The silence of the Turkeys

Even Hannibal Lecter would be “cutting back” at Thanksgiving this year, with the American Farm Bureau Federation calculating that the average components of Thanksgiving dinner are 15% higher this year than 2020. As Americans head of to a price inflated helping of turkey, cranberry sauce and something called a green bean casserole, inflation was very much in the minds of markets from last nights pre-holiday US data dump.

Although Durable Goods disappointed, when automobiles and Boeing aeroplanes are stripped out, the number looked pretty good. Elsewhere, the inflationary signals were more Hannibal, and less Clarice. Personal Income and Personal Spending both rose by more than forecast and the PCE Price Index, a Fed favourite, also exceeded expectations, rising to multi-decade highs on a YoY basis. The FOMC Minutes suggested the doves are in retreat as well. The committee noted that inflationary expectations in the near term could exceed forecasts and that a faster tapering is not out of the question.

It is probably the last item that weighed on markets the most. Once again, currency markets were the pressure relief valve, with the US Dollar spiking once again, helped along by a soggy German IFO, fears of virus lockdowns and ECB officials pouring cold water on rate hikes. Front end yields squeezed higher in response as the FOMC maintained a 2.0% inflation target for the end of 2022. Stock markets ignored the data as investors dipped their toes back into the S&P 500 and Nasdaq waters ahead of the US holiday, unable to resist a cranberry sauce covered buy-the-dip moment.  

Another Turkey that benefited from a Silence of the Turkey was Turkey. President Erdogan managed to talk the Turkish Lira 12% lower on Monday, but some silence yesterday saw the Lira close 7.0% higher versus the greenback. I rather suspect the stay is temporary though, and that financial markets intend to keep eating the Lira with some fava beans and a nice chianti once the Thanksgiving leftovers are consumed.

Another emerging market, perhaps more pertinent to Asia, Mexico, also saw plenty of action. The Fed taper-trade has not been kind to the Mexican Peso this week. The Peso finished 1.0% lower at 21.4200 after the Mexican President appointed the Deputy Finance Minister, who has zero experience in central banks or monetary policy, as the next central bank Governor. Nothing beats learning on the job, I guess. As a developing market and a major oil producer with a high beta to the US economy, Mexico could well be a template for many parts of ASEAN and the Mexican Peso is now 3.0% lower for the week. China, once again, set a weaker Yuan fixing today, and with that shield eroding, a taper-trade could be coming to a country near you if you are sitting in Asia.

Two countries that will probably buck that trend in regional Asia are Singapore and South Korea. Singapore is rapidly reopening its economy internationally and recovering domestic demand should outperform the export sector in Q1 2022. The Singapore/Malaysia partial reopening of the land border on November 29th being but one example. Notably, both the Monetary Authority of Singapore and the Bank of Korea have both started tightening monetary policy. The MAS tightened via the NEER recently (look this one up readers, like communicating with Mrs Halley, it's complicated), and the BOK hiked by another 0.25% to 1.0% this morning. The BOK Governor was hawkish in his outlook, and you can be sure the MAS will be at its next biannual policy decision in Q2 2022. For the rest of Asia though, policy settings look set to remain dovish, and if the Fed taper is accelerated at the December meeting, Asian FX could be in for a torrid finish to the year.

Elsewhere, New Zealand’s Balance of Trade and Australia’s Capex have passed without incident. Rising exports flattered the New Zealand Balance of Trade, while Australian Capex was a Q3 print and thus, was eroded by the New South Wales and Victoria lockdowns. Better times will come as Australia reopens. Both the Australian and New Zealand Dollars continue to look vulnerable though, in no small part due to their hawkishly dovish fence-sitting central banks. Mostly though, their roles as global risk sentiment barometers leave them at the coal-face of the reality of the Fed taper.

Turning to China, the China Securities Journal is running a story that more fiscal stimulus could be on the way. With the PBOC adding liquidity via the repo today and setting a weaker Yuan fix, China markets should have plenty of reasons to be happy. Instead, investors seemed more focused on three other developments. Firstly, indebted property developer Kaisa Group is offering to swap $400 million of Singapore Exchange-listed notes for longer maturities. The wording of the offer feels more like playing Russian roulette with 5 bullets in the 6 chambers. Take the offer or we won’t be able to pay the note when it expires on the 7th of December.

China’s property sector woes haven’t gone away, which leads me to the next point. A group of US Federal Reserve researchers have found substantial downside risks to China's growth outlook. That won’t bother Beijing, but the banning of 12 more China companies by the US overnight might well do. Finally, spare a thought for JP Morgan overlord, Jamie Dimon, who may be feeling like more Jamie Ma than Jamie Dimon this morning, after joking that a 100-year old JP Morgan would outlast the 100-year old Chinese Communist Party. There’s nothing like being a Dimon in the rough.

Asia equity markets are having a mixed day

The buy-the-dippers couldn’t help themselves on Wall Street overnight as both the Nasdaq and S&P 500 shrugged of inflationary data retraced some of their losses overnight, helped by a retracement low in 30-year yields, flattening the yield curve. The S&P 500 rose 0.23% while the Nasdaq finished 0.44% higher. The Dow Jones was weighed down by retail names but finished only 0.03 lower. In Asia, futures have climbed once again, the Dow And S&P futures rising 0.30%, with Nasdaq futures 0.15% higher.

With the US on holiday, Asian markets have been left to their own devices leading to a very mixed day across the region. The Nikkei 225 has climbed 0.75% following Wall Street, while the Kospi is 0.40% lower following a BoK rate hike and hawkish comments afterwards. In China, the Shanghai Composite is flat while further US tech company bans see the CSI 300 fall by 0.30%. Hong Kong is remarkably quiet, the Hang Seng up just 0.10% today.

ASEAN markets are equally mixed with Singapore and Kuala Lumpur down 0.15% and Taipei up just 0.10%. Jakarta has climbed 0.55% higher while Bangkok is flat and Manila is 0.65% lower. Australian markets are content to mark time as the side-ways price action this week continues. Both the ASX 200 and All Ordinaries creeping 0.10% higher.

With a US holiday dampening activity today, European markets are likely to struggle once again, as potentially wider virus restrictions across the continent continue to dampen sentiment.

US Dollar rallies once again

The US Dollar rallied once again overnight after a more hawkish tone to the FOMC Minutes and higher than expected PCE data. Some pre-holiday risk-hedging buying may also have flowed through currency markets with the US Dollar being the market's favourite way to play the inflation/Fed-taper trade at the moment, especially with the Euro languishing under a virus cloud. The dollar index rose by 0.35% t0 96.86 but has eased back to 96.75 in Asia as US stock index futures continue to rally. With volumes sure to be muted for the rest of the week, the US Dollar remains vulnerable to a downside correction, with the dollar index’s relative strength index (RSI) remaining in very overbought territory. Nevertheless, the index remains a buy-on-dips and could well move through 97.00 into next week.

Interestingly, despite a flattening of the US yield curve overnight, USD/JPY continued to move higher, rising 0.25% to 115.40, which, in my mind, reinforces the upside bias to the cross. Resistance is nearby at 115.50 and a rise through that opens the door to 118.00 in the coming weeks, assuming US yields remain firm. Support remains at 115.00 and 113.50.

EUR/USD retreated in the face of US dollar strength once again overnight, weighed down by dovish ECB officials and virus restriction concerns. The single currency fell 0.43% to 1.1200 overnight before climbing to 1.1415 in Asia today. It remains on track to test 1.1160 this week. That in turn sets up a potential retest of 1.1000. Only a reversal of US yields lower alleviates the negative outlook, although the Covid-19 situation will cap any gains. GBP/USD fell in sympathy, easing 0.37% to 1.3330 before rising to 1.3345 in Asia. Short-covering, like the Euro, is likely to be temporary and Sterling remains vulnerable to a test of 1.3300, being guilty by geographic association with the Euro.

The Australian and New Zealand Dollars eased overnight, AUD/USD falling 0.45% to 0.7200, and NZD/USD tumbling by 1.10% to 0.6870 as markets voiced their disappointment over the 0.25% hike yesterday by the RBNZ. A cautious risk sentiment atmosphere, with the US on holiday, is likely to cap any gains in either currency. Both are in danger of retesting 2021 lows at 0.7100 and 0.6800 respectively with the Kiwi the more vulnerable of the two with no RBNZ meeting until February.

The PBOC set a weaker Yuan fixing at 6.3980 today, adding another CNY 100 billion in liquidity via the repos. However, USD/CNY refuses to take the bait with USD/CNY trading OTC at 6.3880 and remaining anchored below 6.3900. That continues to provide some support to regional Asian currencies, which mostly traded sideways overnight and today. One exception is the Malaysian Ringgit which has fallen 0.40% to 4.2260 today. The Korean Won is holding steady at 1189.90 the Bank of Korea policy hiked rates by 0.25% with a hawkish outlook. USD/Asia dips should find plenty of support if the USD/MXN price action overnight is anything to go by. We could see a couple of days of consolidation though before the US Dollar uptrend resumes next week.

Oil consolidates post-Biden rally

Oil prices were almost unchanged overnight and remain so in muted Asian trading. Brent crude is trading at $82.35 today, with WTI trading at $78.35 a barrel. US official Crude Inventories rose unexpectedly by 1 million barrels overnight, temporarily capping gains. Prices were supported though, as markets turn their attention to the OPEC+ meeting next week and any possible response to the Biden-led SPR release from across the globe.

The OPEC+ JMMC meets on November 30th, with the full meeting occurring on December 2nd. Chatter is increasing that OPEC+ may less-than-subtly retaliate by slowing the pace of monthly production increases, particularly as their own data indictors a daily surplus in the world by early next year. But the fact that US production has now risen back to 11.5 million barrels a day, and yet oil prices remain near highs, suggests its underlying fundamentals remain strong, especially with OPEC+ compliance above 100%. Notably, the oil futures backwardation curve has flattened as hedgers pile into far-dated contracts, implying that expectations of future oil prices remain well anchored to the higher side.

I do not expect OPEC+ to dial back on production hikes next week in retaliation. The grouping is nothing if not pragmatic. From a geopolitical perspective, rubbing salt in the wounds of their largest customers would be counterproductive although we can expect some peripheral noise from bay boys, Russia and Iran. The high compliance level by OPEC+ implies that the grouping is pumping as fast as it can and will probably struggle to meet increased target allocations anyway with only Saudi Arabia, the UAE and Iraq having swing production capacity. Taken in totality, prices will remain solidly supported on material dips, as we have seen over the past week.

Brent crude is testing resistance at $83.25 a barrel. Support is at $81.80 followed by $78.60 and $5.00 a barrel with the 100-DMA lurking at $76.90. WTI has traced out a triple top around $79.30 a barrel. That is followed by $80.00 and $82.00 a barrel. Support is at $78.00 and $74.85 a barrel, followed by the 100-DMA at $74.35.

Gold consolidates near its weekly lows

Gold traded sideways overnight, with a slight flattening of the US yield curve allowing it to finish unchanged at $1788.60 an ounce. In Asia, some risk-hedging and a slightly lower US Dollar has seen it climb a modest 0.20% higher to $1792.20 an ounce. In all likelihood, with the US on holiday today and many in the US making a long weekend of it, gold is likely to range between $1780.00 and $1810.00 for the rest of the week.

If US yields remain firm gold will be vulnerable to further losses, and it faces a challenging technical outlook in the short term. The 50-day, 100-day, and 200-day moving averages are clumped together at the present level between $1789.50 and $1793,50 an ounce. That is followed by $1800.00 and $1810.00 an ounce. Support is nearby at $1780.00 an ounce and failure will signal a retest of $1760.00 and $1740.00 an ounce.