Stalling markets a temporary pause

The US Dollar sell-off stalled overnight, with the beleaguered greenback recouping some of its recent losses. Precious metals and equities also took a staycation after impressive recent gains. Mixed US earnings, a fall in US consumer confidence, fiscal stimulus negotiations, and the upcoming FOMC announcements combining to take the edge of the recent buy everything momentum. 

In the greater scheme of schemes though, the reversals overnight look more of a temporary blip, rather than a structural turn in sentiment. The street has got so used to one-directional price movements since March, that the merest hint of discord sends traders to the exit door. The underlying drivers of the US Dollar rotation and the rally remain intact. That is negative real yields across the globe, most notably the US, and infinite amounts of central bank money looking for a home.

I am not overly concerned about the alleged stall of negotiations in Washington DC over the follow-on stimulus package. With an election in November, neither side has an interest in being painted as the bad guy by delaying a solution. Politicians potentially losing their jobs is a strong incentive to get something done. 

The Federal Reserve will not rock the boat and should continue to reassure markets with an uber-dovish tone. On the US earnings front, poor results by consumer discretionary companies should surprise precisely no-one in 2020. All will be forgiven though if tech heavyweights Amazon, Apple, Alphabet and Facebook report steady results tomorrow. I do, however, acknowledge this as a significant risk point if they disappoint. 

Covid-19 remains a primary concern, with the secondary outbreaks occurring across developed countries where the virus had previously been brought under control. An escalation followed by the renewal of severe movement restrictions could see the much-feared secondary wave double-dip recession occur. That has not been priced into markets remotely unless you are talking about precious metals. But as yet, we are not at the double-dip stage.

The data calendar across Asia and Europe is strictly second tier today, with the main event being the FOMC rate decision and accompanying statements this evening. As I have stated, the Federal Reserve will do nothing to rock the boat. Tonight’s US EIA Crude Inventories may spark come fireworks in energy markets though. The rally in oil has stalled with prices moving sideways this last week. A jump in crude inventories or gasoline stocks could spark a downward correction, flushing some stale long positioning from the market.

Asian equities mixed

Refreshingly, Asian stock markets have not blindly followed the US markets' retreat overnight. Across the Asia Pacific, it is a mixed bag this morning, with no unifying directional factors emerging from the press wires.

US markets fell late in the session after US Consumer Confidence underperformed. That was likely the excuse US markets needed to book some profits before the FOMC decision after a series of strong rallies in the previous sessions. The S&P 500 fell 0.65%, the Nasdaq fell 1.27% ahead of big Thursday's 'tech results, and the Dow Jones eased 0.77% lower.

The Nikkei 225 has fallen by 0.73% this morning, contrasting with a 0.35% gain by the Kospi. Mainland China is also ignoring Wall Street, with the Shanghai Composite rising 1.30%, and CSI 300 jumping 1.70%. Hong Kong has also chiselled out a 0.30% gain despite the escalating movement restrictions as Covid-19 re-emerges in the SAR.

Across regional Asia, Singapore is 0.25% lower, while Kuala Lumpur has risen 0.30% with Jakarta flat thus far. Australia is having a moderate session with the AX 200 and All Ordinaries down just 0.25%.

Clues to the next big move in stocks may come from the Nasdaq, especially with Alphabet, Amazon, Apple and Facebook reporting on Thursday. The Nasdaq has carved a perfect double top on the daily charts at 11071. If big tech outperforms, but this resistance zone remains intact, it could signal that momentum is finally ebbing from world’s greatest FOMO trade. Technical support lies at around 10,300. A daily close below that level indicates a deeper correction to approximately 9,700 could occur.

Overall most of Asia seems content to move into wait-and-see mode after substantial gains in recent days. With an FOMC rate decision and big-tech reporting on Thursday, pausing for breath makes eminent sense.

Profit-taking lifts the US Dollar

The US Dollar finally found some footing overnight, carving out modest gains versus G-10 currencies. That does not mark a change in sentiment though, with the move higher by the greenback looking decidedly profit-taking-driven in nature. The US dollar index edged 0.08% higher to 93.73 but remains in a robust technical downtrend.

The EUR/USD pair retreated from 1.1800 overnight, closing down 0.30% at 1.1730. Having led the US Dollar sell-off, the single currency is somewhat of a bellwether at the moment. A close below 1.1700 suggests a deeper correction to the low 1.1600's could occur. However, even a fall to those levels will still leave the single currency comfortably in an uptrend. A similar pattern was followed by most of the G-10 set-up and regional Asian currencies overnight. Still, the underlying theme is that all could materially correct lower versus the US Dollar but remain comfortably in technical up-trends.

One notable exception was the British Pound. GBP/USD shrugged off the malaise seen elsewhere, rising 0.40% to 1.2930. Selling of the EUR/GBP cross appears to be the main culprit, with the resurgence of Covid-19 in Europe causing frayed nerves for Eurozone investors. 

Currency markets could well spend the next couple of days in choppy range trading, consolidating recent gains versus the US Dollar. It is crucial to distinguish the nuances of consolidating markets from turns in sentiment and momentum, though. With the Fed likely to be uber-dovish tonight, and US real yields remaining in negative territory, the underlying factors driving the US Dollar rotation remain firmly in place. Only disappointing big-tech earnings have the potential to upset the apple cart. (no pun intended)

Oil's compressed range trading continues

Oil prices hardly budged again overnight, with the compressed range trading of the past month still very much ascendant. Brent crude eased by 0.45% to $43.40 a barrel, and WTI slipped 1.30% to $41.10 a barrel. Oil remains of investors radars as the fireworks fly in other markets. Oil is being capped over persistent concerns about Covid-19's effect on the US and global growth, while being supported by a generally weaker US Dollar.

Tonight’s EIA US Crude Inventories could provide the spark for a move lower though, should crude inventories or gasoline inventories spike higher. After a month isolated in a relatively tight range by oil's standards, that may be enough for stale long positioning out there to throw in the towel.

Key support regions remain $41.50 a barrel on Brent crude and $40.00 a barrel on WTI. A daily close below one or either implies a deeper correction lower is in progress.

Precious metals stabilise after a torrid session overnight

Gold and Silver has a hugely volatile overnight session, likely reflecting the amount of fast money that had entered both trades in the past week. Gold traded in a 75-dollar range between $1906.00 and $1981.00, before finally closing 0.85% higher at $1958.00 an ounce. Trading was even more emotional in Silver markets, with Silver trading in a 15% range between $22.3000 and $26.3000 an ounce overnight. Silver finally finishing 0.70% lower at $24.40, almost precisely mid-range for the session.

The breath-taking price action suggests that a lot of fast money spent the day getting seriously chopped-up on intra-day reversals. What is clear though that despite the volatility, both precious metals found plenty of willing buyers on the material dips, as evidenced by their almost unchanged finishes. The speculative herd has undoubtedly been aggressively culled now, along with more than a few freshly minted recent systematic and technical longs. That leaves the playing field much less crowded now, allowing the return of sensible fundamental thinking, as opposed to the get-rich-quick massive. 

Those underlying fundamentals strongly suggest higher levels await on both metals. In Silver's case, it is still not yet oversold on a gold/silver ratio basis. Critical supports are the overnight lows at $1906.00 and $22.30 an ounce respectively with $1900.00 for gold being a psychological level for the market. Gold's fundamentals still shout that a test of $2000.00 an ounce will occur soon, with Silver likely to test $30.00 an ounce. The critical thing to remember is that the road to those points is expected to be a windy once with cliff-edge sides, and not a polished and straight six-lane motorway.