The return of the Queen

The Trump impeachment vote was overshadowed by momentous scenes at 0530 this morning in South Jakarta, as Queen Cricket returned to her palace. The unannounced royal trip, lasting two nights, led to frantic searches of the wider realm by her servants. Her feline highness announced her arrival loudly at the front door of the palace in the early hours. That was followed by an immediate spot inspection of the royal "facilities," an early breakfast of tuna and jelly, before swatting Princess Twinkle and taking some royal repose.

Mrs Halley and I are thankful for Her Majesty's return, as are other royal household members. Thanks once again to all those from around the world wishing a speedy and safe return from Her Majesty. Netflix's "The Crown" production team have not yet contacted us, but we are expecting a call imminently.

In other news, financial markets diverged once again overnight. US equities traced out a modestly positive day with technology outperforming as usual. US yields fell overnight after an excellent bid to cover ratio for the 30-year bond auction overnight. That appeared to assuage inflationista’s after US inflation printed right on expectations at 1.40%. Interestingly, the US Dollar rose overnight, perhaps buoyed by bond inflows after a very heavy issuance by the US Treasury this week. That pushed gold slightly lower and sparked some profit-taking in oil.

Fed officials also calmed inflation worriers overnight with Governor Harker, Rosengren, Clarida and Brainard all speaking. Harker said that the Fed would basically keep rates lower for longer. Brainard, always an uber-dove, said much the same and added that the Fed could increase bond purchases if necessary. Governor Clarida noted that when the Fed does raise rates, they will only have to raise them a short distance to reach a neutral policy stance. He added that the Fed would like to see one year of two per cent inflation before tightening.

All in all, the Fed produced more doves then a soap factory and US bonds duly rallied pushing yields lower. It was all the more surprising than that the US Dollar strengthened overnight. The move more down in US yields could be a short one, as only Governor Brainard suggested that the Fed could increase bond-buying, thus capping yields even if inflation rises. Depending on your point of view, you could cut the comments cake either way. US yields could still advance with inflation if the Fed chooses to hold rates low and decline to cap yield increases Bank of Japan-style. That may explain why the US Dollar continued to rise overnight and implies that the Dollar short squeeze still has room to run.

President-elect Biden will announce his follow-on fiscal stimulus wishes today. Current thinking is that $1.3 trillion will be added to the wish list. CNN is reporting that Biden aids are throwing around a $2 billion number. More visibility on other Biden initiatives and their price tags should start appearing in the coming days. Therefore, the move lower in US yields may be relatively short-lived, potentially giving more momentum to the US Dollar short squeeze. The Byrd Rule will probably make the last number particularly challenging to get through the Senate, with 60 votes needed to circumvent it. Markets are likely to concentrate on the headline, and ignore the nuts and bolts detail, as is their want.

This morning, in Asia, Japan's Machine Orders for November defied expectations, rising 1.50% MoM, vastly higher than the fall of 6.20% anticipated. We may yet see December’s number reflecting the Covid-19 woes in Europe and the USA. Overall, it dovetails nicely with the strength seen in manufacturing worldwide, despite the virus resurgence. 

For December, Japan's PPI was also surprised, rising 0.50%; well above the expected zero per cent. Before readers get excited about inflation finally reappearing in Japan after 30 years, I would note most of the increase can be attributed to rising energy costs. South Korean Import Prices fell 10.20% YoY for December, with Export prices dropping by 5.40% YoY. The falls can be attributed to the Won's impressive appreciation. The market's attention is more focused on the Bank of Korea rate decision tomorrow morning, where we expect the BoK to remain unchanged.

China's Balance of Trade has just been released and shows another impressive set of data. In Dollar terms, Exports YoY rose 18.10% (15.10% exp), and Imports YoY rose by 6.50% (5.0% exp). The Trade Balance expanded to $78.17 billion, again, well above expectations. The data may cause some upward changes in forecasts to China's GDP release due on Monday and be a market positive today. China's economic leadership in 2021 continues unabated and bodes well for the regional Asian recovery as well. 

With President-elect Biden shooting for the moon on stimulus, and China data suggesting its economic juggernaut remains on track, financial markets should enter the last part of the week on a positive frame of mind. Any rise in US yields and the US Dollar should not be enough to derail further rallies in equity markets and support energy. 

Another boost for markets could come from Johnson and Johnson, who have released preliminary data from their phase one and two trials for their Covid-19 vaccine. Early data showed encouraging results with initial phase three data due at the end of the month. The J&J vaccine is a potential game-changer in that it is a one-shot vaccine and does not require special cold storage. Success in phase three could see another burst in activity in the cyclical recovery rotation trade at the end of the month.

Asian equities mixed today

Asian equity markets are mostly higher across the region after a mostly upbeat session from Wall Street overnight. Slightly lower US yields and expectations of a larger than expected Biden-led stimulus package have boosted sentiment along with impressive China trade data. It is ironic then that the region's laggard is Mainland China where the Shanghai Composite has fallen 0.75%, and the CSI 300 has retreated 1.0%. Especially so after the US Treasury intervened to prevent a US delisting by China tech giants Alibaba, Tencent and Baidu. 

It would appear that China's retail investors (who account for most equity market turnover) are increasingly nervous about stretched valuations and are reducing exposure at these levels. The expanded Covid-19 restrictions in parts of China may also be eroding sentiment. Given the positive outlook seen elsewhere globally, I am looking at today's falls in China as a temporary one. 

US major index futures have risen modestly today, by between 0.20% and 0.30%. In Japan, the Nikkei 225 has jumped by 1.50% while the Kospi has only managed to eke out a 0.30% gain. After the US Treasury intervention, Hong Kong has climbed 0.45% as the dual-listed China tech giants rise locally. 

Singapore and Kuala Lumpur are 0.40% higher, although Jakarta has slipped slightly by 0.20%. In Australia, the All Ordinaries has climbed 0.50%, with the ASX 200 rising 0.35%.

Despite the retreat in China, the overall sentiment in equity markets remains positive. President-elect Biden's potentially two billion Dollar stimulus package should anchor gains, even if getting it through the Senate would be a monumental task. That is likely to be a story for the end of the month.

The Dollar's rise resumes

A plethora of Federal Reserve Governors, along with some successful bond auctions, managed to cap the rise in US yields overnight, with the 10-year now over ten basis points of its recent highs. Notably, though, the US Dollar ignored that and finished the overnight session stronger. The dollar index rose 0.30% to 90.35 and has climbed to 90.40 this morning. That leaves the index mid-range with critical levels being 90.00 and 91.00.

Amongst the major currencies, only Sterling defied the greenback overnight but has traced out a double top at 1.3700. Sterling’s uptrend remains intact, but elsewhere, EUR/USD, AUD/USD, NZD/USD and USD/CHF have all moved deeper into reversal territory. Notably, on EUR/USD, a failure of 1.2135 opens a correction lower that could extend to 1.1900, its 100-day moving average. (DMA) On USD/CHF, a rise through 0.8920 could see USD/CHF rise to 0.9050 initially, its 100-DMA.

Asian currencies are showing more fortitude, as the Chinese Yuan remains anchored near its recent highs with USD/CNY unchanged at 4.4710 this morning. Although the PBOC is sending subtle signals that the CNY rally has done enough, for now, it would take a rise through 6.5500 to signal that the US Dollar squeeze is spilling into the regional Asia space. Only the Korean Won and Indonesian Rupiah show material signs of weakening, but realistically, the Yuan will have to buckle before seeing a general Asian currency retreat.

Overall, the rise of the US Dollar overnight, even as US yields retreat, is a warning sign that the short-Dollar squeeze may be about to accelerate.

Profit-taking hits oil prices

Oil prices beat a modest retreat overnight with official US Crude Inventory data broadly neutral. Headline crude inventories fell more than expected, but distillate and gasoline inventories rose more than expected. That was enough to spark speculative longs to lock in some profits with Brent crude and WTI's relative strength indices (RSI's) having been in overbought territory for most of this week.

Brent crude eased 1.25% to $56.00 a barrel, and WTI fell 0.80% to $52.85 a barrel. Both contracts remain unchanged in Asia. With gas prices still at record highs in Asia, oil is unlikely to retreat far in today's session. 

Both RSI’s for Brent crude and WTI remain in overbought territory, suggesting that further downward pressure could persist. Any retreat lower will be due to a readjustment of positioning though and should not portend a structural change in oils outlook. China data continues to outperform, and a monstrous US stimulus package appears to be on the way. Both should ensure that plenty of physical buyers will appear on any price dips, limiting losses.

Brent crude has initial resistance at its overnight high at $57.40 a barrel followed by $60.00 a barrel. Its correction could extend to $53.50 a barrel. WTI has resistance at the overnight high at $53.90 a barrel and possibly looks the more vulnerable of the two, the nearest meaningful support being $50.00 a barrel. 

Gold's price action is ominous

Despite US yields easing overnight, the US Dollar still strengthened. That was enough to send gold 0.45% lower to $1845.00 an ounce overnight. Asian traders appear nervous as well, with gold falling another 0.40% to $1838.00 an ounce this morning.

Gold has now fallen through its 200-DMA at $1841.00 an ounce and if it closes below there tonight, would be a bearish technical signal. Monday's low at $1817.00 an ounce is the next support level, and failure opens a retest of the psychological $1800.00 an ounce level. Gold's long-term critical support is the 61.80% Fibonacci at $1760.00 an ounce. Resistance lies at $1865.00 an ounce, followed by the 100-DMA at $1890.00 an ounce.

It is an ominous development for gold that it fell overnight, even as the key US 10-year yield also eased lower. If the US 10-year yield reverse course and starts to rise again, reducing the negative real yield carry, I fear that gold may suffer another sustained bout of selling. A $1.5 to $2.0 trillion US stimulus package could be enough to tip the balance.