Progress, but not substantially so

Overnight, the FOMC released its latest policy decision leaving rates unchanged with no change to its quantitative easing programme. Fed Chair Powell reiterated the view that inflation remains transitory and noted that although progress towards its goals had been made, it was not substantial enough as yet to look at material policy changes.

The comments were probably as much to assuage the hawks on the 18-person committee, as for the financial markets. Mr Powell did note that tapering and its timing are being discussed. We may get more signals at the August Jackson Hole Conference, and something firmer from a timetable perspective could emerge at September's meeting. For now, though, it is business as usual.

Markets had priced in no surprises this time, and the US yield curve flattened once again, with long-dated yields set to continue easing now. The US Dollar fell versus the major currency and Asian FX space as taper hedges were taken off. However, with tapering potentially starting as soon as December of this year, moving US monetary policy out of alignment with most Asian currencies, and definitely with Europe, I believe that the medium-term downside for the greenback is limited for the rest of 2021.

In other news, Chinese officials called in representatives of both local and international banks for a fireside chat about the recent education and technology sector clampdowns. From what I can ascertain, the officials went out of their way to assure the participants that the clampdowns were targeted and not part of a broader rollback of market reforms. That has taken some of the pressure of the offshore and onshore Yuan's today, although how long that will last, I am not sure.

The US Senate has made progress on the US infrastructure bill, voting to open debate on its much trimmed down $550 billion-odd total. It seems like markets don't get out of bed for less than a trillion dollars these days, though, and for now, the whole process seems to have faded into the background consciousness of the financial sector.

Equity markets in Singapore received a boost yesterday, with the MAS signalling that local banks can resume full dividends. With the major banks in Singapore well capitalised and well run and sitting in a well-run country with a vaccination programme running at breakneck speed, and sitting in the middle of Asia, which itself will eventually recover, there is a lot to like about this sector going forward, even if banking is considered boring.

Asia's data releases today have been second-tier. Japan Stock Investment by Foreigners data covering the last two weeks indicates that plenty of international fast money has joined the Nikkei retail frenzy. Japan may well be picking up some of the flows previously destined for China. Australian Export Prices rose 13.20% QoQ for Q2 as commodity prices rallied aggressively. By contrast, Import Prices rose only 1.90%, suggesting that despite their current Covid-19 travails, the lucky country in the medium term will continue to be very lucky. Both the Australian and New Zealand Dollars resumed their recoveries overnight.

Singapore and Malaysia PPI's will also show very elevated readings later today, reflecting supply-chain bottlenecks and rising input prices. However, Covid-19 continues to hang like a dark cloud over both, particularly Malaysia, and neither data points should be market moving.

Europe releases a swath of individual and pan-Europe confidence data today, but it will be the German Inflation Preliminary for July that will have the market's attention. The MoM print for July is expected to rise by 0.50%, with YoY approaching 3.30%. Given the ECB appears to have moved to Japanification QE forever with monetary policy and their 2.0% inflation target, low prints by the German data is likely to have the more significant effect. Expect the Euro to come under some selling pressure and for European banking stocks to edge lower in that scenario.

The US releases Advanced GDP Growth Rate QoQ this evening, which is expected to touch 8.50%, mightily impressive. The GDP Price Index is expected at 5.40%, giving transitory inflation food for thought to some. Core PCE Prices QoQ Adv Q2 (say that quickly) will also be watched closely as it is also a favoured indicator for the Fed and is expected to come in at an eye-watering 5.90%.

The data is quite backwards-looking, given it is nearly August and will lose some of its zeal. If anything, given the refusal of the US bond market to react to anything inflationary, low prints could cause a scenario similar to the German inflation outlined above. US long-dated yields could move lower again, and the US Dollar may ease. On the earnings front, Amazon releases quarterly results today as well. Expect another blockbuster result but watch the statement. Facebook indicated in results overnight that a revenue plateau was approaching. Although Amazon won't say that, if they indicate slowing future sales growth, the Nasdaq may be temporarily punished with so much good news is built into big-tech stock prices. 

Asian stock markets rally on China's soothing words

US stock markets had a mixed result overnight, with the FOMC statement being largely discounted. However, Asia markets are off to a lively start after China officials called a meeting with bankers overnight and assured them that the recent clampdowns were targetted and not part of a broader strategy. Temporary abating of China risk has been enough to greenlight a broad rally across the region.

Overnight, the S&P 500 was unchanged, while the Nasdaq rose by 0.70%, while the Dow Joens fell by 0.37%. That price action continues in Asia with Nasdaq futures flat, but S&P 500 and Dow futures easing. In Asia, the Nikkei 225 has climbed by 0.65%, with the Kospi rising 0.30%. China markets welcomed the governmental words overnight and, after a few torrid sessions, are all higher this morning. The Shanghai Composite has rallied 1.25%, with the CSI 300 jumping by 1.45% and Hong Kong, heavy with China-tech, leaping 2.40% higher.

Regionally, Singapore has risen 0.60% as the MAS greenlights a resumption of full bank dividends. Kuala Lumpur is 0.30% higher, while Taipei has risen 0.70%. Jakarta is flat while Bangkok bucks the trend, falling 0.60% after returning from holiday. Australia is also higher, with the ASX 200 and All Ordinaries rising by 0.40%.

The upbeat mood in Asia, and some relief that the China clampdown may be done, for now, should be enough to lift European markets at the open this afternoon. Unless Amazon disappoints, it is hard to see the US data derailing the rally on Wall Street either, now that the FOMC is out of the way.

The US Dollar eases after the FOMC stays dovish

It looks like a few FOMC taper-hedging positions were taken off last night as the US Dollar broadly eased in the overnight session versus DM and EM. The soothing words from China about targeted versus broader clampdowns also helped relieve the pressure on Asian currencies, including the onshore and offshore Yuan's. 

The dollar index fell by 0.22% to 92.22 overnight, easing another 0.10% in Asia to 92.18. Resistance is now distant at the 92.60 break-out point, and the dollar index looks set to retest support at 92.00 later today, which could open up a retest of critical support at 91.50 next week. 

EUR/USD rose 0.22% to 11840 overnight, touching 1.1855 in Asia this morning. Only a lowball German inflation print will derail an attempt at 1.1900, with the single currency having traced out impressive support at 1.1750. GBP/USD is testing its 100-day moving average at 1.3924 this morning and continues to target further gains to its medium-term pivot level at 1.4000, with only a failure of 1.3800 now changing the bullish narrative.

The recovery in risk sentiment after the China bankers meeting and a suitably dovish FOMC has seen both the Australian and New Zealand Dollars rally overnight and this morning. AUD/USD is creeping towards resistance at 0.7400, which will open up further gains to 0.7500, while NZD/USD, at 0.6965, continues to target resistance at 0.7000.

USD/CNH fell 0.65% overnight to 6.4860, with the onshore USD/CNY retreating 0.30% to 6.4900 before falling to 6.4750 this morning. The China clampdown assurances previously mentioned have driven the rallies and today retreat by USD/CNY leaves it comfortably nestled in the middle of its previous 6.4500 to 6.4900 range. With risk nerves easing, USD/CNY is likely to remain around these levels until the end of the week. From now on, much will depend on just what the China definition of "targeted" turns out to mean and whether US bond yields finished the week on a soft note once again.

That has taken the pressure of regional Asian currencies, which also rallied on the China news and a steady as she goes FOMC outcome overnight. Notably, the Indian Rupee is outperforming, USD/INR falling to 74.224 this morning. Data suggesting that Indian oil imports continue to slump due to the Covid-19 demand crush may be assisting the INR rally, as oil importers have to buy less US Dollars. In the bigger picture, most of Asia remains gripped in a delta-variant funk, and its impact on the regional recovery is why ASEAN currencies are under pressure. Nothing has materially changed on that front, and I expect any rallies today and tomorrow to quickly run out of steam next week and the downtrend to resume.

Oil trades sideways

Oil prices traded sideways overnight, despite a suitably dovish FOMC, and significant falls in US official crude and gasoline inventories, along with a weaker US Dollar. All of those factors should have supported oil prices, and although oil did not retreat, it did not rally materially either. Brent crude was unchanged at $74,75 a barrel, and WTI finished just 0.70% higher at $72.40 a barrel.

Oil prices have crept higher by 25 cents a barrel in Asia. Still, the lack of upward momentum after crude inventories fell by 2.25 million barrels and gasoline inventories fell by a whopping 4.1 million barrels indicates that both contracts have seen the best of the recovery rally from early last week.

The balance of risks now shifts to the downside slightly, although I emphasise that at these price levels, both Brent and WTI look close to equilibrium right now. Nagging doubts over the impact of the delta-variant on consumption, and the recovery speed, appear to be staying the hands of more bullish price action.

With that in mind, I expect Brent crude to continue trading in a roughly $73.00 to $75.00 a barrel range into the end of the week, while WTI should be confined to approximately $71.00 to $73.00 a barrel.

Gold rises on unchanged FOMC

Gold prices rose overnight after the FOMC indicated no change to its monetary policy outlook was imminent. That flattened the US yield curve and sent the US Dollar lower, which lifted gold prices from just under $1800.00 an ounce. Gold rose 0.44% to $1807.00 an ounce, rising another 0.43% in Asian trading to $1814.75 an ounce.

With the FOMC removing the upward pressure on the US Dollar now, gold has likely weathered the storm that has left glued in a $1790.00 to $1810.00 range for the past week. Support at $1790.00 looks safe for now, and a rise through $1810.00 should trigger a test of the 200-DMA at $1822.00 an ounce, possibly by the end of the week. 

A daily and weekly close above the 200-DMA would be a strong bullish signal indicating further gains to the $1840.00 an ounce region. However, we will likely need to see additional US Dollar weakness to keep the bullish momentum going. Gold should find plenty of willing buyers now on dips to $1800.00 with the FOMC clearly not interested in rocking the tapering boat for now, and US data tonight likely to show inflationary pressure is alive and well.

Bitcoin looks bid

As a special treat to readers, I have included this section today, I love a good children’s fairy story as anyone.

As shocking as readers will find this coming from me, Bitcoin’s price action continues to impress, especially the recovery post the Amazon denial that it was thinking about accepting crypto’s. As we all know, the crypto market never lets reality get in the way of a good get-rich-quick-the-future-is here rally.

The roughly 7.0% recovery over the past two sessions now finds the digital Dutch tulip just below its 100-DMA at $40,310.00. The original bullish triangle breakout I noted earlier this week at around $34,300.00 remained safely intact, even with the pullback, keeping the potential technical rally target of $51,000.00 still in play. A close above the 100-DMA should see Bitcoin advance to test the 200-DMA at $44,600.00 before a Buzz Lightyear binary code onwards and upwards to $51,000.00.