No news is good news in a buy everything world, and the hand wringing angst apparent after Monday's equity market retreat disappeared as rapidly as it began, as normal service was resumed on Wall Street last night. With the US rates market negotiating a chunky treasury auction without incident, leaving US yields almost unchanged, the FOMO-nista herd quickly moved into "buy the dip" mode. Equities, precious metals and energy rallied, and the US Dollar fell across the board. 

Somewhat surprisingly, the Emperor’s New Clothes Bitcoin didn't share the Dollar debasement, global recovery, vaccines, and we're all doomed, love. The digital Dutch tulips fell by over 4.0% yesterday and have lost another 2.50% to $33,166 of fiat currency Dollars this morning. Bitcoin has now shed nearly $10,000 a digital tulip in the past few sessions, and I am still waiting for signs of the so-called "institutional tulip money" espoused by apparent experts, to appear. Being Bitcoin, a 10% range intra-day is a mere flesh wound to the digital asset, in a world where tradeable versus investable is seriously blurred. The digital Dutch tulip could easily be $42,000 again tomorrow or could drop through $30,000 and turn from Dutch Tulip to Dutch Elm disease. 

Thankfully, I am unlikely to be asked today whether we see the top in equity markets like yesterday, after a one-day fall. It probably does highlight the nervousness out there in markets though, with its stretched valuations on traditional methodologies. Three Federal Reserve officials spoke overnight, and from what I can tell, all were very dovish. All were optimistic for an acceleration of the US recovery in the second half of the year, and all appeared comfortable with rising inflation. Both Bostic and Kaplan suggested tapering could occur if employment and inflation accelerate, and Bostic suggested rate hikes were not likely until late 2022. 

The net message seems to be that the Fed will be as dovish as they can be in the H1 2021 and are probably keen to dampen any over speculation that US yields will spike higher. Depending on the vehemence of the Biden new deal, tapering may well be wishful think on the Fed's part, especially if a torrent of US government debt is being issued into a market that is nervous about being long at the bottom, in yield terms. The global financial system is completely addicted to zero per cent central bank money.  

I would argue it has been since the GFC, not the Covid-19 crisis, because rates never "normalised," the Fed and its central bank brethren have made a rod for their own monetary backs. The taper tantrum this time, when it comes, will be a taper earthquake, and not a tantrum. I do believe this will be a story for 2022 though, if not later; and not one driven by one gloomy day for Wall Street on Monday.

Nothing has materially changed for the "buy almost everything" trade. The US Dollar retreat overnight smells more of tail-chasing then the end of the short Dollar squeeze. US yields will decide that, and I suspect they will head higher again once Biden takes over formally and reveals his fiscal goodies agenda. In other asset markets though, the dipping-buying herd can still dream of CaliFOMOcation, even if prices trade sideways for a while, diminishing your risk-free instant gratification. The world's central banks and vaccine manufacturers have got your back.

In Asia, China monetary supply data gave some concern yesterday. M1 growth comes in much lower than expected at 8.60%, while M2 rose 10.1%, still slightly below consensus. The PBOC is subtly signalling that the appreciation trend in the Yuan has done enough for now. Nevertheless, if monetary conditions are tightening more than expected, it may struggle to offset Yuan appreciation. December's data may be just a blip, but January's number will be much more closely monitored now. If M1 and M2, (basically all the money in circulation), fall again, may require some reassessment of China's 2021 growth. I'm not panicking yet though; blip is much easier to spell.

South Korea's employment data disappointed today, as the Covid-19 restrictions finally made their presence felt. The needle has probably moved slightly towards a rate cut at this Friday's Bank of Korea meeting. The BoK announcing previously that it would now feed labour market dynamics into their rate-setting thoughts. I believe that the BoK will keep their powder dry and remain at 0.50%, but a surprise cut could lead to some temporary Won weakness. 

Otherwise, the highlight of the session will be US inflation data this evening. Headline inflation is expected to rise slightly to 1.30%, with core inflation remaining at 1.60%. With the US bond market nervous at the moment, and acceleration in inflation will probably see US yields rising again. Given the schizophrenic nature of financial markets this week, the US Dollar will likely also spike higher, equities drop, and gold gets crushed once again. 

Thankfully we have another plethora of Fed officials speaking tonight after the releases to calm the nerves of the end-is-nigh inflationary merchants of doom. It probably won't save me from a battery of questions again asking if the equity rally is over. The answer is no; it just isn't likely to move in an instant gratification day-trader-nirvana straight-line like post-March 2020.

Wall Street comeback lifts Asian equities

The range-trading nature of this week saw Wall Street rise modestly overnight, mostly because US yields remained unchanged. The S&P 500 rose 0.12%, the Nasdaq rose 0.32%, and the Dow Jones rose 0.19%. With the White House quiet, and a modest data calendar, that has been enough to greenlight a rally in Asian equities today.

The Nikkei 225 has risen 0.63% with the Kospi increasing 0.50%. In China, the Shanghai Composite is 0.20% higher, with the CSI 300 unchanged. Hong Kong has risen by 0.05%. Singapore has climbed 0.40%, with technology driving an impressive 1.35% rally in Taipei today. The cancellation of the US ambassadorial visit to Taiwan has also caused a collective sigh of relief in Taiwan markets. 

Kuala Lumpur has rallied an impressive 1.30% today. As noted yesterday, the state emergency decree has removed political risk from the Malaysian stage for the next eight months, even if the reasoning behind it may be politically dubious to some. Bangkok and Jakarta have risen by 0.50%, while Australia's All Ordinaries and ASX 200 are ranging either side of unchanged.

European equities should also move higher in sympathy. However, sentiment may be muted after Reuters has reported that the US is threatening European companies working on the Nord Stream 2 pipeline with sanctions. The Reuters article says that the threat is wide-ranging, encompassing construction equipment, certification and even European insurers' insuring aspect. A Biden administration is likely to be tougher than a Trump one on Russia arguably, and this development is unlikely to be reversed come January 20th. If anything, it may tighten sanction threats, and that may dampen European equities this afternoon.

US reverses course as US yields stabilise

The US Dollar gave back all of its gains from Monday overnight, and US yields remained unchanged. The dollar index fell 0.40% to 90.09, having touched a high of 90.60 earlier in the session. The index has dropped again in Asian trading, easing 0.16% to 89.95. Although this week has all the hallmarks of a tail-chasing range-trading one, it does highlight how import the direction of US yields are to the Dollar's direction at the moment. Yields up, Dollar up, yields down, Dollar down, it becomes as simple as that. 

The fall in the Dollar overnight saw major currencies rally strongly, with EUR/USD climbing 0.46% to 1.2205. AUD/USD rose 1.0% to 0.7770, and NZD/USD rose by 0.70% to 0.7230. However, I note that all three cyclicals remain below the rising support lines they broke down through on Monday, suggesting that the US Dollar rally is not down yet. 

GBP/USD rose an impressive 1.12% to 1.3660 overnight after the Bank of England Governor appeared to dismiss the prospect of negative interest rates. Sterling has risen to 1.3690 this morning, threatening resistance just above at 1.3700. With the Pound marching to its own beat, a daily close above 1.3700 opens the road to 1.4000 initially. EUR/GBP fell 0.67% overnight to 0.8935, and the cross has eroded support at these levels, grinding lower to 0.8925 in Asia. Readers should monitor to cross for clues to Sterling's direction. The long-term triple-bottom support at 0.8860 is within striking distance. A daily close below this point heralds another decisive round of general Sterling strength.

Asian currencies have also rallied, with the Singapore Dollar notably gaining 70 points versus the greenback, as USD/SGD reversed Monday's upside breakout and fell to 1.3230. USD/CNY continues to mark time around 6.4500, with tightening Monday supply data yesterday giving added support. The Malaysian Ringgit had a volatile day yesterday, USD/MYR rising to 4.0720 before falling back to 4.0430 this morning as local equity markets regained their poise. 

Asian currencies remain of their highs still versus the greenback. Notably, USD/KRW has traced, and impressive multi-day low just ahead of 1080.00 and a dovish BoK on Friday could trigger a squeeze in short USD/KRW positions. The direction of US yields seems to have a 100% correlation to the US Dollar at the moment. As such, that is what should be monitored for directional signals for the rest of the week. The US Dollar short squeeze still has plenty of juice left in it over the coming weeks.

Oil prices rally in Asia

Oil prices powered higher overnight, as normal service was resumed on the global recovery, Saudi Arabia output cut trade. A larger than expected fall in US API Crude Inventories of 5.8 million barrels helped the rally along nicely. Brent crude rose 1.95% to $56.70 a barrel, and WTI rose 2.10% to $53.60 a barrel. 

In Asia, the rally has continued unabated with Brent crude adding 1.05% to $57.30 a barrel, and WTI also rising 1.05% to $53.85 a barrel. Oil markets in Asia seem to be hitching a ride to the massive rise in LNG gas prices across the region. The cold snap in Northern Asia is increasing demand and lifting gas prices to record highs overnight. 

Brent crude has carved through previous resistance at $56.30 a barrel, and now becomes support with its next resistance at $60.00 a barrel. Similarly, WTI has taken out its double top at $52.70 a barrel, which now becomes initial support. Initial resistance is at $54.45 a barrel after which WTI's chart becomes rather intriguing, with no technical resistance until $60.00 a barrel. 

The Reuters report detailing US sanction threats on European companies involved with Nordstream-2 is likely to squeeze gas prices even higher in the short term. That should benefit oil by default, and at the moment, oil's rally looks well equipped to withstand a stronger US Dollar. A larger than expected drop in official US Crude Inventories this evening will also boost the rally.

Gold stages a modest comeback

Unchanged US yields, and the ensuing fall by the US Dollar, granted gold a reprieve overnight. Gold climbed 0.60% to $1854.80 an ounce and has gained another 0.28% to $1860.00 an ounce this morning. Gold remains in the casualty ward, however. 

From a technical perspective, gold is now boxed in nicely by its 100 and 200-day moving averages (DMA's), at $1890.00 and $1840.00 an ounce respectively. It would not surprise me in the least if those levels roughly defined gold's range over the next few days. Support appears $1820.00 an ounce with critical support remaining at golds 61.5% Fibonacci at $1760.00 an ounce. All bets are off for the longer-term uptrend if that level fails.

After a traumatic seven days for long positions, gold's fate remains entirely in the hand of US yields. If inflation spikes in the US tomorrow night, pushing up yields, gold will almost certainly test below $1800.00 an ounce. The weight of long positioning out there is likely to limit gold gains to around $1900.00 an ounce though, with higher US yields and a stronger US Dollar in prospect in the weeks ahead. 

Footnotes from the edge

Thank you to the well-wishers asking about my beloved cat Cricket yesterday. A neighbourhood search yesterday evening and this morning yielded no sign of the elusive feline. I shall keep readers informed. It is refreshing to see that Cricket's fate is accorded more weight with many then US politics. There is hope for the world.

On that note, the second trump impeachment vote will occur later today in the House and may also enjoy some bi-partisan Senate support, assuming the Senate can be recalled. Whatever emotions a Trump impeachment may engender, it will be a low impact event for financial markets, even if it is a high impact media event. That's all I intend to say about it for the rest of the week.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Opinions are the authors — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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