It’s good to talk

You know it's a quiet week when the weekly US Initial Jobless Claims spurs Fed tapering fears and leads to a stock market sell-off. That's pretty much what happened, though. This was despite a strong US 30-year bond auction sending yields lower and the US Dollar falling. All-in-all it sums up what I had telegraphed earlier in the week, a lack of tier-1 data points would lead to a choppy market dominated by intra-sentiment. 

Perhaps the only theme I can glean from this week is that despite the nightmare Non-Farm's last Friday, high-frequency surveys, and the JOLTS Job Openings data suggest there are a vast number of jobs in America, the problem is getting Americans to take them. Thus, the headline Non-Farms may not be telling the whole story, and the Fed taper could still b on at years end.

However, sentiment has abruptly reversed in Asia today as news that President Biden and President Xi had had their first phone call in seven months. China state television is also running a story saying that President Xi wants better trading relationships with ASEAN countries. China has also sent an olive branch letter to Australia's Government, asking them to support China's application to join the CPTPP, the old Trans-Pacific Partnership.

All of that is music to the ears of the Asia-Pacific, improved trade with the region, tick. Potentially thawing relations with Australia; tick. President Biden and President Xi talking in person as the first step to warming relations between the two superpowers; tick, tick, tick, tick, my pen has run out of ink. Unsurprisingly, Asian equities are following the China charm offensive and heading North. It certainly has more substance than using the weekly Initial Jobless Claims to justify a mini taper-tantrum.

Last night’s ECB policy meeting was a bit of a non-event. The ECB didn't taper (ask Christine Lagarde), but they decided to reduce the front-loaded pace of PEPP bond-buying and extend it over a longer period into the programme's termination around March 2022. What they didn't say was by how much they would reduce their bond-buying to. Still, it left the hawks and the doves with their dignity intact, and its impact on markets was minimal to non-existent.

Later today, German Inflation and US PPI might spark some intra-day volatility. However, today's Asian calendar is more threadbare than my tee-shirt today (none of Mrs Halley's online shopping lands on this pauper's back), leaving markets in Asia to bask in the warm afterglow of hope that is improving US/China, ASEAN/China, and Australia/China relations. As good a reason to fill 'yah boots on the global recovery trade as any. Happy Friday.

Asian equities surge on US/China hopes

This morning, President Biden and Xi's phone call has spurred hopes of a thaw in US/China relations. That is ostensibly good for trade everywhere and spurred a decent rally in stocks across Asia. That has sharply reversed the negative sentiment that dominated the US session, where a technical correction to an extended rally this week has been painted as tapering nerves.

Overnight, the S&P 500 fell by 0.46%, the Nasdaq eased by 0.25%, and the Dow Jones fell by 0.42%. US index futures have picked up a Biden/Xi shuffle themselves in Asia, though. Dow futures rising by 0.30%, S&P futures by 0.20%, and Nasdaq futures by 0.12%.

Needing no further cues, Japan's Nikkei 225 has leapt 1.30 higher today, with South Korea's Kospi rising by 0.30%. The Shanghai Composite is oddly muted in China, rising only 0.05% today, although the narrower Shanghai 50 had jumped by 0.72%. It is all systems go elsewhere, though, with the CSI 300 climbing 0.44% and the Hang Seng leaping 1.65% higher after Hong Kong list Mainland tech giants endured a torrid day yesterday. Sentiment in Hong Kong may also be aided by Ever-teflon, I mean Evergrande, pulling off another stay of execution.

Regionally, Singapore has risen by 0.65%, with Taipei 0.75% higher, although Kuala Lumpur and Bangkok have edged 0.20% lower. Jakarta and Manilla are 0.10% and 0.45% higher. Australian markets also share the good cheer, the All Ordinaries rising by 0.25%, and the ASX 200 climbing by 0.45%. The rally is led by, you guessed it, resource companies and banks. 

I expect European bourses to take a neutral ECB and the potential olive branch of US/China relations to heart and open higher today, as should US markets, where some good news and Joe Biden in the same sentence have become a rare commodity of late.

Asian currencies rally on US/China hopes

Currency markets had another dire overnight session, with volatility proving an elusive beast these days. Lower US yields were enough to send the dollar index just 0.20% lower to 92.52, easing another 0.06% to 92.47 this morning. EUR/USD tested support at 1.1800 overnight, but this held, and EUR/USD has recovered to 1.1830 this morning. GBP/USD rallied by 0.47% to 1.3835 overnight after a Bank of England official talked rate hikes. GBP/USD has risen to 1.3848 today but still faces stern resistance between 1.3900 and 1.3920, its 100-day moving average. (DMA).

The Biden/Xi phone call has propelled Asian currencies higher today, with USD/ASEAN around 0.20% and USD/KRW also falling by 0.22% after a tough week for the Won. AUD/USD and NZD/USD, with a high beta to Asia at the best of times, have climbed by 0.22% to 0.7383 and 0.7120, respectively, alleviating their downside pressures of the past few days. 0.7300 and 0.7080 should mark interim lows now, setting Asia FX and AUD and NZD up for further advances into next week.

USD/JPY, still a dull US/Japan rate differential place, plummeted by 0.50% to 109.70 before recovering marginally to 109.80 this morning. The culprit was the fall in US yields across the curve, notably in the 30-year tenor, after a robust 30-year US bond auction. With tapering talk in the US dominating the narrative this week, there are likely to be quite a few longs above 110.00 quite nervous now. A failure of support at 109.60 could spur a reactionary sell-off to 109.00. 

Despite some individual noises and the moves in USD/Asia today, volatility in currency markets remains muted. In the bigger picture, the dollar index is bouncing around in a wider 92.00 to 93.20 range. German and Canadian elections are unlikely to be enough to lift the lethargy in forex markets; we may require a surprise from this month's FOMC to achieve that.

Oil partially reverses overnight losses

Oil prices continue to trade in a choppy but ultimately range-trading manner. News that China was releasing some strategic oil reserves into domestic markets put the bears in the ascendancy. However, I suspect a lower than expected fall in official Crude Inventories had more to do with the falls. Brent crude fell by 1.80% to $71.35, and WTI slumped by 2.0% to $67.95 a barrel.

The Biden/Xi phone call has had the same effect on oil markets as it has other asset classes, with any hope that US/China relations, no matter how small, are construed as positive for global trade and basically almost every asset. Oil markets are no different with the China reserve story quickly forgotten as Brent crude and WTI rise 0.75% in Asia to $71.85 and $68.50 a barrel.

The Biden/Xi phone call should be a powerful enough incentive to keep the music playing into New York, and I expect oil to continue retracing its overnight losses and climb to the top of its recent range. 

Brent crude has resistance at $73.20 and $73.70 a barrel, with support at $71.00 and $70.50 a barrel. WTI has resistance at $68.85 and $70.50 a barrel, with support at $67.50 and $67.00 a barrel. It would be a huge surprise if oil finished the week outside of those ranges tonight.

Gold remains punch drunk

The fall in US yields and easing of the US Dollar was enough to lift gold slightly higher overnight, rising 0.30% to $1794.50 an ounce. In Asia, it to has received a modest US/China tailwind as it climbs another 0.20% to $1798.00 an ounce.

In the bigger picture, gold still looks punch drunk, and its price action is most unimpressive. The balance of risks continues to be skewed to the downside, with gold's upward momentum vanishing this week. Even when US yields and the US Dollar fall, gold can still not create a meaningful rally, suggesting that there are many stale speculative long positions out there.

Gold has contracted into a narrow $1780.00 to $1800.00 an ounce range, and a break higher unlikely to seriously test the 200-DMA at $1809.40, or the 100-DMA at $1815.90 an ounce, let alone the much more formidable $1835.00 an ounce region. Failure of nearby support at $1780.00 an ounce could see stop-loss selling emerge, pushing gold quickly lower to $1750.00 an ounce.

Bitcoin

I must apologise for not commenting earlier on Bitcoin's volatility this week, as readers know it is important to me. Unfortunately, I was watching some paint dry and didn't have the bandwidth to do so.

Bitcoin has plummeted from near $53,000.00 of fiat tax-payer revenue backed fiat currency to $46.670.00 as of this morning. The sell-off occurred as soon as El Salvador went long and made it an official currency. Coincidence? Possibly. I suspect heavy long-positioning and nerves once it dropped back through $50,000.00 are better reasons.

In the spirit of tradeable versus investible assets, though (there is a huge difference), I do not think Bitcoin is out for the count yet. Bitcoin managed to close above its 200-DMA at $45,930.00 on a daily basis this week, despite the multi-day waves of selling. That suggests it still has the potential to rally above $50,000.00 once again. However, failure of support at $44,000.00 is likely to unleash another wave of panic selling and angrier El Salvadoreans.

I note that another sovereign global economic powerhouse, and bastion of fiscal stability, the Ukraine, has also made Bitcoin legal tender today. El Salvador and Ukraine's forward-thinking actions have spurred more stories from the press, and institutional, always bullish, a 30% fall in two days is merely a technical correction “experts” about Bitcoin going global. 

Bitcoin has hardly moved on this momentous and exciting event unless you are a foreign donor, the World Bank, the IMF or a rating agency or a Ukrainian anti-money laundering officer in a financial institution. The lack of positive price follow-through is slightly concerning. You could argue that Ukraine has "stopped the rot" or " Bitcoin should" have rallied. I shall tune in on Sunday at around 1437 SGT, when trading is in full cry, to find out.