The Omicron/Build Back Better (BBB) sell-off seen yesterday morning in Asia, continued throughout the day, sweeping into Europe and US markets. However, in line with my view that tail-chasing range-trading will dominate December, Asian equity markets are rising sharply today. With no news of note hitting the wires, it appears that short-covering in US index futures has been enough to attract the fast money back into local markets in a classic follow-the-leader move.
Similarly, the US Dollar retreated slightly overnight as well as traders booked short-term profits on long positions, while oil, which looked to be suffering some ugly stop-loss price action in thin markets overnight, recovered to finish only slightly down. Notably, the risk-sentiment three amigos, the CAD, AUD and NZD, didn’t rally at all, and remain near year lows. That is as good a warning to the fast-money FOMO gnomes as any, that sentiment remains exceedingly fragile, complicated by rapidly thinning liquidity in asset classes ahead of the holiday season and year-end.
We are one headline away, be it omicron or something else, from normal service resuming. I’ll say it again, December is about V for Volatility and not directional market trends. Searching for conspiracies or rays of hope on every intraday move is a fool’s errand. A case in point is the Turkish Lira which had the mother of all rallies overnight, falling 11.0% intraday, but finishing the overnight session over 20% higher after President Erdogan announced new policy measures to protect the Lira savings from currency depreciation. A look through the new measures left me scratching my head about how they would ever be enacted and executed, especially in a short time. USD/TRY is already 2.40% higher in Asia and all I can say to President Erdogan is thanks for the dip.
The data calendar in Asia is threadbare once again, yesterday’s China Loan Prime Rate announcements being the highlight of the week for the region. The action will be in the US tomorrow with some old news Q3 GDP and PCE Prices, followed by the far more relevant US Personal Income/Spending and Durable Goods for November, plus the weekly Jobless Claims, on Thursday. There is also a swath of minor inflation data released from around the world that will probably only be interesting if it shows large falls that aren’t due to baseline effects. Otherwise, US politics and virus headlines will continue to dominate proceedings.
Relief rally lifts Asian equities.
Asian equities are mostly higher today, thanks to a wave of short-covering sharply lifting US index futures in ever thinner liquidity. Nothing has changed in the world, but the pull of buy-the-dip is stronger than anything the Sackler’s made but should also be approached with caution.
Overnight US equities followed the Asian sell-off from early Monday, finishing deeply in the red. The S&P 500 dropped by 1.11%, while the Nasdaq and Dow Jones retreated by 1.23%. In Asian trading, futures on all three have staged a sharp rally, though. S&P 500 futures are 0.60% higher, while Nasdaq futures have jumped by 0.80% and Dow Jones futures have climbed by 0.50%.
That has been enough to sucker the fast-money FOMO gnomes in Asia into action, nowhere more evident than Japan’s Nikkei 225, which has leapt 2.05% higher, whereas South Korea’s Kospi is up only 0.20%, with Mainland China’s Shanghai Composite and CSI 300 are unchanged. Press suggesting that more clampdowns could be on the way, which should be a surprise to precisely nobody. Hong Kong has rallied modestly, rising 0.30%.
Singapore has risen by 0.60% with Taipei climbing by 0.55%, while Kuala Lumpur and Jakarta remain stubbornly unchanged. Manila is 0.35% lower, but Bangkok has added 0.60%. Australian markets have also joined in some pre-Christmas cheer, the ASX 200 rising 0.55%, and the All Ordinaries by 0.65%.
European investors may cautiously dip their toes back in the water, assuming US index futures maintain their gains. However, with the omicron situation darkening in the UK, and on the continent, by the day, I am not expecting much of a rally, if any.
US Dollar is modestly lower.
The dollar index fell slightly overnight as some profit-taking of Friday’s monster US Dollar rally set in as the new wires stayed relatively quiet. The dollar index fell 0.17% to 96.50, edging lower to 96.46 in sedate Asian trading. I expect the chop-fest to continue, with a move through either 96.00 or 97.00 indicating the US Dollars next directional move.
EUR/USD staged a modest technical recovery, rising to 1.1285 by this morning, with 1.1200 to 1.1350 likely to contain this week. GBP/USD has continued falling to 1.3215 today as its virus situation and political turmoil weigh. Failure of 1.3150 will signal a potential test of 1.3000. With US yields hardly moved overnight, USD/JPY remains marooned at 113.70, bring a good book to read.
As I stated above, the sentiment indicating three amigos, the CAD, AUD and NZD, did not rally on US Dollar weakness overnight elsewhere. That suggests that markets remain vulnerable to more virus headlines and that dips in the US Dollar may be shallow.
Asian currencies have had another mixed performance. The Yuan continues to strengthen despite weaker fixes from the PBOC. The Indian Rupee notably, gained some respite on US Dollar weakness. The firm Chinese Yuan and diminishing holiday season liquidity are dampening activity in the regional Asia FX space, and I expect range trading to dominate over the rest of the week.
Headless chickens rule oil markets.
Brent crude and WTI finished on moderately lower overnight, but that belied the aggressive intraday price action with both contracts falling over $3.0 a barrel intraday. The intraday capitulation reversed leaving Brent crude 1.20% lower at $72.10, and WTI 1.60% lower at $69.20 a barrel. In Asia, the slight rebound in sentiment has seen both contracts add 10 cents a barrel.
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 is at $69.00 a barrel. WTI has resistance at $69.40 and then the 200-DMA at $70.50 a barrel. Support lies at $66.00 a barrel.
Gold range trade continues.
Gold edged lower overnight as momentum once again faded, leaving the yellow metal 0.40% lower at $1790.50 an ounce. In Asia, the recovery in sentiment has lifted it 0.10% higher to $1792.30 an ounce.
Gold’s attempts to stage a meaningful recovery continue to disappoint, 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. Likely, 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.