Honeymoon in DC

Joe Biden was sworn in as the new US President overnight with financial markets granting him a DC honeymoon on his first day as the buy everything trade returned with a vengeance. Equity markets soared, as did precious metals, and currency markets saw commodity link currencies outperform at the US Dollar's expense. US bond yields were almost unchanged, as were oil markets as they digest the implications of a flurry of energy-related executive orders from the new President yesterday. Nevertheless, energy prices remain at their recent highs.

For all the noise about the Biden $1.9 trillion stimulus package that we are writing about ad nauseum, and the follow-on remake America spending the new President also wishes to enact, one critical risk remains and is being totally ignored by financial markets everywhere. That is the inclination of the Republican minority in the US Senate to bipartisanship. Their silence has been deafening until now on how cooperative they intend to be with the new President.  

Certain aspects of the Biden stimulus plan, and his follow-on spending wishes will almost certainly require a 60-vote majority in the Senate under the Byrd Rule. Otherwise, they will enter reconciliation, piece by piece in Senate committees to work around the filibuster. The net result will be a long drawn out process and risks momentum being lost on the Biden plan. It should also be noted that some Democrat Senators are more right of centre, making controversial passages potentially challenging to pass even within their own party. 

With financial markets all in on $1.9 trillion, it could be an unwelcome surprise when that number almost certainly gets put on a diet. The momentum has clearly swung back to the stimulus-driven, global recovery FOMO trade, notably the US Dollar correction higher appears to have finished for now. However, don't count out its reappearance once Senate Republicans make their positions clear.

We have a flurry of central bank decisions due today. The Bank of Japan should release an unchanged decision shortly with the main risk being a surprise tweaking of their quantitative easing programme. Bank Indonesia (BI) releases its latest rate decision at 1530 SGT. The re-imposition of partial Covid-19 lockdowns across the most populous parts of the country will slow the economic recovery. That raises the base case for more easing, but BI is likely to place more weight on the Indonesian Rupiah, which had slid back above 14,000 versus the Dollar. BI is expected to remain unchanged at 3.75%.

Bank Negara Malaysia (BNM) surprised markets by leaving rates unchanged at 1.75% yesterday. Although most of the country is now under Covid-19 movement control orders, BNM broke with markets expectations and said it saw signs of domestic recovery, despite the short-term situation. The Ringgit traced out a chunky rally in response, USD/MYR falling from a high of 4.0480 yesterday to 4.0330 this morning, and well of its highs near 4.0700 last week. 

The European Central Bank (ECB) also releases its latest decision this afternoon, but it is unlikely to have much market impact. The ECB will hold pat while noting the downside growth risks associated with the pan-European Covid-19 restrictions. Potentially the only surprise will be if they mention elevated medium inflation risks. Given that they have been waiting for inflation to appear for about 15 years, they should be grateful. The Euro underperformed versus the commodity-bloc overnight, and the technical picture suggests the recent correction lower is not out of the woods yet.

Weekly US Initial Jobless Claims is expected to print another dire number above 800,000 jobs lost this evening. Any market impact will be muted though unless the number seriously blows out to the topside. Markets remain target fixated on the Biden $1.9 trillion stimulus plan as an instant panacea to America's ills, and the claims data will be swept aside in that euphoric rush.

For now, Biden's honeymoon in DC is the one ring to rule them all, with 1.9 trillion reasons to back it up. Unlike Honeymoon in Vegas, President Biden can't rely on squadrons of Flying Elvis' parachuting in to save the day in the Senate. That is a Return of King I'd love to see though.

Asian equity markets join in Presidential honeymoon

 The FOMO buy everything trade was back in force overnight, with President Biden's swearing-in unleashing another round of stimulus-powered buying. Morgan Stanley's impressive earnings data and a huge by Netflix on their zero borrowing/buyback news added to the jovial mood on Wall Street. The S&P 500 finished 1.39% higher; the Nasdaq leapt 1.97% higher, and the Dow Jones finished a relatively sedate 0.83% higher. The rally has continued in Asia with US Index futures powering higher once again.

Wall Street's festive mood has spilt over into Asian markets which are a sea of green today. The Nikkei 225 and Kospi are 0.90% higher. Mainland China's Shanghai Composite and CSI 300 are 1.0% higher, and the Hang Seng has risen 0.30%. Singapore has climbed 0.20%, but Taipei has jumped nearly 2.0% this morning, and Bangkok is 1.0% higher. Australian markets have also rallied, the All Ordinaries and ASX 200 rising by 0.75%.

Jakarta and Kuala Lumpur are lagging with the Jakarta Composite unchanged ahead of the Bank Indonesia decision. Likewise, the KLCI has edged 0.25% lower as the local market digested an unchanged rate decision by Bank Negara yesterday.

European equities are likely to open higher today as well, as momentum globally has swung back to the US stimulus-powered global recovery trade. That is likely to continue into the end of the week and into the next, until the Republican Senate reveal the level of cooperation they intend with the new President.

The Dollar wilts before the US stimulus trade

The dollar index remained almost unchanged at 90.45 overnight, with much of the Dollar's retreat seen amongst the commodity-bloc currencies as opposed the Euro and Sterling. The Australian, New Zealand and Canadian Dollars all posting gains of around 0.70% with the Yen another notable gainer, USD/JPY falling 0.35% to 103.55.

The US Dollar retreated against the major currencies has become more broad-based this morning with the Euro and Sterling rising 0.25% to 1.2130 and 1.3680 respectively. That still leaves the single currency in range-trading no man's land, but Sterling is now threatening significant resistance at 1.3700. A rise through 1.3700 signalling a potential test of 1.4000. USD/JPY is threatening support at 103.50 as the Bank of Japan left policy unchanged this morning. A move through 103.50 signalling a potential drop to 102.50.

The commodity-bloc Australian and New Zealand Dollars have continued their rallies this morning. The technical picture is suggesting that their downward correction has now run its course for the meantime. AUD/USD has risen by 0.40% to 0.7780 and a move through resistance at 0.7820 signals a test of 0.8000. NZD/USD has risen 0.55% to 0.7210 this morning with resistance at 0.7220 and 0.7315. USD/CAD had fallen 0.20% to 1.2613 today, clearing support at 1.2620 and initially signalling further losses to the 1.2520 area.

Asian currencies rallied strongly overnight with their high beta to the global recovery and trade, both of which are expected to improve under President Biden. Except for the Malaysian Ringgit, Asian currencies are only slightly higher this morning, with local markets content to consolidate gains made overnight. USD/MYR is now 0.35% lower at 4.0290 as I write, boosted by the stimulus trade and an unchanged Bank Negara yesterday. It has cleared support at 4.0330 and could well outperform over the next few days, potentially testing 4.0000.

Overall, the US Dollar weakness has been somewhat uneven with currencies more closely linked to a global recovery outperforming, notably versus European ones. Nevertheless, momentum has clearly swung against the US Dollar, and it seems likely that the US Dollar short squeeze will take a hiatus for now. It may reappear if the Senate Republicans dish out a harsh dose of political reality to the Biden administration.

Oil markets balanced between opposing forces

Oil markets finished almost unchanged overnight, Brent crude ending 0.25% lower at $55.70 a barrel, and WTI 0.10% lower at $52.95 a barrel. In Asian trading, markets are equally muted, content to reverse those modest falls overnight leaving Brent at $55.90 a barrel, and WTI at $53.10 a barrel. 

Oil prices appear to be caught between opposing forces on the near term, which cancel each other out. President Biden quickly moved to quash the XL oil pipeline yesterday, signalling more restrictions on the oil industry, emphasising renewables. He also announced the intention to re-join the Paris Climate Accords. Conversely, oil prices remain supported by the fiscal stimulus trade, with the US intention to reengage with the WTO also perceived as positive for growth and thereby oil consumption. That is somewhat balanced out by Chinese tariffs remaining completely intact for now.

Despite the neutral session for oil, both contracts remain comfortably ensconced near the top of their recent ranges. The weight of speculative long positioning may be muting rallies for now. Still, the technical picture suggests a test of resistance is imminent, especially if the US Dollar has entered a weakening path in the shorter term.

Brent crude's immediate resistance is at $57.40 a barrel, with losses likely to be limited to %54.50 a barrel. WTI has substantial resistance ahead of $54.00 a barrel with support between $51.80 and $52.00 a barrel likely to restrict any pullbacks.

Gold bugs buy into Biden

The Biden inauguration led to an impressive 1.70% rally by gold overnight, closing nearly $32.00 an ounce higher in New York at $1871.50 an ounce. Precious metals markets were tunnel focused on the potential $1.9 trillion stimulus trade, to the exclusion of any associated risks, with Dollar debasement theory back in vogue. Notably, US yields were unchanged, and as the US Dollar retreated, this gave bullish gold investors to pile into new longs, with intra-day momentum becoming a self-fulfilling prophecy.

Gold prices will be acutely vulnerable now to an aggressive pullback if Senate Republicans signal that they are not sold on the Biden stimulus proposal. Asian investors certainly seem to be considering this after such a large move overnight, gold being unchanged in Asia this morning.

Gold faces resistance nearby at its 100-day moving average (DMA) at 1884.60 an ounce, followed by the $1900.00 and $1920.00 an ounce. The nearest support intraday is ominously distant around $1833.00 an ounce, followed by $1800.00 an ounce.

Having been viciously whipsawed this month already, bullish gold investors should treat the overnight rally with caution and resist chasing the market at these levels.