Markets circle in the holding pattern

It wasn't a night to write home about overnight as investors adjusted positioning as they circled in the holding pattern ahead of tonight’s FOMC decisions. Wall Street equities gave back some of their previous day’s gains, while currencies and precious metals marched on the spot. Oil continued to climb after a much lower US API Crude Inventory number and a Federal Judge suspending President Biden's pause on new oil and gas leases.

Last night’s US Retail Sales, PPI and Industrial Production data was another nil-all draw and won't be enough to move the needle for the FOMC today. Retail Sales disappointed, as Americans finally baulked at pay more for a used car than they had to a year ago. I thought that sort of thing only happened in Singapore, but the year 2020 just keeps on giving. April Retail Sales were adjusted 1.50% higher, though, and overall retail sales fell off a very high base. PPI hit record highs for May, but the Fed can still spin that as "transitory," and Industrial Production was as expected.

The street is heavily positioned with the Fed in the transitory indication corner. The FOMC is unlikely to rock the boat tonight, and if they did, it would be a massive surprise. Don't hold out your hopes for any hint of we're beginning to think about talking about thinking about tapering either. That might have to wait until December.

If readers are wondering why the US Dollar remains so strong in that case, last night’s 20-year bond auction and the Net Long-Term Tics flows for April may hold the answer. Auction demand was firm, and the Tics data showed roughly $100 billion of inflows in April. The Tics data show the net balance of foreign investor sales and purchases of US securities to and from US residents. $100 billion is a lot of US Dollars being bought and follows a $262.40 billion inflow in March. So, there's your dollar strength right there.

The day is not without interest, though, FOMC aside. US President Biden meets Russian President Putin in Geneva today. It is unlikely anything market-moving will emerge, but any geopolitical process will a marginal positive. Perhaps tell Mr Putin you're a coffee drinker if he offers you a cup of tea Mr President.

Japan's Export and Import data was released this morning, both showing stellar increases thanks to YoY distortions. Exports surged over a wide range of sectors, but imports remained constrained, and Machinery Order data also disappointed. With a modest slowdown from pandemic restrictions locally, the BoJ is almost certain to extend pandemic support programmes at Friday's meeting even if nothing else changes, which it won't.

Asia's highlight is this afternoons China data dump. China releases Unemployment, Retail Sales, Industrial Production and Fixed Asset Investment for May at 1500 SGT. Unemployment should hold steady at 5.0%, while Retail Sales are expected to fall to around 13%, coming of a high base in April. Industrial Production should hold steady at 9.0%, while a fall in Fixed Asset Investment below 15% could cause some temporary shivers. Overall, the data won't set the world on fire after April's stellar month, and unless it misses lower by a lot, it shouldn't rock the boat.

China has announced new measures to clamp down on the shadow banking sector yesterday, requiring savings products to be held in AA+ assets. Given that much of those funds get funnelled into property developers, that sector took a bath yesterday. That, rather than nuclear power plant nerves, may have been the main reason for China's equity fall yesterday. Ironically, China is also chasing crypto miners out of the country, and they are apparently heading to Texas. 2021 is giving me some giggles, and one just can't assume we are seeing peak stupidity in any "asset" class this year. Let's hope it doesn't snow again in Texas. 

Asian equities drift mostly lower

Investors reduced exposures overnight on Wall Street ahead of today's FOMC outcome, and Asia looks like it is doing much the same. Overnight the S&P 500 finished 0.20% lower, with the Nasdaq unwinding Monday's gains as it fell by 0.71%. The Dow Jones continued edging lower, falling 0.27%.

US futures are slightly lower in Asia, with bourses across the region following Wall Street mostly lower in sympathy. The Nikkei 225 has fallen 0.30% today, but the Kospi has risen 0.60% to new record highs led by technology-related heavyweights. China markets are retreating once again as the PBOC declined to add liquidity at the reverse repo, and concerns continue over the government shadow-banking clampdown. The Shanghai Composite is 0.37% lower, with the CSI 300 down 0.70%, while Hong Kong has eased by 0.35%.

Regionally, Singapore has fallen by 0.65%, with Kuala Lumpur and Jakarta edging 0.15% higher, with Taiwan and Bangkok unchanged. In Australia, markets are modestly green, with the ASX 200 and All Ordinaries and ASX 200 rising 0.30%, boosted by energy stocks and momentum buyers after the ASX 200 breached 7,400.00. 

The Kospi and ASX 200 have attracted momentum buyers as bot indices breached previous all-time highs; however, the picture is more mixed across the region, if sedate. Europe is likely to follow the same reasoning and look to reduce risk into the FOMC meeting. Assuming no surprises and the FOMC remains suitably dovish, I can see no reason why the gentle rally in equity markets will not resume into the remainder of the week. 

Currency markets becalmed ahead of the FOMC

Currency markets saw some volatility intra-day over the US data overnight, with decent ranges seen on the dollar index and some of the majors. However, once the dust had settled and the 20-year bond auction had passed with firm demand, currency markets drifted back to finish near to their opening levels. Momentum seems insufficient ahead of the FOMC to maintain directional momentum.

The dollar index finished unchanged at 90.50, where its remains this morning. Nearby support/resistance is at 90.35 and 90.70. EUR/USD showed no reaction to the cessation of aircraft manufacturing hostilities between the US and Europe overnight. The single currency did trade in a handy 1.2100 to 1.2150 range before settling unchanged at 1.2125. The risk is still skewed to a deeper correction lower with support at 1.2100. Only a failure of 1.2000 changes its longer-term bullish outlook.

GBP/USD traded in a near 100 point range between 1.4030 and 1.4130 before finishing only slightly lower at 1.4085. It was buffeted by EUR/GBP volatility as its Northern Island disagreement with the EU continued. However, it received a modest tailwind from the UK/Australia free trade agreement announcement with the pandemic restrictions extension well telegraphed. Only a failure of the 1.4000 support zone will signal a much deeper correction; otherwise, it remains a buy on dips for the medium-term.

USD/JPY continues to consolidate above 110.00, being almost unmoved overnight. However, its ability to maintain those gains is entirely dependent on the reaction of the US yield curve post the FOMC outcome. If US yields move lower tonight, USD/JPY will follow. Similarly, USD/CNY is unchanged at 6.4040 today, with no liquidity changes at the repo from the PBOC. Therefore, USD/CNY and USD/Asia will remain circling in the holding pattern until tonight's main event.

The Australian, New Zealand and Canadian Dollars look most vulnerable to further US Dollar strength. All three fell overnight as investors continue to unwind risk-facing positioning into the FOMC, and commodity prices, ex-oil, come off the boil for now. Ironically, two of the three have central banks that are signalling tightening of interest rates ahead. Key support for AUD/USD is 0.7600 and 0.7100 for NZD.USD. A rise through 1.2200 by USD/CAD will signal more Loonie weakness.

Oil markets continue rallying

Oil markets seem unstoppable right now, with both Brent and WTI rising once again overnight. Brent crude rose 1.55% to $74.25 a barrel, and WTI leapt 1.80% to $72.45 a barrel. Both contracts continue to rise in Asia, adding 0.50% to $74.65 and $72.75 a barrel, respectively.

The continuing large backwardation in the prompt futures curve remains a strong indicator of physical demand and supports oil on any dips. Oil also gained another tailwind from the US API Crude Inventories overnight, which fell by a much larger than expected 8.50 million barrels.

However, although the world is seemingly universally bullish on oil, both contracts are now vulnerable to a potentially sharp downward correction to cull excessive speculative longs in the shorter term. As a result, the Relative Strength Indexes (RSI's) on both contracts have risen firmly into overbought territory. The daily RSI is usually a good indicator of intra-trend corrections when it reaches extreme levels.

Brent crude has $75.50 and $78.00 in its sights, but a fall through $72.80 could signal a drop extending as far as $71.00 a barrel. WTI has resistance at $75.50, and failure of $71.00 could see $70.00 a barrel retested. Any abrupt sell-off is likely to be violent but short in duration. 

Gold edges lower once again

Nervous speculative longs continued to head for the exit door overnight, although gold itself only fell modestly. Gold ended the session 0.40% lower at $1859.00 an ounce. In Asia, it has probed the downside but quickly returned to an unchanged level.

Gold's RSI has staged a remarkable retreat from very overbought levels to neutral in a short amount of time. However, gold still looks vulnerable to further losses, especially if the US Dollar rallies after the FOMC this evening. A Musk tweet boosting cryptos could also dispense the coup de grace to gold, such is the world we live in.

Critical support remains its 200-day moving average (DMA) at $1840.00 an ounce. A daily close below this region targets deeper losses that could extend to its 100-DMA at $1798.00 an ounce. At those levels, though, gold becomes a seriously appealing medium-term play once again. Patience, and nerves of steel, are as ever, a virtue in the world of precious metal trading.