Dude, where are my toys?

The US bond market tantrum returned last night, not a full-blown one, mind you, just enough for the baby to throw a few of its toys out of the pram. US 10-years firmed to 1.47%, having tested 1.50% earlier in the day. US 30-year yields climbed to 2.25%. The five-year breakeven rate, a measure of future inflation expectations, hit 2.50%, a level last seen in 2008.

The move by bond yields was somewhat surprising given that the ADP Employment data for February was disappointing, adding only 117,000 jobs. The index has an opaque component weighting attached to the previous month's Non-Farm Payrolls number, which disappointed in January and may account for the ADP miss. I remain confident that tomorrows February Non-Farm Payrolls will outperform, possibly well North of 200,000 jobs. What should be a bullish indicator for equities is likely to be negative in current market conditions, as bond yields will likely squeeze higher.

The culprit appears to be two-pronged. The US ISM Non-Manufacturing PMI retreated to 55.8, still expansionary, but less than the 58.7 expected. Buried in the ISM sub-index, though, the Non-Manufacturing Prices index rocketed higher to 71.80, triggering the inflation alarm. Secondly, although President Biden has agreed to an income cap for stimulus cheque eligibility, it looks like the $1.90 trillion package will ease through the Senate mostly intact. The realisation that more Government debt issuance was on the way, with sentiment fragile, opened up the bond exit door.

Currency markets, somewhat surprisingly, were content to watch the histrionics in other asset classes from afar, hardly moving from the day before. That doesn't mean that the creeping US Dollar strength has left the building; the technical picture on several major currencies remains ominous. Having seen these bond levels already, Currency markets will need to see more pain in that space to awaken from their slumber.

The same cannot be said for equity markets. What caught my attention overnight was that the markets seemed to realise that the higher inflation is "good" inflation. A function of the global recovery and not a wage/price spiral. The cyclical-heavy Dow Jones emerged relatively unscathed overnight. Meanwhile, the Nasdaq and S&P 500, laden with tech-heavy Caligula's of extended FOMO working from home valuations, were removed from the bar for wearing trainers.

A similar pattern is playing out in Asia today. The North Asia winners of the rally from the March 2020 capitulation, Japan, China, South Korea, and Taiwan, are being stretchered off the field today. Meanwhile, the ASEAN markets of Singapore, Malaysia, Indonesia and Thailand, laden with dull banks, property and resource stocks, are holding their own.

The technical pictures have been screaming downside correction for some time on a number of important equity markets. The Nasdaq broke down last week; the S&P 500 is in the process of doing so. The Nikkei 225, Shanghai Composite, CSI 300, ASX 200 and Hang Seng are all either breaking lower or about to test critical supports that, in most cases, extend back to the March 2020 lows. I am sure I have missed a few others as well.

Any developments from today's annual meeting in China of the impressively named National Committee of the Chinese People's Political Consultative Conference, and any other data releases globally, will probably be ignored now. Instead, all eyes and ears will be on the Federal Reserve Chairman Jerome Powell. Mr Powell is taking part in a discussion at the virtual Wall Street Journal Jobs Summit this evening. Markets will be looking for signals from Mr Powell regarding his comfort with rising bond yields, inflation, and any signs of potential changes in Fed guidance. He will have to choose his words very carefully this evening.

Lost in the noise of overnight developments, Bank Negara Malaysia will announce its latest rate decision today. Having held its nerve through Covid-19 part two in Malaysia, BNM will almost certainly keep rates unchanged at 1.75%. That will be a wise course of action given that any bond-driven US Dollar strength would weigh on the Ringgit. The ebbing of Covid-19 cases and the rise in oil prices will provide BNM with the confidence to keep it's monetary powder dry.

Asian equities floored by US sell-off

The rise in US bond yields overnight saw the tech-heavy S&P 500 and Nasdaq indices experience another tough day at the office. The S&P 500 fell by 1.30%, with the Nasdaq retreating by 2.70%. By contrast, the cyclical-heavy Dow Jones eased only 0.38%, hinting that cyclical rotation is in play. In Asia, US index futures are in full retreat, with the Nasdaq down 0.90%, the S&P 500 minis down 0.80%, while Dow Jones futures outperform comparatively, lower by only 0.35%.

A similar story is playing out in Asian markets. North Asian markets, the prime beneficiaries of the recovery from the March 2020 lows, are being heavily sold. The Nikkei 225 has fallen by a whopping 2.45%, with the Kospi down 1.40%. The Shanghai Composite and CSI 300 have plummeted by nearly 3.0%, with Hong Kong down 2.75% and Taipei 1.90% lower.

By contrast, the more cyclical-heavy ASEAN markets are weathering the storm comparatively, in line with the rotation flows seen on Wall Street overnight. Singapore has, in fact, risen by 0.25%, while Kuala Lumpur is down just 0.35%, with Jakarta and Bangkok falling around 0.70%, with Manilla 0.50% lower.

The bank and resource-heavy Australian markets have a much higher beta to Wall Street, reflecting their performance today, despite excellent Australian Balance of Trade data. That beta also extends to their bond market, where yields have spiked in sympathy with US Treasuries, and that has been the greater weight on sentiment. The ASX 200 is 1.40% lower, with the All Ordinaries falling by 1.25%. The RBA Head of Economic Research is speaking at the moment. He has just mentioned that the RBA monitors the RBNZ macro-prudential housing lending rules and their effectiveness closely. That is likely to increase the gloom down under; Australians love their houses.

From a technical perspective, two charts concerning me are the S&P 500 and Nasdaq. The Nasdaq broke through an ascending long-term support line, extending back to Mar 2020, at the start of last week. Since breaking 13,100.00, the index has tried multiple times to recapture it without success. It is now testing its 100-day moving average at 12.615.00. A daily close below 12,600.00 is an ominous bearish signal. 

The S&P 500 has broken through support at 3800.00, an ascending line dating mack to the March 2020 lows. This evening, a daily close below this level will signal further losses, initially targeting its 100-DMA at 3,693.00, followed by 3,600.00. 

The price action on equity markets is ominous. Everything rests on Mr Powell's remarks this evening in the short-term. An outsized increase by US Non-Farm Payrolls tomorrow night, though, will almost certainly lead to another spike in US bond yields in the current environment. I will stick my head out and say that equity markets worldwide are on the cusp of a material correction lower.

Currency markets remain in hibernation

In contrast to the action in equity, bond and energy markets, currency markets remain in a state of suspended animation. The US Dollar continues to range, the dollar index edging lower to 90.80 overnight, although the equity sell-off in Asia has pushed it higher by 0.15% to 91.07 today. A further squeeze in US bond yields this evening could see the index test resistance at 91.60.

Although markets are ranging, several currencies remain vulnerable to US dollar strength. EUR/USD has fallen to 1.2050 today, not far from support at its 100-DMA at 1.2025, and then 1.2000. Failure of the latter could extend losses to the 1.1800 regions. Although yesterday's UK Budget was well received, with the fiscal taps to be left fully open until December, the British Pound could not rally. GBP/USD has fallen to 1.3935 today, the middle of its 6-month ascending wedge, bordered by a.3800 and 1.4040. Failure of 1.3800 in the days ahead opens up a material correction lower for the Pound.

With their high betas to the FOMO equity rally of 2020, the Australian, Canadian and New Zealand Dollars are also at risk of a significant correction lower. Although iron ore prices remain high, copper, platinum, aluminium, and tin prices have retreated in recent days, eroding the Commonwealths' usual source of support. At 0.7770 today, AUD/USD is hovering just above its multi-month ascending wedge support at 0.7750. USD/CAD remains just shy of long-term resistance at 1.2690, and NZD/USD is just above its multi-month support at 0.7200. Weekly closes through those levels tomorrow will signal a significant correction has started.

By contrast, Asian currencies remain a sea of calm, with only the Korean Won and Indonesian Rupiah showing cracks. The PBOC raised the USD/CNY markedly to 6.4758, the largest move in some time. However, it has kept USD/CNY anchored between 6.4000/6.5000 since the start of the year, which has anchored the rest of the Asian currency grouping. If the Won and Rupiah are hinting at further US Dollar strength ahead, it will need the PBOC to start raising the fixes above 6.5000 for the edifice to crack. The Indian Rupee, Indonesian Rupiah, and Philippine Peso remain the most vulnerable to US Dollar strength among the regional currencies.

OPEC+ speculation lifts oil prices

Oil prices rose last night, ignoring a record increase in official US Crude Inventories of a monumental 21.56 million barrels. That was offset partially by a 13.62-million-barrel drop in gasoline stocks, and clearly, the weather disruptions in Texas and neighbouring states are reflected in the data. 

After Reuters published a story suggesting the OPEC+ may now not wind back production cuts at their meeting today, oil prices moved higher. That sent prices flying, and Brent crude finished the day 2.35% higher at $63.90 a barrel, WTI climbing by 2.70% to $61/05 a barrel.

Asia markets have continued to rally, in line with the cyclical rotation seen in equity markets, the Reuters story and news that the Yemeni Houthi's had fired a missile at a Saudi facility in Jeddah. Brent crude and WTI are both 1.15% higher at $64.60 and $61.75 a barrel, respectively.

The Reuters report has introduced a binary outcome to today's meeting, and I will not try to second-guess OPEC+. I do note that they have surprised us before and that if no change is forthcoming today, it will undoubtedly be on the table from next month.

Brent crude has resistance at $66.00 and $68.00 a barrel, with support at $62.00 and $60.00 a barrel. WTI has resistance at $62.00 and $64.00 a barrel, with support at $59.40 and $58.60 a barrel. With positioning now less balanced towards increased OPEC+ supply, if they do go ahead, oil should spike lower. I believe that any spikes lower will be short-lived, however.

Gold is singing in the Bit-November rain

The rise in US bond yields put a quick stop to the nascent gold recovery overnight. Gold fell 1.60% to $1711.00 an ounce. Ironically, Bitcoin continued to power higher, rising back through the $50,000 mark. For now, it seems cryptos are eating gold's inflationary hedge lunch.

Gold has crept a few dollars higher in Asia, rising to $1715.00 an ounce, but is still gasping for air. The technical picture for gold looks awful now. It has fallen through long-term support at $1760.00 an ounce, and then attempted, but failed, to reclaim it. Rallies are currently limited to $1740.00 an ounce, which is now a double top. In fact, gold came perilously close to tracing out a bearish outside reversal day overnight.

Gold has support at $1702.00 an ounce, the overnight low. That is followed by the 61.80% Fibonacci of the March to August 2020 rally at $1689.00 an ounce. If bond yields move higher over the next two days, gold will almost certainly fail at the latter, opening further losses targeting the $1600.00 region. Oversold short-term technical indicators are gold's only glimmer of light now, but I suspect they will fade quickly.