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Omicron Fears Continue Receding

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Omicron variant

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

Omicron fears continued to fade overnight, in North America at least, propelling the S&P 500 and Dow Jones to record closes, lifting oil prices, and weighing on the US Dollar. Even gold managed to recoup most of its intra-day losses as optimistic long positions were once again culled.

The upbeat mood was helped along by better than expected US Retail Sales and larger than expected drops in US crude oil and gasoline inventories, suggesting that despite the current virus wave, the US domestic economy continues to power forward. A dearth of heavy-duty data releases globally this week continues to leave markets driven by sentiment and by sentiment, I mean omicron headlines.

China has also shrugged of tightening virus measures in the city of Xi’an, and a Bloomberg report indicating that Evergrande Property has once again missed two offshore bond payments on Tuesday, totalling around USD 220 million. A Ministry of Finance official said that China would guide interest rates lower for 2022 government bond issuance, which despite sounding a little bit illegal potentially in other countries, is a reason for cheer in China stocks, which are performing well today. The controversial IPO of SenseTime in Hong Kong today, up 25.0%, is also lifting the animal spirits of local investors.

Today’s only significant data release in Asia, South Korean Industrial Production, rose to a 17-month high of 5.10% MoM. However, it was overshadowed by a virus-induced slump of 1.90% MoM by Retail Sales in November, with the Kospi gently lower today.

Tonights US Initial Jobless Claims will be of passing interest, a fall below 200,000 for the weekly number likely reinforcing the bullish sentiment dominating markets. Far more important will be China’s official Manufacturing and Non-Manufacturing PMIs for December released tomorrow morning. We should get a very binary outcome, up or down, on a decent deviation from the forecast 50.50 and 52.5 respectively. Otherwise, I expect the modestly bullish risk appetite washing through asset classes to continue as holiday season markets continue.

Asian equities are mixed.

Wall Street rose modestly overnight as receding omicron fears continued attracting buyers out of cover and back into equities, with the S&P 500 and Dow Jones having record closes. The S&P 500 rose by 0.14%, the Nasdaq eased by just 0.10%, and the Dow Jones rose by 0.25%. Most price action needs to be taken with a grain of salt at this time of the year, but the omicron rear-view mirror trade appears to be favouring value over growth right now. In Asia, some long-covering has appeared, pushing futures on all three slightly lower by 0.05%.

Asia is having a mixed day in contrast, and it appears that some pre-New-Years-Eve book squaring is weighing on some markets. Japan’s Nikkei 225 has fallen by 0.35%, with South Korea’s Kospi down by 0.40%. Mainland China is enjoying a firm session, helped by dovish MoF comments earlier this morning around bond yields. The Shanghai Composite is 0.80% higher, while the CSI 300 has jumped by 1.05%. Hong Kong is just 0.30% higher, a successful SenseTime IPO balanced by a slump in Evergrande stock after more missed offshore bond payments.

Singapore has eased by 0.30%, while Taipei and Jakarta are just 0.05% lower, and Kuala Lumpur is down 0.10%. Bangkok is 0.05% higher with Manila closed for a public holiday. Similarly, Australian markets are also subdued ahead of New Year, the ASC 200 and All Ordinaries edging 0.10% lower. Asia, ex-China, looks to have closed their books for the year.

US Dollar fall resumes.

After trading sideways for a few sessions, receding omicron concerns amongst investors saw the US Dollar resume its gentle retreat overnight as traders moved out of defensive positioning. The dollar index fell by 0.28% to 95.89, before rising to 95.95 in listless Asian trading. Support at 95.85 remains marginally intact, and a daily close below 95.80 should signal further losses to 95.50.

Major currencies continue to build modest gains with EUR/USD rising to 1.1345, and GBP/USD jumping to 1.3485 as omicron hospitalisations remain controllable, even as infection numbers surge. USD/JPY has added 20 points to recapture 115.00 as defensive long-yen positioning continues to be unwound., AUD/USD has risen slightly to 0.7250, NZD/USD to 0.6845, and USD/CAD has eased to 1.2790 as investor risk appetite continues to improve.

Asian currencies have performed well this week, backstopped by a stubbornly firm Chinese Yuan, despite weaker PBOC fixings. One would have to say that the renewed risk appetite from international investors is being most strongly expressed in regional Asian currencies at the moment.

Oil edges higher.

Oil prices edged higher overnight thanks to larger than expected falls in US crude and gasoline inventories and receding virus nerves. Brent crude tested $80.00 a barrel intraday but finished the session 0.25% higher at $79.35. Crude inventories pushed WTI 0.75% higher to $76.60 a barrel. Asia has been modestly positive, lifting Brent and WTI 0.30% higher to $79.50 and $76.80 a barrel, respectively.

Brent crude has support at $78.15 and then $77.30 a barrel, its 100-day moving average (DMA). It has resistance at $80.00 a barrel, where it failed once again overnight.  WTI has support at $75.40 and then $74.45, it’s 100-DMA. It has resistance at $77.50 a barrel, near to its overnight high.

Gold flops and recovers.

Gold showed, once again, how frail bullish sentiment is as recent long positions were stopped out overnight, gold falling $26 an ounce intraday to $1789.50 before a weaker US Dollar led to an incipient recovery to $1801.00 in Asia today.

Gold’s attempts to stage a meaningful recovery remain unconvincing, with traders cutting long positions at the very first sign of trouble intra-day.It cleared the double top around the $1815.00 region but stalled just above at $1820.00.  It faces resistance also at $1840.00 an ounce.  Support lies at $1790.00, followed by $1780.00 an ounce. $1790.00 to $1815.00 continues to be my call for the range for the week.

With the US Dollar looking more vulnerable to positive virus sentiment now, gold could potentially move higher throughout this week, but I still doubt it could sustain those gains. Traders should stay nimble.

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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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