse before it gets better.

Wednesday is going to be massive. The Fed needs to strike the right balance between taking inflation seriously and not wanting to cause further unnecessary turmoil in the markets. Not an easy balancing act when four hikes are already priced in, alongside balance sheet reduction, and some are arguing it’s not enough.

That’s a lot of pressure for a meeting that’s not really live but investors will be hanging on every single word. It won’t take much for the Fed to add to the anxiety but if they manage to strike the right chord, it could help settle the markets and draw investors back in.

And then there’s earnings. Netflix got things off to a rotten start for big tech but there’ll be plenty of opportunities to turn that around this week. The Nasdaq has fallen more than 16% from its highs and sits very close to bear market territory. Will investors be tempted back in at these levels if the other big tech names deliver?

Whatever happens, it promises to be a really interesting week in the markets and one that could go terribly wrong or be the turning point. Perhaps that’s oversimplifying things but when fear is in control as it seems to be now, it creates these kinds of extremes.

Weak PMIs as omicron weighs

The PMIs we’ve seen today won’t exactly be helping the mood but we should take them with a pinch of salt given the impact that omicron will have had. The services sector was hit particularly hard, especially in the US, but again that’s to be expected under the circumstance. While the data won’t have helped to lift the mood, it won’t change the outlook for interest rates either. There was cause for optimism in some of the UK service’s forward-looking components which bodes well for the coming months, even as households and businesses are hampered by higher energy costs and taxes.

Oil lower but fundamentals remain bullish

Oil prices are lower at the start of the week as we continue to see some profit-taking alongside another hit to risk appetite. It’s been a remarkable rally and there’s nothing to suggest that prices are peaking. It’s just come a long way in a short period of time but the fundamentals continue to look bullish.

Despite it already trading at very elevated levels, I wouldn’t be surprised if any corrective moves are relatively shallow. There’s still a big issue on the supply side, with OPEC+ unable to even come close to monthly addition targets and it’s happening at a time of strong demand.

Not to mention the fact that tensions are seriously heightened between Russia and the West and an invasion of Ukraine is becoming an increasing possibility. When energy markets are already so tight, the additional risk premium should continue to support prices.

Gold pares earlier gains

Gold got off to a decent start this week as it continued to do well in risk-averse trade, but it has since given those back to trade marginally lower on the day. Whether its performance recently is a safe haven move, inflation hedge, or a combination of the two, it’s certainly been supportive for the yellow metal. And now it’s found strong support around $1,830 where it had been seeing plenty of resistance in recent weeks before breaking higher.

That could be a bullish confirmation signal and there still appears to be a healthy amount of momentum, even as the dollar is performing well. The next big test for gold is $1,850, where it struggled on Thursday before profit-taking kicked in.

A major test of support coming for bitcoin

Another miserable day for bitcoin which is continuing to slide after surpassing the 50% mark a little over two months after hitting record highs. It’s in freefall once more and really suffering in these risk-averse markets.

We’ve seen this before though, extreme moves work both ways and while the market has matured over the years, it is still a highly speculative, high-risk asset class. And high-risk assets are being pummelled.

But bitcoin now has a real test on its hands. The psychological blow of losing $40,000 is nothing compared to what happens if $30,000 falls. This is a major level of technical support that held throughout 2021, despite numerous tests early in the year and then throughout the summer. If this falls, it could get very messy.

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