Ranging

No, the title is not an Elon Musk-like tweet that will send an army of retail traders looking for companies with range, ranging, ranger etc. in its name, to send higher by 1000% on the day via the options market. They may see Reddit at my comments, but if money-making Signals were that Etsy, I wouldn't be sitting her toiling over my laptop to bring you editorial entertainment each day.

Instead, ranging is a summation of the state of play in the financial markets at the moment. The reduction in risk seen yesterday in Asia was a function of the first glimmer of reality that President Biden's stimulus package won't be rubber-stamped meekly through the US Senate. The one ring to rule them all though remains the FOMC statement that will be accompanying their rate decision this evening. 

A strong directional move by markets is nigh on a certainty. Its direction depending on the wording of the statement, and the comments made by Jerome Powell afterwards. With the inflationistas circling, Mr Powell and the FOMC will need to drive home their lower for longer message least a mini taper-tantrum erupt. That won't be good for equities, precious metals or emerging markets, but should be positive for the US Dollar, notably versus the commodity currency grouping. If Mr Powell releases the doves and backstops (or is that GameStop? Buy it anyway), we should be back to buy everything business as usual. FOMC, after all, is only one letter difference from FOMO, that can't be a coincidence. 

Any rally post-FOMC may receive a tailwind from US earnings releases. Microsoft posted record quarterly earnings overnight, boosted by its Azure cloud. Markets will be expecting much of the same from Apple and Facebook this evening. Tesla also reports, although markets will be more focused on their delivery targets for 2021 rather than earnings, which have long been divorced from reality.

Markets have received a double boost in Asia this morning, with equity markets of to a good start. China Industrial Profits climbed 20.1% YoY for December, signalling that China's growth story, and by default, the rest of Asia, remains on track. Secondly, Democrat Representative Jarod Golden has tweeted that a bi-partisan group of Senators and Representatives are working hard on the Biden stimulus package and that Senate reconciliation is "off the table at the moment." 

Senate reconciliation is a nightmarish process of passing bills in a piecemeal approach with the Senate voting for each part. Some aspects of the Biden package requiring 60 votes to pass. Think of it as having a giant pavlova being put in front of you but being told you can only eat one berry or piece of meringue at a time. And after each mouthful, you must get permission to take another mouthful, which may or may not be given. The fact that Rep. Golden is neither a Senator nor a Republican should also be a cautionary note, but I don't want to get in the way of a good story. Markets in Asia are reacting positively to the headline. 

The rest of the day's data calendar across Asia, Europe and the US is low impact. The FOMC remains the week's critical event, and I expect markets to continue ranging ahead of it.

Equities in Asia boosted by China and stimulus hopes

US markets trod water overnight as positive earnings data was balanced out by investors reducing risk into this evenings FOMC. Wall Street finished barely changed with the S&P 500 easing by 0.15%, the Nasdaq edging 0.07% lower, and the Dow Jones slipping 0.04%. Positive China Industrial Profits and hopes that the US fiscal stimulus bill will have an easy passage through the US Senate have lifted spirits in Asia, which is trading mostly in the green.

The Nikkei 225 is 0.18% higher, with the Kospi up a modest 0.34%. In China, retail investors continue to exit the market after officials warned of a stock bubble yesterday and the PBOC withdrew liquidity via the 7-day repo this morning. The Shanghai Composite is down 0.95% with the CSI 300 lower by 0.55%. The Hang Seng has managed only a modest 0.15% rally this morning. 

Regionally, Singapore and Taipei have climbed 0.35%, with Kuala Lumpur up 0.55%. Covid-19 weighs on Indonesian markets today, as total cases pass 1 million and the Jakarta hospital system comes under severe pressure. That adds to worries about Indonesia's economic recovery, sending the Jakarta Index down 2.10% this morning. After a holiday yesterday, Australian markets are playing catchup to yesterday's price action and have fallen. The ASX 200 and All Ordinaries are down 0.50%.

The rallies that we have seen have been modest in scale after the Rep. Golden tweet, indicating a lack of upward momentum. The unevenness of the gains is also a warning sign that any gains are likely to be short-lived. I expect Asian and European markets to continue their orderly retreat into this evening's FOMC outcome.

Currency markets becalmed ahead of FOMC

Currency markets remained becalmed in Asia this morning, in a continuation of the range-trading pattern seen overnight. Currency markets are clearly on hold until the FOMC, and it will take a big headline surprise to awaken them from their slumber beforehand.

The dollar index edged lower overnight by 0.24% to 90.18, edging higher to 90.22 in Asia in directionless trading. The US Dollar is slightly higher versus both major and regional currencies this morning, but the moves look like noise and are not directional. Some pre-FOMC selling is evident in the Australian and New Zealand Dollars which have fallen by 0.15% today. 

The Chinese Yuan remains unchanged at 6.4700 today, supported by a net drain by the PBOC of CNY 100 bio via the 7-day repos. The PBOC continues to quietly withdraw short-term liquidity, which has pushed Shibor rates higher, perhaps to dampen down stock market exuberance. 

The Sterling was the evening's exception, climbing 0.45% to 1.3735 overnight after employment data outperformed and notable progress in its Covid-19 vaccination programme. Sterling is set to continue to outperform, and the UK should recover faster than Europe, which faces a double-dip recession. GBP/USD looks likely to test nearby resistance at 1.3745, which points to further gains above 1.40000 in the coming days as long as the FOMC remains ultra-dovish.

The FOMC meeting tonight has a binary outcome. If the FOMC is ultra-dovish and allays tapering nerves, the US Dollar retreat should resume. That will bring dollar index support into play at 90.00. A move lower through the 90.00 pivot sets up a retest of lows at 89.25. Conversely, if the FOMC does not dovishly deliver, a mini taper-tantrum could ensue. That will see US yields rise along with the US Dollar and a potentially aggressive Dollar short-squeeze follow. USD/JPY should outperform in this scenario, potentially breaking out of its 6-month downward channel, today at 104.35. Asian and commodity currencies are will also experience a tough day at the office.

Oil markets supported by surprise API drop

The near three-week sideways consolidation continued for oil overnight, with yet another directionless range-trading session. The gentle risk aversion seen elsewhere was offset by a large surprise fall in US API Crude Inventory stocks overnight. The net result left oil almost unchanged. Brent crude edging 0.13% higher to $56.00 a barrel, and WTI fell 0.23% to $52.35 a barrel. Oil markets are sharply unchanged in Asia today.

The FOMC presents a binary outcome for oil prices this evening in the short-term. A dovish FOMC and a positive economic assessment from them should be enough to break oil out of the top of its January range. Conversely, an FOMC that delivers a mini-taper tantrum will likely see oil fall through the three-week support and wash out speculative long positions. If official US Crude Inventories follow the API numbers by dropping strongly, that should limit the damage of any FOMC-induced downside move. 

In the bigger picture, oil continues consolidating at the top of the range of its rally from the November lows. The Saudi Arabian cuts, OPEC+ compliance above 85.0% and an insatiable demand from Asia means that oil has seen its cyclical lows for 2021. 

Brent crude is bound by resistance at $56.60 and $57.40 a barrel, with support at $54.50 a barrel. WTI has resistance at $54.00 a barrel, and support at $51.60 a barrel. Clearance of those levels, either way, will signal oil's next directional move. 

Gold remains cemented in place

Gold had a moribund session overnight, edging lower by 0.25% to $1851.00 an ounce, with daily ranges continuing to compress. Asia has been just as quiet as precious metals markets await tonight's FOMC. Gold has nudged 0.15% lower to $1847.00 an ounce in this morning's session.

Gold has resistance at $1875.00 an ounce, followed by the 100-day moving average (DMA) at $1881.40 an ounce. Modest support appears nearby at the 200-DMA at $1847.50, followed by $1837.00 an ounce. The January 18th spike follows that at $1802.50 an ounce.

With the 100 and 200-DMA's slowly but surely converging, a large directional move by gold is in the offing. Unfortunately, the charts give no hint as to which way that move will be. The FOMC decision and the press conference after should resolve that. Depending on the FOMC's dovishness, or not, gold could be either $1800.00 or $1900.00 an ounce by tomorrow morning.