Delta doubts fade

North American markets continue to put Monday's "delta-dip" behind them, with Wall Street rising once again overnight on strong corporate earnings and despite a slightly weak 20-year bond auction. Asian equity markets are also trending higher in a follow-the-leader play as the data calendar remains ultra-light with a dearth of market-moving news headlines. Japan markets are closed today and tomorrow for national holidays, which will likely reduce volatility until the end of the week.

Other asset classes also unwound their Monday delta-dip overnight as nervousness faded and the buy everything in a zero percent world equilibrium reasserted itself. The US Dollar pared recent gains, gold retreated slightly, and US long-dated bond yields edged higher. Oil rose impressively despite higher official US crude inventories, and my old friend Bitcoin staged an impressive rally. 

Bitcoin jumped nearly 8.0% from below $30,000.00 of fiat US currency, dragging Ether and some other digital things higher with it. Our old friend Elon Musk was behind the move, stating he owned a few digital coins and might start accepting Bitcoin again soon for Tesla’s. Somehow, in the space of a couple of months, Mr. Musk feels that the Bitcoin mining industrial complex is well on the way to pivoting to more "green" energy use. That is an impressively fast pivot to green energy, as was the timing of the comments one might observe, coming just as Bitcoin was in danger of breaking multi-month lows. Despite the bounce overnight, Bitcoin's technical picture remains as fragile as a blockchain made of glass. 

In Asia today, the only data point of note will be the Bank Indonesia policy decision. With inflation benign and growth downgraded by the central bank themselves, BI could potentially reduce policy rates today. However, along with the Malaysian Ringgit, Thai Baht and Philippine Peso, the Indonesian Rupiah is part of an unloved ASEAN club of covid-currencies at the moment. With one eye on USD/IDR, which is trading at 14.500.00 today, Bank Indonesia is most likely to remain unchanged, although they may announce some new liquidity measures at the periphery.

Today's main event will be the European Central Bank (ECB) policy meeting. This meeting has attracted more attention than is usual as markets await further details around how the ECB will police its new fixed 2.0% inflation strategy/target. With core inflation expected to ease well below 2.0% in 2022, the implication is that the ECB will have to maintain an aggressive easing bias for the foreseeable future to try and meet that 2.0% target. Much of the Euro's weakness this week can be attributed to those expectations, especially given that markets feel the Fed is much closer to tapering than the ECB is. Whatever the details, it should be suitable for some binary volatility in EUR/USD later today. It wouldn't surprise me in the least to see EUR/USD either at 1.1600 tomorrow or nearer to 1.2000.

Asian equities drift higher

Wall Street once again rose overnight, as Monday's delta-dip became buy-the-dip, supported by strong US corporate earnings. The S&P 500 rose 0.82%, with the Nasdaq climbing 0.92% and the Dow Jones finishing 0.83% higher. US markets shrugged off the procedural defeat of the US infrastructure bill in the Senate as administrative, with the real fireworks to come next week.

Although Japan markets are closed, the rest of Asia has contented itself with hitching its wagon to the Wall Street rally with headline drivers and data points thin on the ground today. The Kospi has jumped 1.10%, as strong US earnings boosted major stocks in Seoul. The Shanghai Composite is 0.30% higher in China, and the CSI 300 is 0.10% higher. Hong Kong has leapt 1.75%, dragged higher by the Evergrande rollercoaster. The property developers share jumping 10% at one stage after it said it had "resolved" some issues with lenders on some of its projects. Expect China technology and property stocks to keep Hang Seng volatility alive and well.

Singapore has also leapt 1.30% higher today, with Kuala Lumpur climbing 0.55% and Jakarta rallying by 1.20%. Bangkok has risen 0.20%, with Manilla jumping by 1.30% and Taiwan climbing by 0.85%. Australia's ASX 200 is 1.05% higher, with the All Ordinaries rising by 0.90%.

Given that the Covid-19 issues sweeping Asia have not gone away, and in fact, you could argue they have got worse, the breadth of the Asia-Pacific rally is quite surprising. I attribute it to a combination of complacency, a slow news day, and pent-up buying demand leading to fast-money retail flows piling back into the market. Assuming the music keeps playing in Europe and the US tonight, Asia could well finish the week on a positive note. I will note that fast-money flows are just that, and the winds could change direction very quickly in these types of markets. Investors who insist on playing should remain light on their feet.

Long-covering pushes US Dollar lower

The US Dollar gave back some of its recent gains overnight, as delta-variant nerves eased on the back of strong US corporate earnings. That saw a reduction in haven flows, pushing US bond yields slightly higher and causing some US dollar outflows. The dollar index fell 0.20% to 92.77, where it remains in Asia in subdued regional trading. 

In the bigger picture, the US Dollar continues to hold onto most of its recent multi-week gains, and a dovish ECB later today could lift the dollar index once again. Having said that, with delta complacency rising as the week has gone on, the US Dollar could just as easily drift lower into Friday with no real data to change the narrative this week. A break of 92.50 by the dollar index likely signals more US Dollar weakness into the week's end and early next week.

As outlined above, EUR/USD's fate will be decided by the ECB this afternoon and should be good for 150 points either way from its present level at 1.1800. Sterling's price action has also turned constructive, with GBP/USD rallying impressively 0.65% to 1.3715 overnight, recapturing its 200-day moving average (DMA) at 1.3703. Although the driver of the rally is elusive to me, I do respect the price action. The technical picture suggests now that a rally through 1.3730 could extend quickly to 1.3800.

AUD/USD and NZD/USD both recovered with risk appetite in general overnight, as did regional Asian currencies. However, both Australasians and regional Asia FX remain vulnerable to another swing South in risk sentiment in what has been a schizophrenic week. The IDR, MYR and THB remain heavy, and I consider them the most vulnerable to further covid-induced sell-offs. A surprise cut by Bank Indonesia today could send USD/IDR sharply higher.

Oil staged a surprise rally

Official US crude inventories followed the API data from the day before and posted a surprise increase in stocks. However, instead of prices falling, oil rallied aggressively. Brent crude leapt 5.25% to $72.225 a barrel, and WTI rocketed 5.80% higher to $70.25 a barrel. Some long covering sees both contracts ease by 30 cents a barrel in another dull Asian session. 

I must admit that the rally caught me completely flat-footed, especially its scale. Notably, there were no surprises within the distillate or gasoline indexes to support the jump in prices either. I can only surmise that with risk sentiment climbing in New York anyway elsewhere, that some gold old fashioned FOMO fast-money drove the rally. Asian physical buyers who had been holding out for deeper bargains may also have needed to scramble in the overnight session.

Having said that, I have previously stated that I believed that any material sell-off would be short in duration. I didn't realise it would be that material and that short in duration!

Unless we get another massive wave of delta-variant risk-off sentiment sweeping markets, the lows seen by oil this week are likely to be the lows seen for some time. The world remains on a recovery track, albeit asymmetrically, supporting oil's consumption fundamentals for the rest of 2022.

Brent crude should find plenty of willing buyers now on any dips to $70.00 and $68.00 a barrel. Similarly, any retreat by WTI below $68.00 a barrel should find plenty of support. The upside remains less clear in the short-term, with resistance now at $74.00 and $ 72.00 a barrel, respectively.

Gold continues to fade

A rise in US long-dated bond yields weighed on gold prices overnight, as did a reduction in risk sentiment, with the delta fears of Monday continuing to ebb in North America overnight. Gold fell 0.40% to $1803.50 an ounce in a non-descript session and have edged lower to $1799.00 an ounce in Asia.

With Asian stock markets performing strongly today, it seems clear that regional investors are quickly rotating out of defensive gold positions and back into equities. That is weighing on gold prices, even if it is not yet enough to flip gold into a temporary bear market. 

The yellow metal has taken a back seat this week, with volatility far higher in other asset classes. In the bigger picture, gold remains confined to a broader trading range bound by its 100 and 200-DMAs at $1790.00 and $1824.00 an ounce, respectively. A daily close above or below either of those levels is required to signal gold's next directional move.