Stimulus nerves sweep markets

If financial markets needed any further confirmation that the US fiscal stimulus was the only game in town, the buy-everything herd received it overnight. Senate Republicans expressed disquiet over the size of the proposed $1.9 trillion bill. That dose of reality was enough to knock equities of their intraday highs, bond yields to fall and send investors scampering back into US Dollars. 

Admittedly, the news came as equity markets had become extended in the shorter horizon, with the buy everything trade in full cry. Yesterday in Hong Kong, Chinese mainland retail buyers continued their tech-buying frenzy, sending Tencent to a near $1 trillion valuation. There was some gob-smacking price action in the options market as well. With Asian markets set to retreat this morning, the reaction in Hong Kong could be outsized. 

Still, with markets in the US and China being powered by gossip on internet chatrooms and overwhelming fundamentals through sheer weight of numbers, it would be dangerous to call markets a bubble or say "peak-retail" just yet. I will paraphrase sage advice from John Maynard Keynes (or maybe it was Gary Shilling, there is some debate), economists from the time when economists spoke to people using words and not calculus. "Markets can stay irrational, longer than you can stay solvent." You Reddit here first.

With the retail herd in control of key stock markets worldwide, data releases elsewhere are somewhat reduced in relevance. South Korean Advance Q4 GDP outperformed this morning, reinforcing that it will emerge from 2020 about where it started, a marvellous result by any standards considering. Like Japan, its Achilles heel remains consumer spending, although it is being swamped by its export machine's noise. 

The rest of the day's data calendar is second tier, with Singapore's volatile December Industrial Production data expected to retreat slightly from the impressive climb in November. The UK employment data dates back to October and November, rendering it irrelevant in the context of life in 2020/21. US Housing data will continue showing herd immunity to Covid-19, thanks to bottomless amounts of free money from the Federal Reserve.

If the US stimulus package is the only game in town, the Federal Reserve FOMC meeting this week is an underreported and underestimated risk point. Suppose noisy stimulus resistance from Senate Republicans increases, undermining the herd's key buy everything premise. In that case, an FOMC press conference that is not suitably uber-dovish could administer the coup de gras to the rally. 

If Jerome Powell doesn't release more doves then a Greenpeace convention, putting the early tapering noise to bed, he could have a mini taper-tantrum on his hands. The US Dollar and US bonds would be obvious winners. Emerging markets, equities and precious metals the losers. Crypto's are unlikely to be spared either. The "institution experts" calling a 20+% fall in digital Dutch tulips a "healthy correction," may have to change that to a 50% correction is "healthy," while keeping a straight face. 

Still, if Mr Powell lets the doves fly, it will be business as usual with markets myopically fixated on US stimulus progress. And no, I am not calling the top of the market for equities. A 10-15% correction would be welcome, but global monetary policy means asset price appreciation remains front and centre for 2021.

Asian stock markets retreat

Wall Street gave back most of its gains intra-day overnight, leading to a mixed finish as stimulus reality bit, thanks to the Senate Republicans. The S&P 500 finished 0.36% higher, the Nasdaq finished 0.69% higher, but the Dow Jones ended the day 0.11% lower. Aftermarket futures on all three indexes have retreated by between 0.30% and 0.40% this morning as the stimulus shakeout continues.

That has spilt over into Asian markets, which are mostly in the red this morning. The Nikkei 225 has fallen 0.80% with the Kospi down 1.50%. In China, the Shanghai Composite and CSI 300 have lost 0.95%, while the Hang Seng, pumped up by Chinese retail money these past few days, is 1.55% lower.

Singapore has fallen 0.75%, with Jakarta down 0.25%, and Taipei is 0.45% lower. Malaysia is bucking the trend, the KLCI rising by 1.0% with semi-conductor companies leading the charge. Australian markets are closed for a public holiday and the barbecuing of prawns.

The negativity is likely to spill into European markets without any meaningful data from the Eurozone today. At this stage, the price action looks more corrective then structural. An increase in Republican stimulus resistance will further dampen equity market spirits.

The US Dollar moves higher on risk reassessment

The mild dose of political reality being administered in Washington DC saw bullish stimulus bets reduced overnight. That lifted the US Dollar to modest gains across the board. The dollar index crept 0.17% higher to 90.39, moving it back to near the middle of its 90.00 to 91.00 two-week range. 

That has left the major currencies consolidating at the lower end of their recent ranges versus the greenback. The overall chart picture is not convincing in either direction. A glance at the Euro, Yen, Australian, Canadian and New Zealand Dollar charts shows markets in a holding pattern, and likely awaiting the FOMC press conference on Thursday morning Asia time.

With the PBOC keeping the Yuan reasonably strong against the Dollar around 6.4800, any stimulus nerves fallout has been limited amongst Asian EM. Regionally, Asian currencies remain tied to the Yuan event horizon, content to continue consolidating at the upper end of their three-month ranges.

All of this could change if the FOMC creates a mini taper-tantrum on Thursday morning Asian time. Conversely, the Fed could stay firmly on message, US stimulus progress could well progress, and it would be business as usual. For now, though, it is hurry up and wait.

Oil markets fall in Asia

It is a measure of the holding pattern financial markets find themselves in, with oil ignoring equity nerves and a stronger Dollar overnight, with both Brent crude and WTI finishing the day higher. However, the negative sentiment sweeping Asia today, as the reality of US stimulus politics dawns, has seen both contracts move lower.

Brent crude rose by 1.60% overnight to $55.95 a barrel but has retreated by 0.75% to $55.50 a barrel in Asia. WTI rose 1.50% to $52.85 a barrel overnight but has retreated by 0.75% to $52.45 a barrel in Asian trading. That leaves both contracts bang in the middle of the January ranges, suggesting that they too, are awaiting signals for their next directional move.

Despite the fall in Asia today, oil itself continues to consolidate at the top of the range of its rallies 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. In the meantime, I expect the noisy range-trading to persist.

Gold patiently awaits further inspiration

Another sideways day of range-trading for gold overnight led to another unchanged close for the session. Gold meandered in a 20 Dollar range before closing where it had started, at $1856.00 an ounce. Asia has not been much better, with gold creeping just 0.23% higher to $1860.30 an ounce in directionless trading, boosted by a small fall in US yields.

Gold has resistance at $1875.00 an ounce, followed by the 100-day moving average (DMA) at $1882.30 an ounce. Modest support appears at the previous two sessions' lows of $1847.00 and $1837.00 an ounce respectively. The January 18th spike follows that at $1802.50 an ounce.

With the 200-DMA at $1847.50, and the 100-DMA at $1882.30 an ounce, 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 help that process along. Until then, choppy range-trading between $1825.00 and $1875.00 an ounce is likely to persist.