China leaves rates unchanged

China left its one and five-year Loan prime Rate benchmarks unchanged this morning at 3.85% and 4.65% respectively. The decision should be of no surprise with China's economy firing on all cylinders. Even a Covid-19 slowdown from the US and Europe impacting exports would only be a mere flesh wound at this stage, especially with vaccines now on the horizon. If China wants to raise money, they can issue bonds in Europe and have Europeans pay them for the privilege.

Elsewhere the night contained a few dramas. In Europe, Poland and Hungary are threatening to veto the Eur 1.8 trillion budget for 2021 over clauses saying they have to follow the rule of law like the rest of Europe. The situation could also threaten the EUR 750 billion pandemic recovery fund if it continues, despite Poland and Hungary being major losers if both are delayed. Markets have been focussing on the UK Brexit trade talks, but Europe has problems out East as well. The situation has the potential to weigh on the Euro and European equities if it continues to evolve.

The UK's Daily Telegraph has reported that a UK/Europe Brexit trade deal could be announced as soon as this Monday. Financial markets have been pricing this into Sterling as a 100% certainty for some time now, with GBP/USD near three-month highs at 1.3250 today. Based on past moves on Brexit-related news, Sterling could well surprise markets and leap higher if the Telegraph story comes to fruition. The 1.3500 September high would be the first target, but it would not surprise me at all, if Sterling moved nearer 1.3800. UK equities would also outperform. Mrs Halley and I are also due to pay a second tranche of cost-centre Two's UK university fees shortly if readers needed more bullish Sterling signals.

The profit-taking on long equities and short US Dollar positions had been continuing overnight, exacerbated by the news that the US Treasury wanted over $400 billion back from the Federal Reserve in the form of unused CARES Act funds. That provoked howls of protest from the central bank but seemed to be in line with the pre-transition scorched earth policies the outgoing US administration is quietly following.

All was quickly forgiven though after weekly US Initial Jobless Claims spiked higher to 742,000 jobs lost, reversing a trend of improving results. The acceptance that Covid-19's resurgence in the US to record levels would slow economic activity, as evidenced by the Initial Claims, saw Senate Republicans agree to return to the fiscal stimulus negotiating table. The reaction was immediate, equities reversed losses, the Dollar fell, and oil prices also gained.  

If nothing else, it proves that the US economy and stimulus packages remain the only game in town for financial markets globally. Still, a $500 billion at $2.2 trillion spread is a huge one to bridge. With fears of another spike in Covid-19 across the Thanksgiving Holidays next week, and Covid-19 potentially the Grinch that will steal the critical Christmas season, both sides have an incentive to book a policy win.

In Asia, both the Philippine and Indonesian central banks cut rates by 0.25% yesterday, surprising both markets and the author. With regional Asian currencies at multi-month highs thanks to their geosynchronous orbit with China, both took the opportunity to trim rates to stimulate their underperforming economies. With the US Dollar expected to fall into 2021, I expect to see more of the same across Asia, particularly from countries such as the Philippines, Malaysia and Indonesia, who have a substantial yield carry.

Both Japan and South Korea reported lower than expected inflation measures this morning. Japan CPI fell to -0.70%, while South Korean PPI badly missed, falling by -0.60%. In South Korea's case, part of the fall can be explained by the massive appreciation of the currency and low energy prices. Japan's headline number is the continuation of decades of deflation. What both highlights are that the export sectors have carried their recovery, with domestic demand subdued. Both are now grappling with renewed spikes in Covid-19 cases which are expected to erode the domestic economy further. With oil prices now bottoming, those numbers should improve, and a Covid-19 demand shock seemingly inevitable from key export markets, the best of the Japan and South Korea recovery may be behind us for now.

As the week ends, renewed hopes from the US fiscal stimulus talks will dictate direction. Having priced in two years of recovery in two hours after the Pfizer vaccine news last week, Moderna and Astra Zeneca's announcements seem to have had a declining marginal effect. For sure, there is life still in that trade, but stimulus hopes in the US will take precedence in the short-term, despite the challenges of reaching a sensible agreement. Don't forget Brexit and the Pound either, much as we would all like to. 

Asia is cautiously optimistic today

After almost a week of profit-taking, sentiment has lifted in Asia after both sides in the US agreed to resume stimulus talks. Talk and headlines are cheap, though, and the reversal in US markets has seen Asian markets rise only modestly. Having been led to water previously; Asia will want to see concrete progress and not just talk.

In the US overnight, equities reversed what was heading for another profit-taking session, with sentiment gloomy after the Initial Jobless Claims. The negotiations headline propelled Wall Street to a positive4 finish. The S&P 500 finishing 0.39% higher, the Nasdaq climbing 0.87%, and the Dow Jones edging into the green by 0.15%. Working from home clearly outperforming we have vaccines; the world is saved. 

In Asia, the Nikkei 225 has retreated by 0.60%, as concerns mount over spiking Covid-19 cases and the Government's refusal to enact movement restrictions. The Kospi has edged 0.25% higher, with China's Shanghai Composite and CSI 300 up just 0.10%. Hong Kong is 0.70% higher, while Taipei has fallen 0.10%.

Singapore's Straits Times has jumped 0.90%, led by their heavyweight banking sector, chemicals and leisure, in a classical light at the end of the tunnel trade. Kuala Lumpur is 0.35% higher, and Jakarta is flat. Manila has jumped 1.20% after yesterday’s rate cut and positive comments this morning from the central bank head. Australian markets are modestly higher, the ASX 200 and All Ordinaries up 0.20%.

US stimulus hopes are likely to be enough to keep equities in the green in Asia this afternoon and lift Europe modestly on its arrival. The follow-through is cautious though and lacks strong momentum. That leaves equities vulnerable to headline shocks. President Donald Trump is attending the Asia-Pacific Economic Cooperation virtual summit today; just saying.

The US Dollar edges lower

The US Dollar quickly reversed its gains overnight as the US fiscal stimulus news hits the wires. In the end, the dollar index finished barely changed at 92.29. It will be eyeing support at 92.12 and 91.75 into the end of the week. The rapidity of the Dollar reversal hints at the potential of the short-Dollar trade on any hints that the renewed talks are making progress.

That left the Euro and Sterling near the upper end of the November ranges at a,1875 and 1.3265 respectively. With suggestions that a Brexit trade agreement is near both have the potential to spike higher. The Sterling is likely to be the greatest recipient though and at a minimum should test monthly resistance around 1.3500 is a deal comes to fruition.

The Australian and New Zealand Dollars continue to outperform, with the Kiwi, in particular, looking set to test 0.7000 into next week. The Australian Dollar continues to defy China's trade embargos, much to the author's surprise, reinforcing that events in North America are the underlying driver for currency markets at the moment.

USD/IDR has risen 0.45% to 14,250.00 this morning after the Bank of Indonesia surprised markets with a surprise rate cut yesterday. BI took their chances after strong IDR appreciation this month and will likely regard the fall today as minor collateral damage. We are going to need a lot more US Dollar depreciation though for the BI to have more room to cut rates from now on. 

The PBOC set a weaker Yuan fix today at 6.5786, reflecting Dollar strength pre the announcement of the fiscal talks from Washington DC. That has not flowed through to the broader market though, with the Yuan and Asian regional currencies mostly edging higher versus the greenback this morning. We expect Asian currencies to remain firm, and for that to accelerate is progress is made on US fiscal negotiations. 

Oil rises modestly overnight

Oil finished the day slightly higher, supported by renewed US fiscal talks. The gains were modest though, with Brent crude 0.10% higher at $44.20 a barrel, and WTI 0.30% higher at $41.70 a barrel. Gains were tempered by news that Libyan oil production has recovered to 1.25 million barrels per day. 

Both contracts continue to consolidate at the upper end of their November ranges. However, momentum has notably waned, and both are vulnerable to negative headline surprises now. 

Brent crude faces challenging resistance at $45.50 and $46.50 a barrel, with support quite a distance away at $42.40 a barrel, its 100-day moving average. (DMA) WTI has resistance at $43.00 a barrel, followed by the formidable $43.50 a barrel region. Support lies at $40.45 a barrel, its 100-DMA.

We still see the possibility that long positions will continue to be trimmed into the end of the week, as the initial enthusiasm of the US talks fades. 

Gold falls through long-term support

Gold's unimpressive price action continues, despite the positive news from Washington DC. Having dropped to $1850.00 overnight, it could not recover all of those losses as the fiscal talk headlines hit the wires. It finished the session 0.35% lower at $1866.00 an ounce. 

Gold has now broken trendline support at $1871.00 an ounce, that extends back to April. The daily close below this level is a negative technical development. Gold has initial support at $1850.00 an ounce, but the technical picture suggests losses have the potential to extend all the way to its 200-DMA, today at $1794.00 an ounce. Resistance is at today at $1874.00 an ounce, followed by $1900.00 an ounce.

The waning momentum, and inability to rally materially on what should have been very positive news, hints that the short-term market is still very long with a dearth of new buyers. Although I am sure there are plenty of gold buyers waiting in the wings, they appear to prefer waiting for a more material dip, instead of chasing the market at these levels.