Treasury Secretary (and former Federal Reserve Chairperson) Janet Yellen perhaps wished she had used less Extreme words last night. Ms Yellen stated that interest rates may have to rise to prevent the economy from overheating. However, she couched that by saying the additional government spending was small relative to the size of the economy.

The retreat continued later in the day, with Ms Yellen saying a rise in interest rates was not something she was predicting or anticipating, but the damage was done. Ms Yellen may have been saying to the markets, "I love you," but they replied, "not the words I want to hear from you." The tech-heavy Nasdaq slumped nearly 2.0%; the S&P 500 fell 0.80%, with only the Dow Jones catching some cyclical rotation and keeping its head above water. The US Dollar spiked higher, and gold fell, but interestingly we can see where all the equity money got parked as US yields actually retreated. 

That should highlight to readers the risks surrounding the Non-Farm Payrolls. Ms. Yellen hoped that by saying, "what would you say if I took those words away?" It failed, and if Non-Farm Payrolls print north of one million jobs this Friday, we may see much the same price action. Except that this time, US longer-dated yields may rise, which will seriously muddy the waters of the buy-everything trade. The reaction of the Nasdaq overnight suggests that after over a year of one-way price action, some hypoxia may be setting in at these altitudes.

US ADP Employment data may give markets a hint of what is to come on Friday, with 800,000 jobs expected to be added. Admittedly, the ADP hasn't been a great indicator of late for the Non-Farms but expect nerves to increase if it outperforms. Although the headline US Factory Orders headline was dragged down by transport overnight, the ex-Transportation for March handsomely beat, rising by 1.70%. US API Crude Inventories also collapsed by 7.7 million barrels. All hinting that the reopening of the US and its recovery momentum is accelerating, even as pricing pressures increase on hard and soft commodities and manufactured goods. None of this is consistent with US 10-year yields at 1.50% and will be less so if the Non-Farm Payrolls dish out an upside surprise.

The data has been mostly supportive in Asia today as well. New Zealand Q1 Unemployment fell by more than expected to 4.70%, while Australia's April Markit Services PMI rose to 58.8, and ANZ's first-half profit surged by 45%. Singapore and Hong Kong's Markit PMIs retreated slightly but remain in expansionary territory above 50.0. Indonesia Q1 GDP and India Markit Services PMI are likely to be less rosy, but both countries' challenges appear to be baked into market pricing for now. 

The tightening of Covid-19 social restrictions in Singapore will continue to dampen spirits there, even though I believe it does not yet imperil the recovery in the city-state as yet. But with China and Japan away until tomorrow, I expect the cautious outlook enveloping the rest of Asia to continue. Covid-19 is the culprit, with Japan looking to extend the state of emergency in Tokyo and elsewhere. Singapore, Hong Kong and notably, Thailand are all dealing with the virus re-emergence, with investor nerves elevated after two weeks of watching the tragedy in India unfold. That theme is likely to continue for the remainder of the week as the street awaits direction from the US data prints.

Asia-Pacific equities mixed after US tech-rout

The Yellen-induced tech-rout overnight has mostly passed Asia by this morning, with the region refusing to follow Wall Street this week slavishly with heavyweights, China and Japan, on holiday until tomorrow. US index futures have all edged higher by around 0.30% this morning, somewhat steadying the ship.

If US markets are having a noisy tail-chasing week, symptomatic of investors nerves after a one-year plus bull market on steroids, regional markets are mixed. The Kospi has risen 0.65% and Taiex by 0.35% as the semi-conductor darlings enjoy the sunshine on a quiet news day. Covid-19 restrictions weigh on Singapore once again, with the STI down 0.90% while Hong Kong and Kuala Lumpur are unchanged while Jakarta has edged 0.35% higher.

Australian markets have rallied once again as ANZ posted bumper results, Services PMI rose to 58.80, and Building Permits exploded higher by 17.40% as commodity prices continued to rise overnight. The avalanche of positive news sees the ASX 200 rising 0.75%, while the All Ordinaries has added 0.55%. 

Asia's nagging Covid-19 fears have dampened spirits this week. Still, they should not be enough to stop Europe from opening modestly higher today as movement and travel restrictions on both the continent and the UK look set to be eased, in contrast to Asia.

The US Dollar gets a Yellen boost

The Yellen rate-rise comments propelled the US Dollar higher in double-quick time overnight, and even a winding back of the remarks later did not dent the greenback rally. The dollar index rose 0.35% to 91.28, although short-term profit-taking has pushed it back to 91.18 in Asia. In the bigger picture, the dollar index is bouncing noisily around in a roughly 90.50 to 91.50 range. A break of one of those levels is needed to signal the US Dollar's next directional move. Although the US Dollar is nearer to the topside of its range, at least four Fed Governors speak tonight by my counting. Most are likely to be in damage control mode and uber dovish, meaning the US Dollar rally could just as easily be a false dawn.

EUR/USD retreated 0.40% to 1.2015 overnight, just above important support at 1.2000. However, with the dollar index in mind, EUR/USD needs to close well below 1.2000 to signal further losses and not a bear trap. Elsewhere, GBP/USD and USD/JPY and USD/CHF continued to mark time in relatively narrow ranges as the street awaits heavyweight US data.

As proxies for market risk sentiment, both the Australian and New Zealand Dollars fell by 0.70% overnight to 0.7710 and 0.7145, respectively. Both have rallied in Asia, with AUD/USD rising 0.35% to 0.7735 on strong banking earnings and data, and NZD/USD rising 0.40% to 0.7170 on the strong employment report. Like the other majors, both Australasians are trading in choppy 100 point ranges the past fortnight, awaiting their next directional move. A question that will hopefully be answered on Friday night.

Asian currencies retreated sharply in overnight trading after the bout of Yellen-induced US Dollar strength. With China away today, activity is muted once again, with regional currencies modestly retracing the overnight movements. Activity is unlikely to pick up until China returns tomorrow, and we see the PBOC USD/CNY fixing and the PBOC's actions in the repo market.

Oil markets gush higher

If equity markets were showing Yellen-induced rate nerves, oil markets were not. Both Brent crude and WTI rallied impressively for the second day in a row. Although oil rallied on a much weaker US Dollar on Monday, it also rallied strongly even as the US Dollar rallied powerfully overnight. That suggests to me that upside momentum is building for oil prices after Friday's month-end hiccup.

A few factors are supporting prices at the moment. The US API Crude Inventories collapsed by 7.7 million barrels overnight, pointing to a drop in official Crude Inventories and Gasoline stocks tonight as the summer driving season gets underway. The constant stream of reopening announcements in the US and the anticipated rising consumption are supportive, as are indications from Europe and the UK that inbound tourism will soon reopen to vaccinated visitors. 

Oil markets are myopically focused on recoveries in the US and Europe, with OPEC+ production increases and India seemingly priced in. Oil prices will receive another boost from the first indications that India is seriously getting on top of its Covid-19 tragedy. A strong Non-Farm Payroll figure on Friday is likely to fan the recovery flames even more.

Overnight, Brent crude rose through $68.00 a barrel on its way to a 2.70% gain to $69.45 a barrel. WTI rose 2.55% to the top of its bullish channel at $66.25 a barrel. Prices in Asia are unchanged with not profit-taking sellers evident, another indicator that upward momentum has materially strengthened.

Brent crude has support at $68.00 a barrel with resistance at $70.00 and $71.50 a barrel. WTI has resistance at $66.50, the top of its two-month ascending channel today. That is followed by $68.00 a barrel. A close above $66.50 signals further gains to $71.00 a barrel in the weeks ahead from a technical perspective. Support is at $64.30 a barrel and then $63.00 a barrel.

Gold sets a bull trap

I warned yesterday that gold's next directional move would be decided by a break of either $1760.00 or $1800.00 an ounce, with the price action in between, choppy, if volatile noise. To my surprise, especially with gold, I was entirely correct. 

Having tested $1799.00 an ounce in earlier trading, the Yellen rate rise comments saw gold stage an immediate retreat. Gold fell 0.85% to $1778.509 an ounce, and no doubt breaking a few bullish hearts along the way. If nothing else, the price action overnight highlights another drum I have been beating, gold's sensitivity to the prospect of higher US yields. Last night’s damage was done by a strengthening US Dollar, just as it rose on a weaker one the day before, even as yields remained neutral. The underlying premise, though, was the prospect of higher interest rates.

With that in mind, a wise course of action is probably to either continue playing the $1760.00 to $1800.00 range or moving to the sidelines until Friday to wait for the post-Non-Farm's fallout. Anything else is playing with fire.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

Opinions are the authors — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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