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Jerome and the Three Bears

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

Federal Reserve Chairman Jerome Powell, testifying at his confirmation hearing on the Hill, soothed markets overnight in a performance worthy of Goldilocks and the Three Bears. Mr Powell noted that the Fed could hike rates to rein in inflation, intended to start the balance sheet run-off sooner rather than later, but also said inflationary pressures would peak mid-year. What he didn’t say was also important. He didn’t back four rate hikes in 2022, nor a March start to hikes, nor did he give any details on when the Fed balance sheet run-off would start.

It was a masterful performance really, leaving the bowls neither too full nor too shallow; but just right from the financial market’s perspective. Ignoring recent comments from hawkish FOMC members while reinforcing that the Fed has likely accomplished its employment objective and was well aware of the inflation one. Certainly, if Mr Powell believes inflation will peak in H2 2022, there seems no need for a panicked start to hikes in March, let alone four of them. If anything, that the Fed has shown over the past two years, it is an abundance of caution and patience.

That was enough to unleash the buy-the-dip gnomes, who had been straining at the leash these past few sessions. Equities rallied, oil rallied, US yields fell, the US Dollar fell, and even gold rallied. As goldilocks as it gets. Even if the Fed hikes to 1.0%-1.25% this year, real US yields will still be very negative. Hardly corporate finance Armageddon. The music can still play in equity markets in 2022, it’s just that we’ve likely seen the best of the technology gains, and markets will see a lot more two-way price action to keep them honest. Nor am I ruling out a 10-15% drop in US markets and other Caligula’s of Valuations, they would still be comfortably in a longer-term bullish uptrend.

Today has seen a few data releases from Asian heavyweights China, South Korea, and Japan. All of which sounded cautious notes for varying reasons. China’s YoY Inflation Dec came in at 1.50% vs 1.80% exp. South Korean Unemployment crept higher unexpectedly to 3.80%. In both circumstances, the blame can be laid on omicron restrictions crimping domestic economic activity. Cases are quietly climbing in Mainland China and Hong Kong, along with widening restrictions, and with Covid-zero policies in place, omicron presents a serious growth risk to China if it fully jumps the fence.

Conversely, Japan’s Reuter’s Tankan Index fell to 17.0 for January from 22.0 in December as Japanese businesses grappled with rising prices. That’s correct, your eyes are not deceiving you. Japanese businesses are grappling with rising prices and may have to raise prices. That will be a 30-year shock to the system but don’t expect any action from the Bank of Japan. The pandemic may have finally done the job that the Ministry of Finance and bank of Japan spent decades failing at.

India releases inflation later this evening and there are definite upside risks to the expected 5.80% print. Throw in rising omicron cases into a low vaccination population, and new social restrictions in cities such as New Delhi, and the ingredients are there for a stagflationary surprise. A high inflation print tonight will do the INR and Sensex no favours tomorrow.

We also get German Wholesales Prices and Eurozone Industrial Production this afternoon, but the main event will be the US Headline and Core Inflation YoY for December, expected at 7.0% and 5.40% respectively. Although Mr Powell managed to goldilocks the market overnight, keeping his three bears at bay, if US inflation tops 7.0% this evening, all his good work could be undone.

Asian equities jump on Wall Street rally.

The soothing words of Jerome Powell overnight unleashed anxiously waiting, but side-lined buyers, resulting in a strong overnight recovery by Wall Street. The S&P 500 rallied 0.92%, the Nasdaq leapt higher by 1.41%, and the Dow Jones rose 0.52%. In Asia, futures on all three have held steady.

Asian markets have coat tailed the New York rally and moved higher today. Notably, those that have struggled as the Nasdaq fell over the past few seasons. The Nikkei 225 has jumped 1.75% higher in response, with the South Korean Kospi rallying 1.15%, and Hong Kong also leaping 1.75% higher.

Mainland China’s Shanghai Composite has drifted 0.15% higher, with the more growth-centric CSI 300 climbing by 0.45%. Singapore and Taipei have drifted 0.15% higher, while Jakarta has gained 0.45%, and Kuala Lumpa and Manilla are unchanged. Australia’s ASX 200 and All Ordinaries have added 0.45% today.

The broader rally has favoured more value-centric markets with a heavier correlation to the Nasdaq today. As such, I am not expecting fireworks from Europe when it opens, having enjoyed a good season with the US overnight. The US inflation data will be the next hurdle for the equity rally continuance. Above 7.0% likely brings the inflation trade back, limiting gains, while a sub 6.50% headline should keep the party going as Fed hiking timetables get reset back to mid-year.

Risk sentiment recovery pushes US Dollar lower.

The Powell-inspired risk sentiment rally overnight saw US yields edge lower and weighed heavily on the US Dollar, which staged a broad retreat. The dollar index fell 0.36% to 95.60, just above support at 95.50. The US inflation data tonight will either confirm a period of US Dollar weakness or result in a nasty whipsaw price action. In the meantime, I wait patiently for a daily close above or below 95.50 or 96.50 to signal the US Dollar’s next directional move.

EUR/USD and GBP/USD gained around 0.40% to 1.1370 and 1.3640, where they remain unchanged in Asia. EUR/USD’ needs to close above 1.1400 to lessen the bearish outlook. However, GBP/USD has closed above 1.3600 and should now target 1.3800 in the days ahead, partying like some private drinks at 10 Downing Street. USD/JPY is steady at 115.25 but remains a bid on dips into 115.00 as long as US yields remain at these levels.

AUD/USD and NZD/USD are unmoved in Asia after edging higher to 0.7210 and 0.6790. Both continue to be bounced around on RORO (risk-on, risk-off) sentiment swings, but ultimately, are range-trading right now. The moves higher overnight weren’t overly convincing suggesting nerves ahead of US inflation data tonight. Key levels for AUD/USD are 0.7150 and 0.7300, and 0.6700 and 0.6850 for NZD/USD.

USD/CAD tumbled 0.85% to 1.2570 overnight and has activated a hand-and-shoulders formation after closing below the neckline at 1.2630. The reasons for the Canadian Dollar rally still elude me but I will respect the technical picture. That now suggest USD/CAD can fall to between 1.2300 and 1.2360 in the days ahead.

USD/Asia softened overnight, with regional currencies strengthening slightly as Jerome Powell took the wind out of the Fed tightening trade. USD/KRW has fallen to 1190.00, USD/PHP to 51.00, while USD/MYR has eased to 4.1790, and USD/THB to 33.369. USD/CNY and USD/CNH remain just below the key pivot level at 6.3800, trading at 6.3650 and 6.3700 respectively today. which is becoming a key pivot point now. Activity is muted in Asia with the region clearly waiting for US inflation data tonight before deciding its next moves.

Oil prices leap higher after Powell testimony.

Oil prices rocketed higher overnight as the Powell testimony removed the threat of early rate hikes, for now, allowing the fundamentals of constrained OEPC+ production, and an omi-gone variant recovery, to reassert themselves with a vengeance. Brent crude rocketed 3.25% higher to $83.60 a barrel, while WTI leapt 3.65% higher to $81.25 a barrel. Both contracts have firmed slightly in Asia to $83.80 and $81.45 a barrel respectively.

This sets the scene for more gains in the week ahead, having traded sideways the past few sessions as equity markets have corrected lower. It seems that even the threat of faster tightening by the Fed over the past few days couldn’t undermine oil prices, and if US inflation is lower than 6.50% tonight, after the Powell comments overnight, then oil prices should continue rising. Assuming China doesn’t suffer a sharp slowdown, that omicron actually becomes omi-gone, and with OPEC+’s ability to raise production clearly limited, I see no reason why Brent crude cannot move towards $100.00 in Q1, possibly sooner. Having said that, I acknowledge there are plenty of variable outcomes in the previous sentence, the biggest threat being omicron in China, India, and Indonesia.

In the nearer term, Brent crude has support at $83.00 and $81.00 a barrel, with resistance at $86.00 a barrel.  WTI has support at $80.50 and $78.50 a barrel, with resistance at $82.00 and 85.00 a barrel. One note of caution is that both Relative Strength Indexes (RSIs) are moving towards overbought. That could limit oil’s gains for the rest of the week and could signal a short-term correction but won’t change the underlying bullish outlook.

Gold rallies in Asia.

Gold saw the fast-money buyers return overnight as the Fed tightening trade was stopped in its tracks by Jerome Powell’s testimony. That pushed gold 1.10% higher to $1821.50 an ounce. As ever, I believe the rally should be taken with a huge grain of salt, as past price action suggests gold will fall just as quickly at the first sign of stalling momentum. A higher US inflation print could create that situation tonight.

Gold has edged lower to $1819.00 an ounce in Asia and has resistance just above at $1823.50, and $1830.00 an ounce. Support lies at $1800.00, followed by $1785.00 and $1780.00 an ounce.

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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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