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Rate Hike Frenzy Continues

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

It was another choppy session overnight in equity and currency markets, followed today, by another cautious Asian session on equity markets, with forex markets marching on the spot. In other words, business as usual for the past few days.

Federal Reserve rate hike nerves continue to grow tauter after Friday’s fall in unemployment and rise in employment cost indexes. From three hikes, I am now hearing for hikes could be possible this year. I would have been laughed out of the room for saying as much a month ago. Actually, I was, it’s funny how quickly sentiment shifts.

Given how cautious the FOMC has been over the past two years, to the point of appearing snail-like, I am struggling to see them hitting the panic button right now. As such I am struggling to pencil in a March hike just as the Fed taper finishes, although I don’t disagree with three hikes across all of 2022. I am definitely disagreeing with four hikes. As such, I do believe we may be approaching “peak Fed-fear” for now. That could see a sharp jump for equities, a retreat by US yields and the US Dollar. The first move the market throws the kitchen sink at is usually the wrong one, always fade January.

Wall Street spent much of the evening on the back foot, especially the interest rate sensitive Nasdaq. It’s sudden rally into positive territory towards the end of the session. The sudden reversal was put down to “bottom-fishing” and I’ll not disagree with that. But I believe the volatility is being spurred by the US monetary policy outlook. Until just how hawkish, or not, the FOMC will be, becomes clearer, we can expect more days with a lot of intra-day noise, but not change by the close, to be ahead.

Data wise, Asia’s calendar today is fairly quiet. Indonesia and Australian Retail Sales for November outperformed, reflecting the recovery in consumer sentiment in both post-delta. The arrival of omicron, particularly in Australia, will likely mean a new year’s hit to consumer demand once again. Apart from that, markets will be awaiting China CPI tomorrow morning and US CPI tomorrow evening as the week’s highlights.

Readers should watch the situation in China as well. Evergrande dodged another bullet yesterday by engineering a domestic bond extension with creditors. But Evergrande, Shimao and other private property developers remain in deep trouble and a slow-moving credit trainwreck. It has the potential to further cut into China’s growth prospects this year. Likewise, the omicron variant keeps popping up in small numbers across China, even as it and Hong Kong tighten restrictions. The only way for Covid-zero policy countries in 2022 is down, whether by wider outbreaks or social restrictions.

Another mixed day for Asian equities.

Wall Street had a schizophrenic session overnight, falling hard for most of the day as markets continued winding themselves up that the Federal Reserve could tighten by as early as March, amid escalating inflation concerns. It is very much a short-term phenomenon though, as US inflation break evens all the way from 1 to 10 years are still pricing in a return to a 2.0% inflation nirvana. Markets rallied sharply for no apparent reason near the end of the session hinting that fast-money flows are dominating at the moment. The S&P 500 finished 0.14% lower even as the Nasdaq unwound over 2.0% intraday losses to finish 0.05% higher. The Dow Jones suffered a late value to growth rotations, falling 0.46%.

In Asia, it is another mixed day once again with the value-centric ASEAN markets outperforming. With Japan returning from holiday today, the Nikkei 225 has played catchup as it falls 0.93%. South Korea’s Kospi by contrast, has eased just 0.15%, with both Japan and South Korean markets ignoring yet another North Korean missile test this morning.

In China, upward momentum quickly faded and reversed as Covid-19 restrictions were tightened once again in some Chinese cities, notably Zhengzhou today. With China showing no signs of opening the stimulus floodgates, swirling virus nerves and property sector concerns, local markets are struggling to maintain any sort of upward momentum. The Shanghai Composite is 0.45% lower, while the CSI 300 is down 0.75%. Hong Kong has gained a temporary respite from the latest Evergrande debt rollover, but the Hang Seng is still only 0.15% higher.

Singapore is 0.45% higher today as it continues to be a defensive play versus Northern Asia with investors still wanting Asia exposure. Taipei, Jakarta and Kuala Lumpur are 0.25% higher, with Manila down 0.15% while Bangkok has climbed 0.45% higher. A weak and nervous New York session, and spiralling omicron cases Australian markets sharply lower today. The All Ordinaries and ASX 200 have tumbled by 0.80%.

Europe should open neutral this morning and I believe markets there will remain more focused on movements in German Bund yields, than noise from Wall Street.

Currency markets nervously range-trade.

The US Dollar rallied sharply overnight as US equities headed south, only to give back most of those gains towards the end of the New York session as the Nasdaq recovered. US Bond markets provided no direction with yields almost unchanged. It all paints a picture of nervous tail-chasing as the dollar index finished 0.22% higher at 95.95, before edging lower to 94.85 in Asia today. In the bigger picture, the dollar index is range trading. I am waiting for 95.50 or 96.50 to break to signal the US Dollar’s next directional move.

EUR/USD and GBP/USD both feel intra-session before steadying at the New York close. GBP/USD continues to erode resistance at 1.3600, signalling a further rally to 1.3800 if broken. EUR/USD’s is marooned at 1.1340 and only a close above 1.1400 will lessen the bearish outlook. Risks are still skewed towards a retest of 1.1200, especially if German Bund yields stop rising. USD/JPY has eased to 115.25 but remains a bid on dips into 115.00 as long as US yields remain at these levels, targeting 118.00 initially.

AUD/USD and NZD/USD are unmoved at 0.7190 and 0.6190 today. Both continue to be bounced around on RORO (risk-on, risk-off) sentiment swings, but ultimately, are range-trading right now. Key levels for AUD/USD are 0.7150 and 0.7300, and 0.6700 and 0.6850 for NZD/USD. USD/CAD is trading sideways at 1.2650 and has support at 1.2600, and resistance at 1.2700.

USD/Asia has run into offers overnight and I suspect some regional central banks may be looking to cap the US Dollar’s rally for now. USD/KRW has fallen to 1195.00, USD/PHP to 51.15, while USD/MYR has eased to 4.1940, and USD/THB to 33.520. USD/CNY and USD/CNH remain just below 6.3800 which is becoming a key pivot point now. The key directional driver this week will be the US CPI data, especially if a high CPI print lifts Fed hiking expectations, pressuring Asian FX.

Oil consolidates.

Oil prices eased slightly overnight in corrective price action consistent with a consolidation of oil’s recent impressive price gains. Brent crude fell by 1.0% to $81.00, rising to $81.30 a barrel in Asia. WTI fell by 0.55% to $78.40, rising slightly to $78.75 in Asian trading.

Despite prices easing again overnight, oil continues to hold onto almost all its gains since the start of December. Omicron has yet to wreak the havoc of the delta variant and may never do so, keeping the global recovery on track, and OPEC+ compliance means that spare production capacity is limited. Both factors will continue supporting oil’s bullish outlook.

In the nearer term, Brent crude has support at $79.60 and the 100-day moving average (DMA) at $78.55 a barrel. A rally through $83.00 signals more gains to $86.00 a barrel.  WTI has support at $78.00 and $77.50 a barrel, with resistance at $80.50 and 82.00 a barrel.

Gold rallies in Asia.

Gold continued range-trading overnight. With US yields moving sideways buyers cautiously push gold higher by 0.30% to $1801.75 an ounce overnight. In Asia, the buying momentum has continued, perhaps after North Korea’s latest missile test today. Gold has risen 0.45% to $1809.50 an ounce.

Gold has resistance here at $1810.00 and $1830.00 an ounce. Support lies at $1785.00, followed by $1780.00 and $1760.00 an ounce. Gold continues to drag in hapless bulls to false rallies, and as such, I believe gold will trade in a $1775.00 to $1815.00 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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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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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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