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Omicron Becomes Omigone

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Omicron

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

You would be hard pushed to find a reason not to be in a jubilant mood as an investor as financial markets dished out the happy new year’s overnight, the first trading day of the year. I spent it on a series of almost empty flights on the trek to managed isolation in New Zealand, but for the rest of the world, the New York session finished with plenty of New Year’s goodies. Stocks finished higher, oil moved higher, the US Dollar moved higher, and US treasury yields moved higher. All signs that the US economy is starting the year in continuing recovery mode.

The chief reason behind the return of investor confidence is omicron, a trend really occurring since Christmas and the incessant “Jeff, will we get a Santa Claus rally?” As more data pours in, it seems that yes, the virus variant is much more contagious, but it is not leading to a proportionally larger number of hospital admissions, the opposite in fact. Quid pro quo, it won’t’ stop the global economic recovery, although China will remain locked up with Hong Kong and New Zealand, therefore “buy everything.”

Tesla jumped 13.0% overnight as it delivered more cars than forecast in Q4. The cost of replacing batteries remain its dirty little secret, and is highly ironic in some ways, as a four-wheeled tree hugger that has fewer moving parts than a normally aspirated petrol burner. Google “Finn,” “explosives'”, “battery,” and “Tesla” for one man’s adventure with an “ancient” 2013 Tesla.  Apple also briefly touched a $3 trillion market cap yesterday, mostly because it’s Apple and its cool, but also because the street wanted to see a 3-handle.

One warning sign around equity exuberance though is the US bond market, with US 10-year yields climbing around 13 basis points to 1.635%, its highest, I believe, since late October. With a return of the post-Omicron buy everything trade, will come to the hard realisation that globally, inflation continues and yields globally, have likely seen the bottom. Monetary policy normalisation will be the name of the game for central banks, although it will look more normal in some countries than in others. The US, Russia, Latin America, and the Commonwealth countries will show normalisation to greater and larger extents. Japan and the Eurozone will change the names on the doors but keep monetising their government’s debt the same as ever behind it, while much of Asia, will tolerate stagflation to support growth making them mostly “bold and hold.”

Although the omicron relief trade could continue dominating investor sentiment for much of January, the new budget year always needs a “throw the kitchen sink at it” to get started, the US bond market is telling us not to get too carried away. Bitter experience also tells me that the first big direction trade of the year is usually wrong. Stock markets, in particular, will have to work much harder to make an honest dollar in 2022, as monetary policy settings get moved back from fantasy to reality.

Asian markets though are showing omicron resilience, with China and pan-Asian Manufacturing PMIs over the last couple of days, mostly outperforming for December. Today’s China Caixin Manufacturing PMI rose to 50.9, while Japan’s Jibun Bank PMI reading held steady at 54.3. Yesterday, Singapore GDP also proved resilient, with 2021 GDP finishing 7.20% for the year, completely reversing with interest, the 5.40% contraction of 2020. That, interestingly, is a trend that has been repeated all over the world, it just doesn’t feel like it in our everyday life.

Germany’s Unemployment and Retail Sales kick off Europe’s week, along with French Inflation. The US releases the JOLTS Job Openings and USD ISM Manufacturing PMI. Omicron headlines will likely have a diminishing impact now that the new year has started and with the data seemingly clear about its virulence. If today’s data from Germany and the US show employment and job vacancies holding firm versus omicron, investors should the year in an ebullient mood as omicron becomes omigone

Asia’s cautious equity mood continues.

With most of the region back at work today, Asian markets have refused to blindly piggyback New York’s overnight rally higher, even as the omicron relief rally gathers steam. The Indonesia coal export ban, and the suspension of Evergrande shares yesterday left plenty of two-way risk on the table for Asia, especially where China is concerned.  Overnight, Wall Street powered higher, led by Tesla and Apple. The S&P 500 rose by 0.53%, the Nasdaq rallied by 1.03%, and the Dow Jones climbed by 0.68%. Futures remain unchanged on all three indexes in Asian trading.

Wall Street’s performance has green-lighted gains in Japan today, but Asia is still displaying a mixed performance. The Nikkei 225 is 1.35%, higher even as the Kospi falls by 0.45%. Property and energy nerves are sweeping Chinese markets, as well as a partial virus shut-down of the city of Zhengzhou, booster requirements in Hong Kong and tighter information security requirements for companies wishing to IPO overseas. With that number of headwinds, it is not surprising that China is in the red. The Shanghai Composite is 0.65% lower, the CSI 300 is 1.20% lower, and Hong Kong is down 0.25%.

Singapore has jumped 1,0% higher after impressive GDP data yesterday, with Taiwan also performing well, climbing 0.90%. Jakarta has risen by 0.65%, but Kuala Lumpur has fallen by -.70%, with Manila down 1.10%, while Bangkok has climbed 1.10%, Australian markets have jumped on the Wall Street rally, helped by low hospitalisation rates as omicron sweeps the country. The All Ordinaries are 0.77% higher, with the ASX 200 rising by 0.87%.

With an underlying omicron is omigone theme pervading, today should see a positive start to European trading.

US Dollar rises sharply on higher yields.

The US dollar rallied sharply against the major currencies overnight as US 10-year bond yields surged back above 1.60%. The dollar index of major currencies rose sharply by 0.58% to 96.22 overnight, more than offsetting the previous days falls and leaving major technical support at 95.50 intact once again.

EUR/USD has fallen 0.70% to 1.1300 and has traced out a number of failures ahead of 1.1400 resistance. Failure of support at 1.1270 heralds a retest of 1.1200. GBP/USD has fallen 0.40% to 1.3470, with resistance at 2.3550, last week’s high and the 100-day moving average (DMA). Failure of support at 1.3400 signals the next leg lower. The widening US/Japan rate differential has pushed USD/JPY 40 points higher to 115.75 today, Asia’s biggest FX mover. Assuming that US yields remain elevated, there is nothing on the charts to stop a rally to 118.00 in the coming weeks.

The US Dollar rally stopped the AUD/NZD and CAD rallies in their track, marking an abrupt end to their holiday season rallies. Although equities rallied on diminishing omicron fears, that same situation has allowed US yields to rise sharply, lifting the US Dollar. The US Dollar rally could peter out if sentiment remains strong, but the moves in equities and currencies highlight what a messy year could be ahead, without the unifying theme of the post-vaccine recovery central bank back-stop in play. In the meantime, AUD/USD has fallen to 0.7200 overnight and is in danger of retesting 0.7100. NZD/USD has fallen to 0.67800 and could revisit 0.6700 initially, and USD/CAD moving higher to 1.2800.

With USD/CNY anchored around 6.3700, and China content with monetary settings for now, including daily liquidity via the repo, Asian currencies have remained anchored as well. However, some cracks are starting to appear, with USD/KRW rising to 1194.50 today and USD/MYR jumping higher to 4.1800. If US yields continue to move higher this week, Asian FX weakness could become more widespread, with INR, PHP, and IDR the most vulnerable to widening yield differential perceptions.

Oil moves to the top of its range.

Oil prices edged higher overnight, Brent crude rising 1.25% to $78.90, and WTI climbing 0.85% to $75.95 barrel. Diminishing omicron concerns have supported oil through the holiday period and the spectre of OPEC+ now looms over energy markets. The OPEC+ monthly meeting has rolled around quickly this time, probably because they left the last one open in December as omicron hit, to support prices. The JMMC and full grouping meet this week with the OPEC+ still-open meeting oil floor having done its job without costing a cent. I do not expect any changes or surprises from OPEC+ this week, but its mere threat should keep a floor under prices this week.

Oil has risen again in Asia, helped along by Indonesia banning coal exports over the weekend, having exported so much this year that their own stocks in Java for power generation are now dangerously low. The ban will impact China the most initially, but given their inventory building, should not cause too much of a stir. In the meantime, it has been enough to life oil prices in Asia by around 0.50% to $79.35 for Brent, and $7.35 a barrel on WTI.

Brent crude has support at $77.60 and $77.50 barrel, its 100-day moving average (DMA), followed by 77.30. It has resistance at $80.00, and $82.00 a barrel.  WTI has support at $75.00 and then $74.60, it’s 100-DMA. It has resistance at $77.50 a barrel, and then $79.30.

Gold’s Christmas rally ends abruptly.

Gold showed, once again, how frail bullish sentiment is as recent long positions were stopped out overnight, gold falling 1.50%, or $28.50 an ounce, intraday to close at $1801.50 an ounce. Some short-covering has seen it creep up to 1804.00 an ounce in Asia.

Gold’s attempts to stage a meaningful recovery remain unconvincing, with traders cutting long positions at the very first sign of trouble intra-day. This time it was the US bond market, with yields rising sharply and sending gold into an equally vicious tail-spin, unwinding its entire Christmas rally. This is not the first time we have seen this sort of price action in the last month, with golds most consistent pricing factor being its ability to disappoint bullish investors.

Gold has resistance at $1830.00 and $1840.00 an ounce, although it would be a huge surprise if we saw those levels this week. Support lies at $1790.00, followed by $1780.00 an ounce. $1790.00 to $1820.00 is my call for the range this week.

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Markets

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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Crude Oil

Oil Extends Gain Above $86 Per Barrel Amid Tight Supply

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Oil

Brent crude oil extended gains above $86.16 per barrel on Monday as global oil investors are projecting that supply will remain tight despite the surge in Libya crude oil production. The increase, they bet would be offset by restraint from top crude oil producers.

Frantic oil buying, driven by supply outages and signs the Omicron coronavirus variant will not be as disruptive to fuel demand as previously feared, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained for a while longer, traders said.

“The bullish sentiment is continuing as (producer group) OPEC+ is not providing enough supply to meet strong global demand,” said Fujitomi Securities analyst Toshitaka Tazawa.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, together known as OPEC+, are gradually relaxing output cuts implemented when demand collapsed in 2020.

But many smaller producers cannot raise supply and others have been wary of pumping too much oil in case of renewed COVID-19 setbacks.

Meanwhile, Libya’s total oil output is back to 1.2 million barrels per day (bpd), according to National Oil Corp. Libyan output was about 900,000 bpd last week owing to a blockade of western oilfields.

“Libya’s oil production had dropped to a good 700,000 bpd at the start of the year, which had played its part in the price rise,” said Commerzbank analyst Carsten Fritsch.

Concerns over supply constraints outweighed the news of China’s possible oil release from reserves, said Fujitomi’s Tazawa.

Sources told Reuters that China plans to release oil reserves around the Lunar New Year holidays between Jan. 31 and Feb. 6 as part of a plan coordinated by the United States to reduce global prices.

Saudi Energy Minister Prince Abdulaziz bin Salman said on Monday that it is the prerogative of the U.S. government whether to release supply from strategic petroleum reserves.

Festering geopolitical threats to supply are also supporting bullish sentiment, analysts said.

U.S. officials voiced fears on Friday that Russia was preparing to attack Ukraine if diplomacy failed. Russia, which has amassed 100,000 troops on Ukraine’s border, released pictures of its forces on the move.

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Markets

Markets Today – Inflation, Jobless Claims, Boris Blunder, Oil, Gold, Bitcoin

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outlook

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

It’s been a rollercoaster start to the year and as we head into earnings season, it’s hard to say exactly where investors stand.

Blocking out the January noise is one thing but it’s made far more complicated by omicron, inflation, and the rapid evolution of monetary policy. Yesterday’s reaction to the inflation data was a case in point. The data mostly exceeded expectations, albeit marginally, while headline inflation was a near 40-year high of 7%. And yet the response was broadly positive.

I get that traders were perhaps fearing the worst and, as I’ve referenced before, it does feel like markets are at peak fear on US monetary policy which could make relief rallies more likely. But there is also underlying anxiety in the markets that could make for some volatile price action for the foreseeable future.

Perhaps earnings season will bring some welcome normality to the markets after a period of fear, relief, and speculation. The fourth quarter is expected to have been another strong quarter, although the emergence of omicron will likely have had an impact during the critical holiday period for many companies. Of course, as we’ve seen throughout the pandemic, that will likely have been to the benefit of others.

And while earnings season will provide a distraction, it is happening against an uncertain backdrop for interest rates and inflation which will keep investors on their toes. It does seem that investors are on the edge of what they will tolerate and it won’t take much to push them over the edge. Which will be fine if we are near the peak of inflation, as many expect.

The data today looks a mixed bag on the face of it, with jobless claims coming in a little higher than expected, which may be down to seasonal adjustments. The overall trend remains positive and continues to point to a tight labor market. The PPI data on the other hand will be welcomed, with the headline number slipping to 0.2% month on month. Perhaps a sign of supply-side pressures finally starting to abate which will come as a relief after inflation hit a near-40 year high last month.

Sterling solid as pressure mounts on Boris

It seems impossible to ignore the political soap opera currently taking place in the UK, with Prime Minister Boris Johnson once again in the public firing line after finally admitting to attending an office party in May 2020.

In other circumstances, uncertainty around the top job in the country could bring pressure in the markets but the pound is performing very well. Perhaps that’s a reflection of the controversy that forever surrounds Boris, and we’re all therefore numb to it, or a sign of the environment we’re in that the PM being a resignation risk is further down the list when compared with inflation, interest rates, omicron, energy prices etc.

Oil remains bullish near highs

Oil prices are easing again today after moving back towards seven-year highs in recent weeks. It was given an additional bump yesterday following the release of the EIA data which showed a larger draw than expected. But with crude already trading near its peak, it maybe didn’t carry the same momentum it otherwise would.

The fundamentals continue to look bullish for gold. Temporary disruptions in Kazakhstan and Libya are close to being resolved, with the latter taking a little longer to get fully back online. But OPEC being unable to hit output targets at a time when demand remains strong is ultimately keeping prices elevated and will continue to do so.

A big test for gold

Gold is off a little today but the price remains elevated with key resistance in sight. The yellow metal has remained well supported in recent weeks even as yields around the world continue to rise in anticipation of aggressive tightening from central banks.

It could be argued that the bullish case for gold is its reputation as an inflation hedge, especially given central banks’ recent record for recognizing how severe the situation is. But with inflation likely nearing its peak, that may not last. That said, fear around Fed tightening may also be peaking which could support gold in the short-term and a break through $1,833 could signal further upside to come.

Can bitcoin break key resistance?

Bitcoin is enjoying some relief along with other risk assets and has recaptured $44,000, only a few days after briefly dipping below $40,000. That swift 10% rebound is nothing by bitcoin standards and if it can break $45,500, we could see another sharp move higher as belief starts to grow that the worst of the rout is behind it. It looks like a fragile rebound at the moment but a break of that resistance could change that.

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