Noise cancelling headsets

The tail chasing noise is already deafening this week. Having spent the first part of the week in doom and gloom mode as the market ran short of bullish excuses to buy everything, equity markets staged a sharp rebound overnight. The cyclical Russell 2000 seeing most of the action, despite the three heavyweight indexes recording decent gains.

Economic recovery and post-Covid bliss were the reasons du jour for the overnight equity rally, which spilt over into gold and catalytic converting palladium. Currency markets were almost unchanged, though, but oil markets retreated as speculative bullish momentum continues to wane ahead of OPEC+'s increasing production starting in May.

In all honesty, I have a much better reason for the rebound in confidence overnight that is flowing into Asia today. The overnight 20-year bond auction had high demand that pushed US 10-year and 30-year yields modestly lower. That was enough to spur some good old-fashioned dip-buying, especially in the unloved Russell 2000. US yields continue to be the one ring that rules them all, with the fall in US yields evident in precious metals and, notably, the fall of USD/JPY over the past three weeks.

Unfortunately, the calendar in Asia today is even thinner than yesterday, with only Thailand's Balance of Trade to break the monotony. Things get busier this evening with the latest ECB rate decision that comes a day after Germany's Constitutional Court quashed a challenge to Europe's pandemic recovery programme. Rates will remain unchanged, and as ever these days, it will be what the Central Bank says afterwards, and not what it necessarily does, that will move markets.

A potential insight into potential moves in the Euro comes from the Bank of Canada (BoC) decision overnight. The headline rate remained unchanged, but the BoC once again trimmed its weekly bond-buying target and brought forward its first rate hike to the second half of 2022, from 2023. The Canadian Dollar rallied by around 1.0%, with USD/CAD plunging over 100 points to 1.2495.

That sets up the Euro for a binary outcome this evening. EUR/USD was almost unchanged overnight at 1.2445. An ECB signalling that Europe's recovery will accelerate and hinting that inflation risks are rising should see EUR/USD rush towards 1.2150 and perhaps 1.2200. A dovish ECB is likely to see 1.1900 tested. The chart picture shows a clear bullish breakout from a falling wedge, suggesting the topside is the path of least resistance.

US Initial Jobless Claims will be of passing interest, particularly if they deviate markedly from the roughly 650,000 market expectation. A large deviations impact is harder to predict in this case, with US markets being driven by the nuances of daily tail-chasing sentiment. Readers should probably assess whether Wall Street is in we're all doomed, or we're all saved mode first. They can make their call from there depending on whether the Jobless Claims' number fits the narrative of the day or not.

Mrs Halley presented me with a beautiful set of semi-noise cancelling wireless sports headsets for my birthday a couple of months ago. They are designed in the US, and made in China naturally, proving that international trade is alive and well despite ongoing challenges. Even Mrs Halley's scolding is drowned out once wired for sound, a purchase she may now be regretting. Given the noise this week across financial markets, I shall have them glued to my ears to drown out the noise that will inevitably make up the rest of it. US yields continue to exert their invisible but powerful gravitational force on markets. Until US yields rise once again, buying the dip in everything in a zero per cent, where's my yield world, remains the path of least resistance.

Asian equities rebound on improved Wall Street sentiment.

A well-received 20-year US bond auction swung the daily momentum back in favour of the bulls overnight on Wall Street, after two days of growling bears. The S&P 500 rallied by 0.93%, the Nasdaq jumped 1.19%, and the Dow Jones climbed by 0.94%. 

The futures on all three indexes have retreated by around 0.15% in Asia, as various headlines about the need for vaccine booster shots and vaccine efficacy have circulated in the press. That hasn't been enough to throw Asia's retail fast-money day traders off their stride, though, as evidenced by the Nikkei 225 today. Having fallen over 2.0% yesterday as the herd ran for the exit door on Tokyo's impending state of emergency, the Nikkei 225 has jumped by 2.10% today. That erases yesterday’s losses despite Tokyo still going into a state of emergency sometime next week, highlighting that speculative fast money flows, and not news, is driving short-term direction in equity markets.

Elsewhere, the Kospi is 0.50% higher, and Taipei has risen 0.80%. Mainland China's Shanghai Composite and CSI ignore the noise yesterday, perhaps helped by national team buying. Today they remain almost unchanged as the PBOC left cash neutral, but USD/CNY slipped back below 6.5000.

Hong Kong has risen 0.40%, with Singapore 0.55% higher and Kuala Lumpur and Jakarta adding 0.45% so far this morning. Australian markets also had a modest day yesterday, and in much the same theme, both the ASX 200 and All Ordinaries are up only 0.30% today. Animal spirits in Sydney being tempered by a fall in US index futures in Asian trading today.

Over, stock markets globally continue to chop back on forth on whichever speculative momentum and sentiment is the more powerful on the day. A lack of clear new drivers has played its part with a lot of good news priced into equity valuation globally. Nerves that Covid-19 may linger for longer and vaccine effectiveness temper a buy-everything rally that is looking a little tired. All of which leads to the boisterous flip-flop price action seen this week. With the data calendar for the next two weeks chock-a-block with tier-1 data and central bank decisions, markets should find a lot more to sink their teeth into.

Risk currencies rally on strong bond auction

The flip-flop price action in equities markets has also been reflected in currency markets to a lesser extent, mainly amongst the risk-sensitive Commonwealth's and regional Asian currencies. A hawkish Bank of Canada saw USD/CAD plummet to 1.0% to 1.2495 overnight, but the Australian and New Zealand Dollars also added 0.30% and 0.50%, respectively, versus the greenback. Both have staged bullish falling wedge topside breakouts, initially targeting 0.8000 and 0.7300.

Both EUR/USD and GBP/USD are almost unchanged from yesterday at 1.2045 and 1.3945 this morning, but both have also staged bullish breakouts of falling wedges. As long as US yields remain soft, capping US Dollar strength, both should be buys on any dips. This evening, a slightly hawkish ECB could turbo-charge the rallies in both, lifting them to 1.2150 and 1.4000+, respectively.

The Japanese Yen has staged a remarkable comeback in April, USD/JPY falling from 111.00 to 108.00 over the past three weeks. The key to the Yen's strength has been the closing of interest rate differentials as US yields have fallen. If this critical correlation remains intact, and USD/JPY strength should be met with a wall of sellers. Covid-19's escalation in Japan is having no noticeable effect on the Yen.

With the US yields continuing to edge lower and the dollar index almost unchanged, the Chinese Yuan has quietly strengthened again this week, especially as credit fears of last week have ebbed. The PBOC continues to tighten liquidity in the financial system quietly, and yield hunting inflows are also proving supportive. USD/CNY has quietly slipped back under 6.5000 this week to 6.4850, with USD/CNH falling to 6.4820 this morning. USD/CNY looks set to stabilise in a 6.4500/6.5000 trading range for now and will continue to support regional Asian currencies. However, the Indonesian Rupiah and Indian Rupee will remain underperformers.

Oil's upward momentum continues to fade

With the US Dollar going nowhere overnight, oil markets continued to focus on the upcoming OPEC+ production increases, starting in May, and India's Covid-19 impact on global consumption. Both are symptomatic of a lack of new bullish drivers after the speculative rally of last week, and both Brent crude and WTI faded again overnight. That was helped along by an unexpected 0.60 million barrel increase in official US Crude Inventories, repeating the API data of the day before.

Brent crude fell by 1.90% to $65.05 a barrel, remaining unchanged in Asia this morning. WTI fell 2.15% to $61.05 a barrel, edging lower to $61.00 a barrel in Asia. A lack of buyers of this dip regionally potentially indicates that regional buyers feel the sell-down has more to go. Given how quickly bullish momentum has faded this week, it is hard to argue with that premise. 

Brent crude broke support at $65.50 overnight, which becomes initial resistance today. Support remains at $64.00 a barrel, but a daily close under that level signals a much deeper correction is in prospect. WTI looks at the more vulnerable contract, with only minor support at $60.60 a barrel, and then clear air until $57.00 a barrel. 

Gold rallies once again

A strong US 20-year bond auction saw US yields fall slightly overnight, and that was enough to propel both gold and silver to another powerful intra-day rally. Gold rose 0.85% to $1783.70 an ounce, and silver rose 2.75% to $25.5000 an ounce. Both were likely aided by the 4.25% jump in palladium prices overnight.

Gold and silver are almost unchanged in a moribund Asian session with investors' attention focused on regional equities today. Gold is now within shouting distance of its 100-day moving average at $1803.00 an ounce. A daily close above this resistance being another powerful bullish technical signal. Interim support is at $1775.00 an ounce, followed by $1760.00 an ounce, its Fibonacci retracement.

Once again, I will repeat that gold's fate is intrinsically tied to the direction of the US 10-year yield. If US 10-year yields remain at present levels or lower, gold's rally will remain intact, and it is a buy on dips. However, the actual test of the rally's longevity and the longer-term low of gold prices will come if US yields rise. Gold's performance in this scenario has been wanting in 2021.