Every man for himself

Financial markets have an every man for himself look about them today, as various asset classes diverge in their own directions. A combination of tightening yields and the impending two-day testimony by Fed Chairman Powell starting today in Washington DC seems to have provoked differing reactions across different markets. 

Despite yields rising once again in the 10 and 30-year tenors, the US Dollar fell overnight across the board. Gold rallied impressively as the Dollar weakened, and US yields rose, despite that being a repeat of the price action the Friday which it completely ignored. Equities fell on Wall Street, led by the tech-heavy Nasdaq, which endured a torrid day. Oil, meanwhile, rose impressively despite thawing signs in Texas and signs of cracks among OPEC+ on the trajectory of production cuts. Base metals, notably tin and copper, rallied strongly once again. Meanwhile, Bitcoin did what it does, falling 10% intra-day before finishing 6.0% lower for the session.

The plot thickens in Asia, with regional equities and US futures rallying this morning, unless you are tech-heavy South Korea or Taiwan, which have followed the Nasdaq's overnight fall South.

Overnight, the Dallas Fed Manufacturing Index, the Conference Board Leading Index and the Chicago Fed National Activity Index all impressively outperformed. Covering the January movement restrictions and February’s inclement weather, the results were all the more impressive. A falling Covid-19 caseload and a ramping up of vaccinations, suggest that the US rebound could well accelerate, once the pandemic gloves come off. 

That was all music to the ears of the inflationistas, with inflation definitely the week's theme for financial markets, even amongst the FOMO gnomes of the equity market. Despite the attention centred on US markets and bond yields, it is not confined just to the United States. A quick glance showed that longer-term yields in Australia, New Zealand, South Korea, the Eurozone and the United Kingdom and Japan (yes Japan), have all firmed over the past few days. That may explain why the US Dollar hasn't received a US bond lift, with the steepening of yield curves appearing to be globally synchronous now.

My first thoughts are steeper yield curves worldwide should bring back the love to banking sectors in various parts of the world, perhaps even Europe and parts of ASEAN. (US banks are already FOMO-loved) Unless your CEO is incompetent, banks typically make lots more money in environments with steeper positive yield curves. In the short-end, funds low on free central bank money lend higher on the steeper yield curve at the long end. Easy. Those on the wrong side of the K-shaped recovery may find their bile rising at the thoughts of banks making more money, but a healthy economy requires profitable banks; just ask Japan and Europe.

If I were to take away anything from the directional moves across markets over the past few days, it would be the markets positioning for an accelerating global recovery. It is led in no small part by the Biden stimulus package, which looks increasingly likely to pass through Congress mostly intact. It leads to cost-push inflation and a rotation into cyclical asset classes. (commodities and boring legacy industries and sectors with company names that don't end in .com). At the same time, the periphery tactically accumulates inflation hedging positioning. (Gold and crypto-Musk’s)

Mr Powell's testimony this evening assumes a more significant than ever importance in maintaining the momentum of the trade. Expect every single word to dissected, looking for hints that the Fed may blink sooner than expected. That is nonsense, of course; America still has 10 million more unemployed than before Covid-19. Mr Powell will go out of his way; I am sure, to put tapering to bed and rightly so, as I dread to think what a taper-tantrum of the 2020s will look like. In this environment, though, the most he can probably hope for is a short-term correction, and he should probably avoid saying he is comfortable with a steeper yield curve at all costs. As Mel Brooks said, "it's good to be the king," it's less fun to be the Chairman.

Asian equities shrug off Wall Street retreat

Wall Street had another negative session overnight, as inflation concerns increased bubble nerves, notably on the tech-heavy Nasdaq. The S&P 500 fell 0.77%, while the Nasdaq was in full retreat, losing 2.46%. The more cyclical Dow Jones, by contrast, managed to cling to a 0.09% gain.

The dip buyers are out in Asia, with US futures all tracking higher and Asia-Pacific equities all riding the cyclical upturn commodity wave. The exception being the tech-heavy Taiwan and South Korean indices. The Nikkei 225 is 0.46% higher, while the Kospi has retreated 0.40%, and Taiwan has fallen 0.20%. 

In Mainland China, local markets have shrugged off yesterday's digital co-lending regulatory hiccup, the Shanghai Composite rising 0.55% and the CSI 300 climbing 0.10%. Hong Kong has powered 0.90% higher, with Singapore increasing 0.60%, Jakarta 0.30%, and Kuala Lumpur 0.40%, with Bangkok rising 1.0%.

Steeper yield curves and higher commodity prices have lifted Australian equities higher, led by banks and resources. The ASX 200 and All Ordinaries have both climbed 0.50% higher. 

Asia has probably seen the best of the intra-day rally now, with the risks around the Powell testimony this evening likely to temper exuberance. Europe and the UK should follow suit this afternoon but will run into the same Powell roadblock.

The US Dollar continues to fade

The US Dollar found no solace in higher longer-end bond yields overnight, likely because the move was mirrored to some extent among other developed market currencies. The greenback suffered as the cyclical rotation into global recovery positioning continued gaining momentum. The dollar index fell 0.40% overnight, leaving it sitting on support at 90.00.

The Euro, Japanese Yen and Canadian Dollars rose overnight, with the cyclical darlings, the Australian and New Zealand Dollars booking 0.50% gains. The most notable gainer was the British Pound which gained 0.50% to 1.4060 as the Prime Minister unveiled a reopening plan and vaccination progress continues impressively. GBP/USD broke through the top of its multi-month ascending wedge at 1.4000 overnight, targeting further gains above 1.4300. In contrast to Europe's bungled efforts, Britain's vaccine progress saw EUR/GBP fall through 0.8670 overnight, and the cross now targets 0.8300 in the coming weeks.

Major currencies are mostly unchanged in Asia, with local markets content to wait for the Powell testimony this evening. The PBOC set the Yuan fixing slightly firmer at 6.4516 this morning while adding 10 bio CNY of liquidity via the repo market. Net net, the effects were neutral and left USD/CNY at 6.4580, almost unchanged from yesterday. 

With the PBOC content to leave the US Dollar fixing on the firm side, activity in regional Asian currencies remains muted. The Korean Won, Singapore Dollar, and Malaysian Ringgit are around 0.10% higher, reflecting the Dollar weakness overnight. In the bigger picture, regional Asian currencies remain content to range trade, awaiting China's further direction.

Oil rallies impressively

Oil powered higher overnight, as global recovery hopes and the slower than hoped return of production and refining in Texas was all the excuse traders needed to reload long positioning. Brent crude leapt 5.0% higher to $65.80 while WTI also outperformed, rallying 5.50% to $62.20 a barrel. 

Notably, neither contract has seen any sign of profit-taking this morning, with Brent crude rising 0.65% to $66.25 and WTI climbing another 0.55% to $62.50 a barrel. Markets are showing no nerves about the March 4th OPEC+ meeting, and with futures curves in a very bullish strong backwardation, the price action overnight and today sends a strong signal that oil will be highly sought after on dips.

Morgan Stanley joined Goldman Sachs in raising its oil price target overnight, and Iran's threat to enrich uranium to 60% purity reduces the odds that it's production will return to world markets in volume anytime soon. 

Brent crude has now broken through resistance at $66.00 and directly targets the January 2020 highs at $71.20 a barrel. Support appears at $66.00 initially, followed by $62.20 a barrel. WTI has cleared resistance at $62.00 a barrel, which becomes intra-day support as the Texas deep freeze recovery drags on. WTI's next target is the January 2020 highs around $65.60 a barrel, and only the failure of $59.00 a barrel calls the rally into doubt.

The RSI technical indicators on both contracts have moved back into overbought territory today, but not markedly so. Given that developments in the physical market are driving the rally, oil will continue to find a wall of buyers awaiting any dips in prices. 

Gold finally finds some friends

Perhaps the most unusual move overnight, was the powerful 1.50% rally in gold prices. Having wilted under higher US yields and ignoring a weaker US Dollar last week, higher US yields and a weaker Dollar could not stop gold climbing $26 to $1810.00 an ounce.

If nothing else, the rally in gold overnight highlights the inflation concerns globally target-fixating financial markets this week. Gold has now traced out a rough double-bottom near the $1760.00 an ounce Fibonacci region. That highlight its importance as a long-term critical support zone, and failure now almost certainly condemns gold to a move to the low $1600's an ounce.

Gold has moved two dollars higher to $1813.00 an ounce today, with Asia unwilling to join the overnight rally ahead of the Powell testimony this evening. Gold's rally, coming as the market's completely ignored the identical factors that sent it lower last week, is a warning sign against unfettered bullishness and recovery hopes. 

Gold has initial resistance at $1830.00 an ounce, but far more formidable resistance remains just above in the shape of its 50,100 and 200-day moving averages. All three are clustered between $1850.50 and $1860 an ounce. The 50-DMA crossed below the 200-DMA last week, and the 100-DMA looks set to do the same in the next few days if prices trade sideways from here. Gold is by no means out of the woods yet. The nature of the rally overnight, and the ominous moves by the technical, signal caution is warranted still. It could yet turn into a sucker's rally.