Overnight news was dominated by the capitulation liquidation in the cryptocurrency space. Depending on which crypto you were talking about, losses ranged between 30.0% and 50.0%. Bitcoin fell from $42,500.00 of US fiat currency to $30,000.00 before recovering more than half of that to $38,000.00 by this morning.
You can't keep a good dip buyer down for long in the financial markets these days, and cryptos are no different. The mass liquidation yesterday will have thinned out the ranks of "believers" massively, complicating the liquidity situation that is messy on the best of days. We saw a general meltdown in equities, precious metals, energy, and commodities overnight, and I suspect that more than a bit of cross-margining liquidation was in place.
Thankfully, even the "institutional experts" in tee-shirts and surrounded by empty pizza boxes are struggling to spin this out as the usual "healthy technical correction" and the "sign of Bitcoins expanding maturity" as a "mainstream financial asset." I shall enjoy the peace and quiet while they reformat their hard drives.
Because I look like a guru for one day at least (even Mrs Halley was impressed), and because you are all going to want to know, my outlook for the next 24 hours for Bitcoin is thus. If Bitcoin recaptures $40,000.00, those poor(er) "investors" liquidated yesterday will look to get back in. Classic dead cat bounce market chasing desperation, but probably enough to push it to $45,000.00, perhaps more. $30,000.00 is the line in the sand now, and another capitulation wave will follow if it breaks. I also note that the Relative Strength Index (RSI) indicator has moved into oversold territory for the first time since March 2020. That might be another straw to clutch at, although it's not as important as Elon Musk.
But most importantly, the sell-off started as a result of the PBOC reiterating its ban on all things virtual currency and its use by local financial institutions. The crypto-market is one quasi-government negative announcement away from another meltdown, should that emerge from the US, Europe or China. I will reiterate that the crypto-space faces an existential threat of regulation or banning after the Colonial Pipeline debacle poked a sleeping bear once too often. Any meltdown will temporarily spill over into other pumped-up markets if the overnight price action is anything to go by.
Back to the real world, the other noteworthy development overnight came from the FOMC Minutes. The minutes both steadied the intra-day ship by staying on super-easy until our goals are achieved message, while at the same time fraying nerves as talk to planning to start talking about tapering was mentioned. The Nasdaq had traded nearly 2.0% lower intra-day as the crypto meltdown created an open season duck shoot on asset classes with rich valuations. (i.e., most of them) It can thank the FOMC for steadying the ship and allowing a semi-orderly rebound, and it was not alone.
Asia has not been idle, though, with today's calendar probably the busiest of the week. The risk-sentiment Australian and New Zealand Dollars were pummelled overnight but have steadied this morning. Australian Unemployment fell unexpectedly by 30,600 jobs but was saved but a sharp increase in full-time employment. The series is volatile at the best of times, but a look under the covers shows the lucky country remains on track.
New Zealand's Budget 2021 has been well received, containing no surprises other than higher than forecast debt borrowing. It will still peak as a percentage of GDP at 48% in a few years, a dream scenario for most developed nations. S&P threw their lot in and said they liked what they saw and that the Land of the Long White Cloud would recover fast than most developed nations.
Interestingly, to lesser or greater degrees, both are a microcosm for the return of the 70's style big government—a trend we see worldwide. Classical capitalism has created enormous disparities in wealth, economic and social inequalities, exacerbated by ham-fisted quantitative easing through the 2000 and teens for far too long. Along with peak globalisation, it will be interesting to see if "lunch is for wimps" being replaced with "everyone can now actually afford to have lunch" works this time around.
China left its one and five-year Loan Prime Rates unchanged this morning which was as expected. With the PBOC having been busy for some time withdrawing excess liquid from the financial system and with signs that China's recovery is slowing a bit, there was no pressure on the PBOC. I believe China’s first-rate hikes will come in late 2021. The decision was market neutral with more focus by financial markets right now on China's crypto warning shots and threats to temper "speculation" (read rampant buying) in commodities.
Looking ahead, we have a busy but noisy data calendar across MENA and Europe. The data is second-tier, though, ahead of US Initial Jobless Claims and the Philly Fed Manufacturing Index for April. Weekly claims could dip below 450,000 this week, with the Philly Fed Index climbing above 50.0, setting another multi-decade high. Along with the US 10-year TIPS bond auction, improving data could give markets another little inflation nudge again, following on from the FOMC "time to start thinking about starting to talk about tapering" Minutes overnight.
Asian equities nervously mixed
Wall Street's leading indices finished the session modestly lower overnight. That belied the intra-day volatility, though, with stocks gyrating in huge ranges before the FOMC Minutes restored a sense of order. An on message Fed lifting spirits after a day of inflation and crypto nerves. Part of the sell-off intra-day was likely due to the cryptocurrency cremation, with liquidated longs selling stocks to raise cash. The S&P 500 fell 0.29%, with the Nasdaq almost unchanged and the Dow Jones retreating by 0.48%.
Asian markets have looked at the price action on Wall Street overnight and wisely decided to remain on the side-lines awaiting further developments, especially with a light data calendar. The day is mixed in Asia, with the Nikkei 225 up just 0.25%. South Korea has returned from holiday with the Kospi playing catchup on its way to a loss of 0.50%. Hong Kong is much the same and has fallen 0.80%.
Mainland China's Shanghai Composite and CSI 300 are unchanged, while Singapore has risen 0.30% while Taipei has retreated by 0.95%. Kuala Lumpur is flat, while Jakarta has risen 0.70%, powered by improving trade data just released today. Australian markets have rebounded sharply after yesterday’s torrid session, with steadying nerves pushing the ASX 200 1.25% higher and the All Ordinaries climbing 0.75%.
With US index futures unchanged in Asia, the mixed performance regionally, and the cautious ranges, suggest Europe will open higher today after catching a crypto-cold yesterday. Overall, the tail-chasing day to day behaviour in stock markets suggests a significant move is coming; my money is on a downward if possibly brief, correction.
Risk aversion lifts the dollar
The carnage sweeping the crypto market spilt into other asset classes overnight, leading to a bout of risk aversion sweeping forex markets. The US Dollar was, naturally, the prime beneficiary, the dollar index climbing 0.44% to 90.17. Like equities, Asian currency markets are cautious today, with the index edging down to 90.13 as sentiment cautiously returns.
The risk proxy Australian and New Zealand Dollars led markets lower, both falling nearly one per cent overnight. But previous leaders like the Euro and Sterling also retreated. The Australian Dollar tested and held its 100-DMA at 0.7727 overnight, rising 0.25% to 0.7750 today. A fall through 0.7680 signals the AUD/USD is not over. NZD/USD fell through its 100-DMA at 0.7180 overnight and is struggling to reclaim it this morning. The Kiwi looks the more vulnerable at the moment and could fall to 0.7000 in the sessions ahead if market nerves elsewhere remain elevated. Today's budget has had no currency impact.
EUR/USD is trading at 1.2180 this morning, but its longer-term bullish technical picture remained intact above 1.2100. Similarly, GBP/USD has retreated to 1.4115, with only a loss of 1.4000, changing an otherwise very positive technical view.
With USD/CNY settled into a 6.4000 to 6.4500 trading range, for now, ignoring the noise in other parts of the currency space, Asian currencies retreated only modestly overnight. USD/MYR has risen back above 4.1400 as Covid-19 cases high a daily record in-country. The virus situation is likely to limit any ongoing gains versus the greenback, even if they are proving resilient to inflation nerves.
The US Dollar's next directional move in the near term is likely to be decided by whether the crypto-rout continues or not and whether tonight’s US data lets the inflation genie out to play again.
Big ranges and big losses for oil
Oil markets were crushed overnight as the crypto market fallout spread to asset classes with large amounts of speculative longs. There were clearly more than I thought still long of oil as Brent crude fell three dollars at one stage to $65.30 a barrel, before bouncing slightly. WTI fell even more to $62.00 a barrel, before recovering, and its technical picture looks somewhat darker.
Brent crude finished lower by 2.75% at $66.35 a barrel, recovering slightly to $66.75 a barrel in cautious Asian trading. WTI collapsed by 2.90% to $63.45 a barrel, also rising somewhat to $66.55 a barrel in Asia.
Brent crude has resistance at yesterday's highs of $68.40 a barrel, with support at the overnight low at $65.30 a barrel. Failure risks a test of significant support at $64.40 a barrel and a crypto-like wipe-out of speculative longs. WTI's overnight collapse fell through the base of its two-month upward channel at $64.00 a barrel, which becomes initial resistance. The overnight low at $62.00 is the first support, followed by $60.65 a barrel. Failure of the latter support risks a capitulation sell-off through $60.00 a barrel. From a technical perspective, WTI really needs to recapture its upward channel quickly.
With nerves on edge in oil markets and elsewhere, tonight’s official US Crude Inventory data will assume a greater than normal importance. The noise around a possible US/Iran deal is increasing, and with risk sentiment turning South, that threatens to weigh more heavily on oil prices than previously. The risks have notably shifted to capitulation sell-offs in the last 24 hours.
Gold: A 40 Dollar range but unchanged
Gold traded in a near 40 dollar range overnight between $1852.00 and $1890.00 an ounce. The spillover from the cryptocurrency meltdown weighed on gold for a while, before an on-message FOMC minutes saw it rally back to finish unchanged at $1869.50.
Although gold failed in its challenge on $1900.00 an ounce, bullish investors can take heart that gold weathered a general risk sell-off and a slight rise in the US yield curve overnight. Gold has resumed its recovery in Asia, rising 0.40% to $1877.00 an ounce, another positive indicator that gold's rally still has legs. Bitcoin has recovered this morning quite impressively, which appears to be lifting gold prices as well. If cryptos and gold are about to start trading on a correlated basis, we should gird ourselves for much higher intra-day volatility.
Gold has support at $1852.00 an ounce, the overnight low, followed by support at $1845.00 an ounce. That is a series of previous daily highs and the 200-DMA. Only below this region is gold's bullish outlook called into question. Resistance is at the overnight higher at $1890.00 an ounce, followed by $1900.00 and then $1920.00 an ounce.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.