The week's wobbles continue

The week's wobbles continued overnight as markets- equities in particular - adjust to the rediscovered concept of two-way price risk. US equities attempted a comeback yesterday in New York, but by mid-session it had run out of steam. Wall Street closed lower with no apparent drivers, other than the defeat of the US Republicans follow-on stimulus bill, much slimmed down and dead on arrival in the Senate anyway.

That may well have been enough, with the risk of no follow-on stimulus before the election in November increasing by the day. With Republicans and Democrats light-years apart and unwilling to budge. Combined with disappointing Initial Jobless Claims data that 884,000 new claims, it suggests that the United States’ easy employment wins are over. Further gains being much harder to come by with Congress politicising fiscal stimulus.

The European Central Bank was more upbeat than expected, moving its 2021 inflation forecasts higher. That said, it noted that it expected to utilise its EUR 1.35 trillion quantitative easing facility fully. More importantly, for short-term pundits, it indicated that the rise of the Euro was concerning and that it would monitor movements closely. That wasn't enough for bearish traders, with the single currency spiking to 1.1900 initially, before retreating to close slightly higher on the day, supported by EUR/GBP buying.

The Brexit situation in the United Kingdom entered dangerous territory overnight, with the European Union threatening legal action over the UK's attempt to rewrite the separation treaty unilaterally. Sterling suffered overnight and looks set for further losses, as financial markets rapidly reprice Brexit risk that had been long dormant.

Tonight, sees the release of US Inflation for August, with the headline number expected to climb to 1.20% YoY, with Core Inflation expected to remain unchanged at 1.60% YoY. A 1.20% print, or an unexpected rise in the Core Inflation number, is most likely to be felt in the long end of the US yield curve. A sharp increase in US long yields may set US equity markets up for another gloomy day at the office.

In Asia, the data calendar is quiet. China New Yuan Loans is due to be released with no set time. It could come out over the weekend as well; such are the whims of Beijing. We are looking for an increase over last month’s CNY 993 billion to CNY 1.200 trillion, reinforcing that China's recovery remains on track. A fall in the headline number could spook Asian markets in the near-term.

More than a few eyes, including the authors who is based here, will be cast at Indonesia today. The announcement on Wednesday night that Jakarta would re-enter full lockdown again this Monday saw the Jakarta Composite Index immediately fall 5.0%, hitting its circuit breaker for the day. The Bank of Indonesia was also intervening selling USD/IDR. 

The Jakarta administration appears to have upset the central government, with various ministries either supporting or completely contradicting Jakarta's intended response. Few details have emerged of what the full lockdown means this time, either from Jakarta or central government. With Jakarta's public hospitals forecast to run out of Covid-19 capacity next week though, this typically Indonesian debacle will send shivers through investors spines, with nobody and everybody in charge it seems. Expect Indonesian equities to fall again today and the Bank of Indonesia to be back selling USD/IDR in the spot and non-deliverable forwards markets. Indonesia's travails, as South East Asia's largest economy, are like to cast some shadows of its neighbours, Singapore and Malaysia, as well.

Mysterious rise of US Index futures drags Asia higher

US index futures have risen strongly in Asian trading this morning, which has quickly reversed the negative starts for the region after Wall Street finished lower overnight. Overnight the S&P 500 fell 1.77%, the Nasdaq fell by 1.99%, and the Dow Jones fell by 1.45% after the Republican fiscal stimulus build was pronounced dead on arrival at the Senate.

This morning, however, S&P e-mini, Nasdaq and Dow futures have all risen sharply, climbing by around 0.70%. I can see no actual headlines or data to support that move. I mentioned yesterday that markets could expect a lot more two-way price action and intra-day volatility in the future. That may well be what we see this morning, with profit-taking occurring from intra-day shorts set overnight.

Whatever the reasons, it has lifted Asian stock markets that looked set to follow the US lower this morning. The Nikkei has risen 0.30%, although the Kospi remain 0.70% lower after the Health Ministry extended social distancing rules for at least two days. In China, the Shanghai Composite has risen 0.10% and the CSI 300 by 0.25%, with Hong Kong 0.05% higher.

Singapore has fallen 0.30% today after Singapore Airlines slashed their workforce overnight, with Kuala Lumpur down 0.10% after Bank Negara left rates unchanged yesterday. The headless chicken situation in Jakarta, with central government departments, and Jakarta's government, contradicting themselves and each other will also way on Singapore and Malaysia today. Jakarta stocks have opened steady this morning after yesterday's rout, but it remains early days, and I expect nervous investors to continue hitting the sell button as the day progresses.

Although Asia has rallied this morning, the advance looks fragile and driven by low volume rallies in US index futures. It will likely take just a small turn in the US futures or one negative headline to see that rally dissipate. Europe is also likely to start the day in the red, with equity sentiment now much more balanced for now; then the past months buy everything every day. If US inflation pushes US yields higher this evening, Wall Street could face another harsh day.

Sterling looks precarious

The US Dollar gave ground as equities rallied initially on Wall Street overnight. Still, a turn in that market quickly saw the Dollar recoup losses, with the dollar index finishing 0.12% higher at 93.35. Asian markets have a decided Friday look about them, with the rise in US equity futures pushing the greenback slightly lower against the G-10 and regional Asian currencies.

The Euro rallied to its 1.1920 overnight but gave all those gains back to finish unchanged at 1.1810. The balance of risks now shifts to a test of support at 1.1750 and 1.1700, especially if the equity rally runs out of steam in New York this afternoon. A daily close below 1.1700 sets up a possible correction lower that has the potential to run as far as 1.1400 to 1.1500. EUR/USD needs a daily close above 1.2020 resistance to confirm its longer-term appreciation is back on track. 

The evening's big mover was the British Pound. GBP/USD fell 1.50% to 1.2805 as the European Union threatened legal action over the UK's intention to rewrite parts of the Brexit agreement with Europe unilaterally. The UK's actions now leave the post-Brexit talks that were already in trouble, in limbo. EUR/GBP rode 1.65% overnight, breaking out of its three-month range. Further gains could potentially target 0.9500 if the standoff continues.

With currency markets having to chase their tails and reprice long-forgotten Brexit risk, Sterling now finds itself in dangerous territory. The fall overnight to 1.2805 broke 6-month trendline support at 1.2880 which now becomes resistance. It leaves GBP/USD perilously closely to critical support formed by its 100 and 200-day moving averages (DMA) at 1.2690 and 1.2735 respectively. A loss of this crucial support zone will signal much deeper losses for Sterling in the weeks ahead.

Sterling aside, currency markets are trading in a directionless manner, content to follow the nuances of equity markets for now.

US Crude Inventories deepen oil's woes

US Crude Inventories unexpectedly rose by 2.0 million barrels overnight, delivering an ugly kidney punch to oils tentative intra-day rally. The sell-off in US equities having already started the rot. Brent crude fell 2.20% to $39.70 a barrel, and WTI fell 2.05% to 37.00 a barrel.

The inventory data will already add to frazzled nerves of oil speculators, confronted by a widening contango in the Brent futures curve and concerns about global consumption, as well as stale long positioning. 

In the case of both contracts, their respective 100-DMA's have managed to stop the rot over the past three sessions. Although oil in Asia has risen slightly with equities today, both Brent and WTI now are in danger of a stern test of this support into the week's end. 

Brent crude's 100-DMA is at $39.80 today, with a loss of that level opening further losses to $37.00 a barrel. WTI's 100-DMA is nearby at $36.95 a barrel. A daily close below opens further loses to $34.50 a barrel region.

For now, OPEC+ has stayed their hand regarding increasing production cuts. Should oil collapse further, and extend losses across next week, their hands may be forced. In the short-term, oil, like currency markets, will track equity price movements.

Gold is content to range trade

Gold fell short of testing trendline resistance at $1975.00 an ounce overnight, fading with equities in the New York afternoon to close unchanged at $1946.00 an ounce. That leaves gold roughly in the middle of the $1900.00 to $1975.00 range is anticipated yesterday.

With gold moving in lockstep with equity markets, it is clear that recent price moves have not been a gold story alone, and hence we expect gold's recent range to contain price movements. A fall in equity markets on Wall Street later today would likely see gold retest the $1900.00 to $1920.00 support zone. It is unlikely to break, as there appears to be plenty of willing buyers waiting patiently for dips in prices. Gold has edged five dollars lower to $1941.00 an ounce in directionless Asian trading today.