Asia Market: Buckle in – It might be a bumpy session

Market highlights 

• Upbeat close belies equity market turmoil under the hood
• US shares trade in a volatile fashion but major indices still finish in the green
• In the context of lockdowns and vaccines, crude price resilience is awe-inspiring
• Resurfacing US-China tensions throw another curve at a frustrating currency market
• Gold concedes ground to stronger dollar, but remains bid

Markets

US shares traded in a volatile fashion, yet major indices all still finished in the green. Impassioned by President Biden’s " Buy American" initiative, and in anticipation of Janet Yellen's confirmation as Treasury Secretary, stock market investors were revelling and relentlessly pumping cash into US shares which helped propel both the S&P 500 and Nasdaq to record highs. But the upbeat close certainly belied a day of equity market turmoil under the hood.

Still, buckle in it might be a bumpy Asia session as local retail froth greets President Biden's "Buy American" mantra and the untimely escalation of US-China political tensions via the Taiwan route. 

There's nothing in the investment world that's quite like hitting a patch of black Covid economic ice, when traditional investing wisdom suggests the best offence is a good defence by taking your foot off the gas pedal as the most straightforward function of damage control.

But nothing could be further from the truth in what will likely inspire a rewrite of "The New Market Wizards" and go down as the most opportunistic technology-inspired stock market buying bonanza as here we are, yet again, with the Nasdaq and S&P finishing at record highs, meriting derisive laughter from Wall Street denizens at the apparent absurdity of it all.  

But who can blame Wall Street for hitting the amber light as recent history tells us it’s best to be fearful, not cheerful when retail gets rapacious? The last time we saw epic retail froth in single names like GME and EXPR was when Hertz and CHK were ripping and Day Trader David Portnoy hit peak fame in June 2020 – and we know how that ended in tears. 

However, is there some logic in the hefty move among tech stocks? When I packed it in last night, frustrated by currency market moves amid massive signs of lockdown de-risking everywhere, it honestly felt like capitulatory behaviour was sinking its teeth in which begged the question as to whether an enormous selloff was imminent. 

One argument for the outperformance could be that tech enjoys low rates, so the fixed-income performance helps amid lockdowns. After all, in a foreshadowing effect, Netflix rose 16% last week after subscriber numbers soared by a record 37mn in 2020. Unsurprisingly, it seems lockdowns and TV go hand in hand and, by extension, so does gaming and the use of cutting-edge software and hardware components.

And with the bulk of the tech market cap (75%) reporting during the next two weeks, it’s clear that investor like the pack's heavyweight leaders instead of buy-the-laggards, leading to these eye-catching moves. And I'm not sure that logic doesn't make sense. 

At some level, dramatic price action is understandable with investors, deprived of yield elsewhere, expecting rapid growth in future earnings, such as in high-growth high-promise sectors like new technology and clean energy which continue to resonate where the payout horizon is long, hence the long-term view makes sense provided low rates oblige. 

But at some point the black ice will come back to haunt – though maybe not in tech. Still, it would be best to worry about the deflationary effects while playing it through commodities where the signalling impact on producers is more vigorous and might only end in tears. The energy sector continues its retreat, and while it feels insignificant these days from a market cap perspective, some all-encompassing early warning signs around the new US administration's policies are starting to show up on a sectoral basis. 

Oil Markets

Crude price resilience is awe-inspiring in the context of extended and fresh lockdown measures across Europe and snags in the manufacture and rollouts of vaccines.

But it was OPEC to the rescue once again as, in the wake of Saudi Arabia shouldering a hefty chunk of Q1 oil price damage control via voluntary production cuts, there was confirmation from SOMO that Iraq would cut production designed to make up for 2020 quota breaches under the OPEC+ agreement which helped assuage the continual Q1 stream of industry-wide consumption and demand down ballots.

This guarantee of the principle of compensation was music to the market's ears, as OPEC compliance demonstrates unwavering unity within the group. Presenting a unified front to combat the negative demand effect of Covid-19 lockdowns is a most welcome deliverable at this stage of the oil market’s recovery; the more price planks the better. The fact that group members remain committed to adjusting production policy to fit macro circumstances provided a most timely bridge, especially with oil traders struggling to digest the China lockdowns and the demand implication from LNY mobility restrictions during the year's busiest travel time in Asia.

Currency Markets

Resurfacing tensions between the US and China via the Taiwan route are throwing another curve at a very frustrating currency market that can't seem to hold a steady direction from time zone to time zone.

The Ringgit 

The ringgit teetered after the local government warned of growing economic risk. So, with most of the rate cuts bets paring back in the wake of BNM’s hold the course policy decision, concerns around the economic impact are seeing rates getting repriced again.

Compounding matters is USDAsia pairs turning a bit higher. Overall, the latest ranges traded across pairs remain intact as flows continue to be two-sided in the outright space. But it is worth keeping an eye on the tensions between the US and China over Taiwan. 

The Canadian Dollar 

President Biden's " Buy American" initiative clobbered the Canadian dollar overnight. Bay Street traders were caught wrong-footed long the Lonnie on the US stimulus infrastructure impulse which had expected to be a boon for Canadian commodity exports, along with Made in Canada engineering and building technology. But 'Buy America" has walked back some of the economic gusto and for currency market concerns might give the Bank of Canada some food for thought regarding a tapering decision. 

The Euro

The Euro suffered an economic reality check when the Institute for Economic Research (Ifo) missed expectations after German companies' sentiment soured markedly against the background of further lockdown measures. While the fall in the service sector was not a shocker, the sharp drop in expectations caused concern.

While currency traders are continually viewing the "jab charts", which compounded matters for the Euro, hopes for a quick rollout of vaccines seems to have faded a bit, delaying an easing of government restrictions. Recent numbers suggest that Germany is lagging behind other countries regarding vaccination, with only 1.95% of the German population vaccinated as of January 22, much less than the UK (10.05%, January 23) and the US (6.2%, January 23).

Gold Markets

Gold conceded ground to the stronger dollar overnight but remains bid against escalating US-China tensions over Taiwan. Gold is struggling to break out. Most short-term fundamentals suggest upside from here, but extended speculative positioning is acting as a drag. 

We’ll see what progress is made on the US USD1.9trn fiscal stimulus package during the remainder of the week. Presumably, the smoother it passes, the more favourable for gold. On the central bank front, the highlight is the FOMC decision.

The FOMC meeting should be gold supportive, but not new news. Robust GDP data could weigh on gold if yields react higher, but aid silver and the PGMs. On balance, in this context, gold may trade in an $1,825-1,875 ahead of the Fed meeting with only a very modest up.