Inflation genie returned to its bottle

The buy-everything animal spirits refused to be caged any longer overnight as financial markets returned the inflation genie to its bottle. Technology was back, the S&P 500 and Dow Jones closed at record highs, US yields held steady, Bitcoin rose, and the US Dollar fell, with markets partying like it was 2020.

Earlier in the evening, the European Central Bank remained unchanged and signalled it would accelerate the pace of QE buying to cap yields. The Euro gained a pass mark, it seemed, because the ECB did not increase the size of the QE programme; instead, they chose to front-load it.

US Initial Jobless Claims fell to 712,000, its lowest since November, allowing another reason for the bulls to escape from their pens. The US 30-year bond auction also passed without incident. Although the bid-to-cover ratio wasn't spectacular, like the 10-year the day before, most of the issue went to direct buyers, not primary dealers, indicating an underlying broader demand. That was the last potential barrier for the week for simmering global recovery demand.

Another tailwind came from the White House, where President Biden signed the stimulus into law with cheques heading out the door almost immediately. Speaking this morning, President Biden stated that all adult Americans would have access to a Covid-19 vaccine by May, well ahead of the previous schedule.

All in all, there were few reasons to be anything other than business as usual into the end of the week. The fall in the US Dollar overnight will be particularly welcomed by Asian countries, who had an uncomfortable week watching it strengthen in their dirty peg world. 

With regular service resumed, we can expect markets globally to end the week on a positive note. So, have we reached "peak inflation sentiment?" Probably not. The Biden stimulus will be positive for American and Asian markets in the short-term. Still, its effects, and those of the general recovery, will start to accelerate in the March data everywhere. The inflation we will see is recovery inflation, not stagnation inflation. With the Federal Reserve comfortable with a steeper yield curve, more adjustment to a higher cost of capital is still required. The inflation genie may have been put back into its bottle for the weekend, but someone is sure to pick it up and uncork it again soon.

Moving past the buy-everything of today and into next week, the data calendar is a juicy one. Monday starts with China's Industrial Production and Retail Sales and Indonesia's Balance of Trade, and India's WPI. Pan-Europe inflation and US Retail Sales follow on Tuesday. Wednesday will see the latest US FOMC rate decision, followed by Bank Indonesia on Thursday and the Bank of Japan on Friday.

In that extensive list, the FOMC governors dot plot of future rate expectations will probably garner the most interest, as no changes to any interest rate benchmarks from the central banks are expected. Markets will be watching for signals that FOMC members have bought forward expectations of future rate hikes. That could be enough to reignite to mini-taper-tantrum once again, making Thursday's session in Asia an interesting one.

On a final note, one alarm bell that is ringing is gold. Gold traced out a double top at $1740.00 an ounce overnight but finished the day slightly lower for the session. The overnight environment should have provided fertile conditions for a sustained gold rally. To say the overnight price action was disappointing is an understatement. Gold's asthmatic recovery has probably run its course for now, and looking at Bitcoin's price action overnight; I can't help feeling crypto's are eating its currency debasement lunch. Expect more pain and new lows for long-suffering gold bulls next week.

Asian equities mixed following the Wall Street rally

After improving Jobless Claims and a non-event US 30-year auction greenlighted the buy-everything business as usual trade, big-tech was back overnight. Although still in correction territory, the Nasdaq powered 2.52% higher, while the S&P 500 and Dow Jones ended in record territory, rising 1.04% and 0.58%, respectively.

US futures are pausing for breath in Asia, and the region is delivering a mixed performance today, with some regional markets pausing for breath. Outperforming are the Nikkei 225 and Kospi, which have both risen by 1.20%. Taipei has climbed 0.30%, with Bangkok 0.25% higher.

Mainland China and Hong Kong are pausing for breath, though, after state-led buying saw strong rebounds in previous sessions. Threats of fines and further restrictions on Ali Baba are also weighing on sentiment in the tech sector. The Shanghai Composite is 0.40% higher, while the CSI 300 is unchanged, and the Hang Seng is 0.30% lower.

The cyclical outperformers this week in ASEAN is also seeing a mixed performance after technology's overnight comeback. Singapore is unchanged, while Kuala Lumpur is down 0.55%, while a stronger Indonesian Rupiah has lifted Jakarta by 0.80%. Australian markets are following their masters on Wall Street. The ASX 200 is 0.75% higher, while the All Ordinaries has climbed 0.95%.

The mixed performance in Asia reflects the effects of the cyclical rotation trade prevalent earlier in the week. The state intervention in China front-running the Wall Street rally overnight. With cyclicals gaining only slightly in Asia, Europe is likely to open higher, but not set the world on fire. However, Wall Street should be set for another strong finish to the week as recovery overrules inflation fear for now.

The US Dollar retreats

The US Dollar headed South overnight, unable to hold onto recent gains as inflation fears temporarily subsided as the 30-year bond auction passed without incident, and a fall in US jobless claims turned attention back to recovery. The dollar index fell 0.44% to 91.45, although Dollar short-covering has lifted it back to 91.55 in Asia.

EUR/USD negotiated the ECB meeting with aplomb, rising 0.45% to 1.980 overnight, and is seemingly out of the woods for now. A similar story has played out with GBP/USD and USD/JPY. The under-pressure Australian and New Zealand Dollars also rallied overnight; both are testing their respective downside breakouts at 0.7805 and 0.7230 today. A close tonight above these levels by AUD/USD and NZD/USD will conclude their downward corrections for now.

Asian currencies rallied strongly overnight int he general risk-on environment, as the Wall Street price action alleviated the pressure on their dirty pegs to the greenback. Today some profit-taking is evident in Asia, with the Singapore Dollar, Malaysian Ringgit, Korean Won and Thai Baht all falling. Still, net-net, regional currencies, including the Yuan, have booked impressive gains over the last 24 hours.

The US Dollar short-squeeze looks to have run its course in the short-term, with the FOMC dot plots next Wednesday in New Year the next hurdle currency markets have to negotiate. A revision of interest rate increase expectations forward will likely see Dollar strength return.

The oil rally is back on track

Oil markets powered higher overnight, with the recent bull market correction appearing to have run its course as expected. US Dollar weakness boosted black gold, with Brent crude rising 2.0% to $69.55 a barrel and WTI climbing 1.90% to $65.90 a barrel.

Oil markets are trading sideways in Asia, with local markets once again displaying a reluctance to chase prices higher, preferring to buy dips. Both contracts, however, will have Monday's highs firmly in their sights now that inflation fears have ebbed temporarily.

Brent crude will target the $71.50 region into next week, and WTI should target the $68.00 a barrel mark. Only a fall through $66.50 a barrel for Brent crude or $63.00 a barrel for WTI delays the rally.

Gold's price action rings alarm bells

The overnight session should have been fertile ground for gold to continue moving higher. Steady US yields, a weaker US Dollar and a strong rally by equities failed to impact gold prices, which instead eased by 0.25% to $1722.50 an ounce overnight. That negative tone continues in Asia, with gold falling another 0.20% to $1719.00 an ounce.

Although gold did spike overnight, all that achieved was to trace out a double top at $1740.00 an ounce. That and the $1760.00 an ounce breakout point form formidable resistance to any future gold advances now.

Given the unimpressive price action overnight, risks have swung to the downside and gold looks set to retest $1700.00 and this week's lows at $1676.00 an ounce next week. Flows out of gold ETFs continue at pace, adding another negative dimension to the gold picture.

Overall, gold is running out of time and excuses with the crypto-market seemingly chipping away at its Dollar debasement, inflation-hedging role.