Powell remains in transit

Federal Reserve Chairman steadied the post-US-inflation ship overnight, reiterating that virus-disrupted price increases among the CPI components would ease in the coming months. Regarding the labour market, Mr Powell felt that when holidays finished, schools reopened, and federal unemployment benefits rolled off, labour market pressures would alleviate. In other words, the Federal Reserve remains with its tent firmly pitched in the transitory inflation camp, and that the FOMC were still far away from meeting the conditions to begin tapering monetary stimulus.

Bond yields, which had only grudgingly moved higher post the US inflation data, quickly retraced those rises overnight, precious metals rose, and the US Dollar retraced some of its previous days' gains. The biggest sigh of relief was probably heard around Asia, where the threat of a divergence in the direction of monetary policy would have weighed heavily.

US stock markets had a mixed day, giving back intraday gains, with the main indexes finishing each side off unchanged. The no news is good news from Mr Powell, perhaps offset by the Fed Beige Book, which showed many businesses expected to see rising input and selling prices in the months ahead. Additionally, after a decent run higher, the US earnings season may well have elements of buying the rumour, selling the fact with lots of good news priced into upcoming results. Still, equities remain near record highs, so despite the sideways shuffle last night, it really is business as usual. 

The US releases another plethora of data this evening, including Industrial Production, Initial Jobless Claims, the NY Empire State Manufacturing Index and Import and Export Prices. The impact on markets will be minimal now that Mr Powell has held fast on the transitory mantra and steadied the ship. As I stated earlier in the week, respect the momentum, and follow the momentum until it changes as many intelligent people worldwide are as divided as a US Congress on whether we are sticky or transitory.

The data calendar has been busy today in Asia. South Korea held rates unchanged this morning at 0.50%, although the decision was not unanimous. The Bank of Japan will meet tomorrow amid speculation in Tokyo that they will downgrade the GDP outlook for 2021. I am expecting no change in policy, however.

China released a solid, if unspectacular by their standards set of data this morning. Retail Sales rose by 12.1% YoY for June, slightly better than expected. In June, Fixed Asset Investment (YTD) rose 12.40%, less than May but better than forecast. Industrial Production rose by 8.30%, while GDP YoY for Q2 rose 7.90%, and QoQ by 1.30%. The data mostly showed an easing from the high baseline effects but was modestly above expectations. 

On releasing the data, China's National Bureau of Statistics (NBS) noted still faces external uncertainties and an unbalanced recovery between the export-facing and domestic sides of the economy. After setting a slightly weaker USD/CNY fix today (in Yuan terms), the PBOC also rolled over a maturing 100 billion Yuan one-year MLF facility today, injecting funding at the one-year Loan Prime Rate. That is very much a similar mantra of many a central bank at the moment. Coming after the RRR cut last Friday, it seems the monetary policy is quietly moving to the side of caution in China, especially with the World Bank downgrading Asian GDP, ex-China, overnight.

Australia may be in various stages of lockdown, but it continues to push out data that supports its "lucky country" nickname. Employment data was impressive, with a fall in part-time jobs by 22,500 handsomely offset by a rise in full-time employment by 51,600, while the unemployment rate eased to 4.90%. That won't budge the RBA from its dovish perch, which wants to see even lower unemployment pushing up wages before it moves. It does, however, show that Australia's economy continues to power through the rolling lockdowns. The currency didn't react, though, as local markets are cautious about the whack-a-mole spread of the delta-variant to Melbourne, South Australia and the extension of the Sydney lockdown.

India dodged a stagflationary bullet last night, as WPI Inflation stays elevated about the RBI target but eased slightly from the month before. That has taken some temporary pressure on the Indian Rupee for now. Sentiment in Asia, ex-China, remains fragile, though. Covid-19 is the reason, and here in Indonesia and Malaysia, the situation is dire indeed. But the rest of the region is also playing a catchup game, and this will continue to mute sentiment, with the World Bank growth downgrade likely to be the first of many.

Stock markets are mixed in Asia

Stock markets are a mixed bag in Asia after Wall Street limped to an almost unchanged finish despite the Powell testimony steadying the ship. The S&P 500 finished 0.12% higher, the Nasdaq closed 0.22% lower, and the Dow Jones edged 0.13% higher. With little direction from Wall Street, which seems to be focusing on upcoming earnings now, Asian markets have been left to their own individual devices.

The Nikkei 225 has fallen 0.88% as speculation mounts that the Bank of Japan will downgrade its outlook for the economy at tomorrow's policy meeting. Despite a slightly hawkish bent to the statement, the Bank of Korea kept rates at a record low of 0.50% this morning, which has lifted the Kospi by 0.45%.

In China, the solid, if unspectacular data dump today see the Shanghai Composite edging 0.20% higher, while the CSI 300 is up just 0.10%. However, Hong Kong has jumped 1.15% as China tech giants talk about opening up their ecosystems to each other, something markets feel will please their ultimate bosses in Beijing. Hong Kong should also benefit from a rotation of China IPOs from the US going forward.

Taipei has risen by 0.45% today, while Singapore has fallen 0.40% after another surge in Covid-19 cases. Kuala Lumpur and Jakarta have, quite surprisingly, climbed by 0.50% in what I assume are technical moves after some previously tricky sessions. I would approach rallies in each with a large grain of salt given the Covid-19 situations both are experiencing. Regional Asia had the most to lose from a change in Fed tone, and the Powell testimony overnight has likely driven the gains. Bangkok is 0.20% higher while Manilla has fallen 0.80%.

The impressive Australian employment data has not been enough to keep markets in the green there, as new cases of Covid-19 pop up across Australia, raising fears of ever-expanding lockdowns. The ASX 200 is 0.30% lower, while the All Ordinaries has eased by 0.10%.

European stock markets should ignore Asia as a result of their vaccination premium. With the Fed still unconcerned about inflation, that should be enough to lift European stocks initially. It is unlikely that Wall Street will sustain any significant dips into the end of the week either. As I have said before, respect the momentum.

Transitory Fed weakens US Dollar

With Jerome Powell firmly camped still in the transitory inflation corner, US bond yields unwound their previous day's rise, and that saw the US Dollar give back part of its previous session's gains. The dollar index fell 0.44% to 92.37 overnight, leaving it mid-range between support at 92.00 and resistance at 92.85, which it once again tested and failed at intra-session overnight. Currency markets continue to show more caution on the inflation equation than either stocks or bonds, and this has been the case for the past couple of weeks. In the meantime, a break of the aforementioned support/resistance levels is now required to signal the US Dollar's next directional move.

A dovish Powell lifted EUR/USD off its 1.1770 lows overnight, rallying to 1.1850, where it remains in moribund trade in Asia. With inflation data remaining soggy in Europe, the single currency needs to recapture the 1.1900 regions to signal a greater recovery. Otherwise, a break of 1.1770 could still signal a deeper correction to between 1.1500/1.1600. A Bank of England official suggested that UK rate hikes could be getting closer overnight, which saw Sterling climb 0.35% to 1.3860. That rally has faded in Asia, with GBP/USD falling to 1.3840. GBP/USD has clear support at 1.3800 and resistance at 1.3900. 

AUD/USD has fallen 0.30% to 0.7460 in Asia, despite very impressive employment data. Covid-19 worries are clearly perceived as a more immediate threat to AUD/USD today, and resistance at 0.7500 looks safe for now. Large options expiries at that level today, though, mean that AUD/USD is unlikely to track much lower intra-session. AUD/NZD selling may also be weighing on the Australian Dollar after a hawkish RBNZ pushed the NZD/USD higher yesterday. NZD/USD has held gains above 0.7000 overnight, and if inflation data released tomorrow morning is higher than expected, the tightening noise will increase. That should see the Kiwi continue to rally versus the US Dollar and Australian Dollars. 

Asian currencies have recorded modest gains overnight in a collective sigh of relief after Jerome Powell kept the Fed in the dovish corner. USD/INR has fallen to 74.476 and USD/KRW to 1141.10, helped along by firm India inflation data and a slightly hawkish Bank of Korea. However, the retracements are shallow, and in the case of USD/IDR, USD/THB and USD/MYR, they are almost non-existent. The latter three remain the most vulnerable to further weakness along with the Philippines as all four continue to grapple with challenging Covid-19 situations. The fall in oil prices overnight will have done the IDR and MYR no favours, and you can throw in political uncertainty into the Ringgit as well. With USD/CNY content to range between 6.4500 and 6.5000, it is regional Asia that remains the most vulnerable to further losses for now.

OPEC+ sends oil lower

Reports are emerging that Saudi Arabia and the UAE have reached an agreement on their dispute, with the UAE apparently securing a higher production baseline. That followed official US crude inventory data that showed another large fall in headline inventories but a significant increase in gasoline and distillate stocks.

That combined to seen oil prices sharply lower, with Brent crude falling by 2.40% to $74.50 a barrel and WTI falling by 3.0% to $72.90 a barrel. The sell-off has continued in Asia, with both contracting falling around 0.50% to $74.20 and $72.50 a barrel, respectively.

ANy agreement between Saudi Arabia and the UAE must be signed off by the whole OPEC+ grouping, adding a layer of uncertainty to the proceedings. Further muddying the waters, Iraq has also allegedly now asked for a higher production baseline. If this is the start of a flood of member requests, then oil prices are now vulnerable to a deeper correction lower. 

The threat of weaker OPEC+ cohesion and higher than anticipated production will cap oil price gains for now. Brent crude has support at $74.00 and $72.00 a barrel, and failure of $72.00 could see a speculative capitulation trade occur, although I expect its duration to be short, if brutal. WTI's line in the sand will be at $70.00 a barrel, and I expect some similarly ugly stop-loss selling to occur if it fails. 

Oil's underlying positive fundamentals remain intact, despite the Covid-19 issues across Asia, ex-China. Oil's short-term price action will revolve around OPEC+ cohesion and whether higher baseline production requests start flowing in from other members.

Gold's price action looks impressive

Gold prices rallied overnight after Jerome Powell was suitably dovish in his congressional testimony. Gold rose 1.10% to $1827.50 an ounce, closing just above its 200-day moving average (DMA) at $1826.50 an ounce, a bullish technical development.

Gold has weathered the storm of higher US yields and a higher US Dollar with aplomb this week, remaining rock solid at $1800.00 an ounce and comfortably above support at its 100-DMA at $1790.00 an ounce. It has resumed its rally powerfully as soon as those pressures alleviated, and this implies to me that gold is targeting further gains ahead. 

Gold has support at $1820.00 and $1800.00 an ounce, with the bullish outlook intact as long as the 100-DMA at $1791.00 holds on a closing basis. Gold's next upside targets are $1845.00 and $1860.00 an ounce, although I expect more of a slow grind higher, rather than the fast jump seen overnight.