Pre-FOMC shuffling

Some pre-FOMC position shuffling is occurring across asset classes at the moment. Equities continue on their merry way higher, with the S&P 500 and Nasdaq tracing new record highs overnight. The Dow Jones is lagging, perhaps as its components could be perceived as more vulnerable to the rising inflation data being seen across the world. US yields moved higher across the curve overnight, notably in the 30-year tenor. Given the recent gains in bond prices, though, the price action looks more corrective and cautious, with US Retail Sales and PPI to come this evening before the main event tomorrow US time. 

Currency markets held steady, having had their US Dollar rally day in the sun on Friday, but gold's woes continued. Gold fell over $30 an ounce at one stage overnight before recovering somewhat, with the price action highly suggestive of stop-loss selling, culling the herd of heavy speculative long positioning. Notably, the $1840.00 to $1845.00 an ounce support zone, containing the 200-day moving (DMA), average held for now.

Bitcoin’s rally maintained momentum, boosted by that most fundamental of economic indicators, an Elon Musk tweet. Bitcoin rose around 4.0% yesterday, hovering around $40,000.00. Paul Tudor Jones said he liked having a bit of virtual in his portfolio as well, boosting sentiment, and Goldman Sachs have announced they will offer Ether futures and options. All meat and three veg for the virtual currency bugs and Bitcoin looks like it will target the 200 DMA near $42,500.00 sooner rather than later.

China and Hong Kong equity markets are under pressure this morning, even as the rest of Asia is following Wall Street higher. Two factors appear to be at play here. Firstly, the PBOC drained a net CNY 10 bio via the repos after the long weekend. Secondly, every major news outlet is running a story about potential problems with a French-designed nuclear reactor located in Taishan, located west of the Pearl River Delta and just 140 km from Hong Kong. Readers can find the details online easily themselves; I'll not pump up the volume on it other than to say we should be watching developments closely.

India dodged a bullet yesterday as its WPI Inflation by an above-consensus 6.30% YoY in May. It was saved by the food sub-component falling unexpectedly to 4.31% YoY even as the other components rose above consensus. The RBI can't do much but sit on its hands from here, boxed into a stagflation canyon but needing to do its part to assist in the recovery from India's Covid-19 tragedy. Even as it is effectively forced by opposing forces to sit on the side-lines, it likely means we have seen the highs for the Indian Rupee for now unless the US Dollar collapses.

This morning's RBA Minutes were as dovish as expected, with AUD/USD heading 10 points lower in sympathy. Indonesia's Balance of Trade should rise above $2.0 bio at midday, taking some pressure off the Rupiah as exports continue to increase. The UK Employment data will be closely watched as it experiences US-style labour shortages in specific sectors. A print above 150,000 could ease the corrective downside pressure on Sterling. Last nights one-month delay to phase 4 reopening made barely a ripple, having been well telegraphed over the weekend. 

The US releases May Retail Sales, New York Empire State Manufacturing and PPI, and Core PPI. Retail Sales should ease from the post-reopening jump, but the Empire data should outperform, with the PPIs of most interest. Both headline and core could rise well north of 0.50% MoM, mainly as US PPI includes services sector costs and not just factory gate prices. Although it won't move the needle materially on the transitory inflation wagon financial markets have glued themselves to, it could see the pre-FOMC bond market correction gain some momentum. Higher yields are likely to push the US Dollar higher, and mute equities, likely leaving gold vulnerable to a deeper correction lower.  

Asian equity markets are mixed

Asian equity markets are mostly higher today after the S7P 500 and Nasdaq closed at record highs last night. The exception is China markets, where the PBOC withdrawing liquidity and nuclear nerves have pushed Mainland and Hong Kong markets lower.

Overnight the S&P 500 rose 0.18%, the Nasdaq jumped 0.74%, with the Dow Jones falling 0.25% as the rotation trade falls out of favour pre-FOMC. Futures on all three indexes have risen in Asia by around 0.10%, underpinning sentiment locally.

The Nikkei 225 has jumped by 1.0 % today, although the Kospi has risen by only 0.17%. Speculation that the BoJ will announce an extension to their pandemic support measures until September at Friday's policy meeting seems to be supporting sentiment. However, China markets are under pressure, with the Shanghai Composite down 1.0% while the CSI 300 has fallen by 1.30%, with Hong Kong lower by 0.90%.

Elsewhere, Singapore has risen 0.83%, with Taipei up 0.60%, with Jakarta and Kuala Lumpur unchanged. Australian markets are also tracking higher, the ASX 200 climbing 1.120% and the All Ordinaries rising by 0.70%.

European and UK equities markets will likely open firmer, following the New York and Asia lead, with China's travails regarded as a local issue for now.

Currency markets consolidate after the US Dollar rally

Currency markets contented themselves with some consolidation after Friday's impressive rally. Major currencies traded sideways with UK markets ignoring the extension of pandemic restrictions. The dollar index was almost unchanged at 90.50, where it remains this morning, with EUR/USD at 1.1215 and GBP/USD at 1.4115.

One notable move was USD/JPY, showing once again its sensitivity to moves in the US yield curve. A rise in US yields overnight saw USD/JPY rise 0.40% to 110.10 overnight, where it remains today. USD/JPY has now moved to the high end of its two-week 109.30 to 110.30 broad range. Further gains from here will depend entirely on whether US yields continue to grind higher into the FOMC. USD/JPY has challenging resistance at 111.00 and does not have the momentum to test this level seriously.

USD/Asia has moved slightly higher today after the return of China from holiday saw the PBOC fixing set at 6.4070, slightly weaker than expected versus the US Dollar. With the PBOC tightening liquidity today, USD/CNY remains below the fixing at 6.4045, almost unchanged for the session. The evolution of the Taishan nuclear story, if negative, is most likely to weigh on the offshore Yuan, USD/CNH, although I expect the PBOC will be out "smoothing" if markets nerve fray.

Overall, currency markets are calm, and I expect US Dollar shorts to continue reducing into the FOMC. The Australian and New Zealand Dollars are the most vulnerable amongst the major currencies.

Oil prices continue edging higher

Oil prices are proving invulnerable to outside influence now, as the backwardation of the prompt futures curves underpins prices and highlights the strong physical demand. Overnight, Brent crude rose 0.66% to $73.10, and WTI rose 0.55% to $71.20 a barrel. Both contracts remain almost unchanged in subdued Asian trading.

Brent crude has nearby resistance at $73.30, followed by $76.00 a barrel, and only the failure of $70.00 a barrel undermines the bullish outlook. WTI has resistance at $72.50, followed by $75.00 a barrel. Again, only a fall through $68.00 a barrel changes its bullish outlook.

That oil has rallied so significantly in the face of notable US Dollar strength suggests the rally has plenty left in it, as does the widening of the futures curve backwardation.

Gold vulnerable to a deeper correction

Gold endured a torrid overnight session, falling over $30 an ounce to $1844.50 at one stage before recovering to finish the session 0.60% lower at $1866.00 an ounce. Gold moved lower in early Asia but held $1860.00 an ounce and is now unchanged for the session.

The price action overnight suggests that quite a few stop losses were executed, with quite a bit of speculative long positioning put on near to $1900.00 an ounce. The strong rally in the crypto-space will not be helping gold either, and if the US Dollar or cryptos continue rallying, gold may face another downside test.

The $1840.00 to $1845.00 an ounce support region remained intact overnight. This continues a series of previous daily highs and the 200-DMA at $1840.60 an ounce. Bullish traders can take heart that the support region held fairly well, but the recovery was modest in scale. Failure of $1840.00 an ounce on a closing basis signals a more significant fall to the 100-DMA at $1800.00 an ounce.