The filling in the sandwich

Financial markets continue to range nervously, sandwiched between Covid-19 vaccine-driven hopes for the future, and the reality of the here and now. That sees Covid-19 cases rampaging, forcing ever more stringent movement restrictions in the developed world. It is a tough place to be, with markets long addicted to a technology-driven instant gratification information overload. 

Based on 2020 thus far though, the financial markets ability to "look ahead" and divorce itself from the reality of our everyday life, will probably win the day. We will just need one more kicker to restart the buy everything rally, which is being driven by the search for yield in a zero-per cent world. That could come in the form of another pharma-company announcing positive vaccine results, or perhaps by President Trump throwing in the towel. My money is on the former, as I have nagging fears the Republican strategy is to hang on as long as possible, leaving a scorched earth for the incoming administration, with one eye on the 2022 mid-terms. "It's forward planning Jim, but not as we know it."

US Initial Jobless Claims could also spur the FOMO gnomes back if the number comes in well below 700,000 tonight. The closing of New York City schools overnight, as Covid-19 restrictions increase, seems to have been the catalyst for more profit-taking in the markets amid the despairing wails of NYC parents. 

Although various Federal Reserve governors and prominent CEO's are calling for more US fiscal stimulus, the vaccine announcements by Pfizer and Moderna have lessened those hopes. A $500 billion at $2.2 trillion spread is wider than Bitcoin on a busy day. If the Initial Jobless Claims strongly outperform tonight, the propensity of Republicans to raise their bid will fade further rover the event horizon. The weight will fall, as ever since the Global Financial Crisis, on the shoulders of the Fed. December will definitely see more easing in some form or shape, and the ECB will join them. Good for asset prices, bad for economic inequality.

Today both the Philippines and Indonesia will release their latest rate decisions, and I expect both to follow Thailand yesterday and hold rates unchanged. With the surge in inflation in the Philippines, real interest rates are already negative, although, of the two, the BSP is most likely to cut, with the Peso at four-year highs. They will probably keep their powder dry though for now and let the spike in food prices work its way through the system. Bank Indonesia will have one eye on the Rupiah in its decision, with the fall of USD/IDR from 14,900 to 14,100 in recent days a massive sigh of relief. Nevertheless, the currency isn't out of the woods, much like the countries Covid-19 strategy. I do expect indirect measures such as the easing of bank liquidity ratios, or a cheap funding programme to appear. 

Both South Korea and Thailand have started making noises about currency appreciation in recent days. Unfortunately, both have already nearly exhausted their ability to cut rates. In other parts of Asia though, with most regional currencies marching higher with the Yuan in military precision, regional Asian central banks still have room to move. That is the blessing that currency appreciation confers, and with the Dollar expected to fall in 2021, will increase more. Given the outperformance of Asia, and with 2021 uncertain still, most will keep the ammunition locked up out of the rain.

Australia produced a gargantuan employment number today, befitting its moniker as the Lucky Country, despite China's best efforts to disagree. Employment rose by a massive 179.000 jobs, 97,000 of them full time, blowing the market estimates of a fall by 30,000 into oblivion. The headline unemployment rate remained steady at 7.0% as more females surveyed re-entered the workforce looking for part-time work. Although the survey was tweaked last month, the headline numbers came during the Victoria State lockdown, making them even more impressive. It will be interesting to see if they can maintain this momentum as we advance. Strangely, neither stock markets nor the currency reacted, highlighting that the drivers of world markets remain centred in the US, Europe and China. The number should provide indirect support to both though.

For the next few days for financial markets in general, however, "patience grasshopper" is the order of the day. 

Asian equities fade

Stale long positioning from short-term players was further trimmed overnight on Wall Street. A lack of new drivers, and fading momentum, was enough for impatient traders to head for the exit door after NYC announced more Covid-19 restrictions. The S&P 500 fell 1.16%, the Nasdaq fell 0.82%, and the Dow Jones also fell 1.16%.

That sentiment has spilt into Asia this morning, with position reduction the order of the day, and regional markets are fading. The Nikkei 225 has fallen 0.80%, with the Kospi down 0.55%. China's Shanghai Composite is flat, but the CSI 300 has eased 0.35%, with Hong Kong falling 0.80%. 

Singapore, Kuala Lumpur and Manilla are 0.70% lower, with Taipei down 0.30%. Jakarta has bucked the trend, rising 0.30% ahead of expected supportive measures by Bank Indonesia today. Australian markets have also eased modestly, the ASX 200 and All ordinaries down 0.15%.

Today appears to be another one of consolidation and profit-taking, with Europe set to follow suit. Headline driven spikes in volatility are possible when markets are in ranging mode. Still, investors should put their perpetually bullish hopes aside and should enjoy the tranquillity; it is unlikely to last.

The US Dollar remains stuck in neutral gear

Momentum has waned in the bearish US Dollar trade as well. Although the dollar index faded by just 0.13% overnight, it has recouped that loss in Asia this morning, rising back to 92.47. Suspected intervention by South Korea and Thailand to buy US Dollars seems to have lifted the greenback modestly higher in general in Asia. With little room to move on interest rates, and with some very public comments about currencies, we expect more of the same to continue. 

That has left major and Asian currencies slightly lower in Asian trading, but in the bigger picture, consolidating recent gains, notably among the commodity and regional Asian currencies. The PBOC set CNY higher again today at 6.5484, its highest since June 26th, 2018, for trivia fans. With the PBOC content with CNY appreciation, the rest of Asia will continue to move in lockstep, and regional central bank intervention to buy Dollars is merely a smoothing operation and not a line in the sand.

High iron ore and copper prices continue to support the Australian and Canadian Dollars. However, the New Zealand Dollar continues to be the outperforming commodity-group currency, after the RBNZ held rates unchanged. China's silent trade war with Australia continues to have zero effect on the currency, much to my surprise. Still, today's employment data suggests little to no impact on the real economy either. 

Among the majors, the Japanese Yen and Swiss Franc are quiet underperformers, boosted perhaps by subtle haven flows. Sterling remains the highest likelihood major to produce some volatility. A Brexit trade agreement will probably be worth a few hundred points of topside immediately, even though markets have been pricing in zero chance of a no-deal for some time.

Crude Inventories saves Oil's Blushes

Oil would probably have finished the overnight session lower as well but can thank a lower than expected rise in official US Crude Inventories. The 768,000-barrel print was well below market expectations of a 1.65-million-barrel increase. That was enough to lift Brent crude and WTI to a positive close. Brent crude rose 0.78% to $44.15 a barrel. WTI finishing 0.56% higher at $41.60 a barrel.

Both contracts have eased by 10 cents in Asian trading, in line with a slightly stronger US Dollar today in Asia. Trading remains directionless for the most part, though, with both contracts content to consolidate their recent monthly gains near to the top of their current ranges.

OPEC's meeting at the end of the month looms as the next major risk event for oil. More positive vaccine news will probably lift prices again, but after Moderna's announcement, seem to be having diminishing returns. That said, as previously stated, the imminent arrival of Covid-19 vaccines has likely put a longer-term bottom under oil prices, as the world looks towards a better consumption picture in 2021. That is evident by the continued tightening of the contango in the 6-month calendar spread. 

At this stage, unless Brent crude prices dramatically collapse to near $35.00 a barrel again, I suspect OPEC+ will hold its nerve. That will likely cap medium-term gains for Brent at $48.00 a barrel at best until more evidence appears that the global economy is achieving escape trajectory. that will likely require mass vaccinations reopening international movement of a large scale.

Gold ranges but is testing support

Gold's range continued to compress overnight, reflecting a lack of drivers to move it one way or the other substantially. Gold retreated 0.42% to $1872.60 an ounce overnight and has fallen to $1868.50 an ounce this morning as the US Dollar has firmed in Asia. 

One unintended effect of golds tight ranges over the past week is that longer-term trendline support has risen much closer to market. That line comes in today at $1870.50 an ounce. Although Asia has moved below it, I would prefer to watch for a daily close beneath before sounding the alarms.

One impression I do have is that the short-term market remains long after the $100 drop on November 9th. With momentum stalling, the risk has increased that gold could suffer another wash-out lower, particularly if it closes under $1870.50 an ounce this evening. That sets up further losses to the $1850.00 an ounce zone initially, and could potentially extend to the 200-day moving average (DMA) at $1792.00 an ounce. Gold still faces strong resistance at $1900.00 an ounce, followed by the 50 and 100-DMA's close behind at $1901.50 and $1908.90 an ounce respectively.

Bitcoin, Haven or Tulip Mania?

Bitcoin's inexorable march higher continued overnight, climbing 1.55% to $17,912.00, disguising yet another $1000+ daily range. Bitcoin has been on a steadily upward track since well before the US elections, and more so than gold, had become perhaps the preferred safe haven of choice of the digital age. 

I will not debate the merits of Bitcoin versus gold, which contains as many shoot first ask questions later haters as both sides of a US election campaign. Undeniably, Bitcoin was used as a hedge into the US elections, and a digital flak vest, is as good a haven as anything made of gold or Kevlar. The increasing steepness of the rally since though is causing some concerns, resembling an exponential curve. Even a Tesla chart looks sensible by comparison.

The steepness of the rally contains several $1000/$1500+ range days, which I struggle to reconcile with as either a haven or a legitimate financial product. The November rally has also been accompanied by the usual noise of a new asset class, institution money piling in, supply limited to 21 million Bitcoins forever, it's going to $300,000. Any institution that is "piling" and crossing a $1000 intra-day range probably shouldn't be in business. And theoretically, any Bitcoin can be divided into an unlimited number of teeny little Santoshi’s.

The noise surrounding Bitcoin at the moment resembles the Dutch tulip mania-type noise we saw as it approached its previous all-time high around $19740.00. The rally of the past two-weeks looks much more like FOMO money talking their books, rather than fundamentals. If it really is haven flows, the scale of the rally would suggest that there would be inevitable spill over into other haven assets. 

That is not evident and if anything, the world is a happier place, then the start of November. Covid-19 spikes or not, vaccines are on the way, and markets have quickly put the US election behind them. Equity markets are higher; oil is higher, the US Dollar is weaker. Not the signs of a defensive market.

If you are long Bitcoin, then congratulations. But the tulip-mania noise is increasing with the steepness of Bitcoin's rally. It all went horribly wrong the last time Bitcoin ascended $19,000.00, and the potential is real that history could repeat itself. I see scant evidence for the acceleration of the rally of the past two weeks in the world as a whole, that justifies the moves by the "new haven asset class." Keep your hard drive disconnected but close, but not too close to magnets; be prepared to run at the first sign of trouble.