Yellen stimulates markets

Wall Street got back to business as usual overnight, buying equities and selling the US Dollar as Janet Yellen, in her Treasury Secretary selection testimony, told them everything they wanted to hear. They wanted to hear more stimulus, and Ms Yellen delivered 1.9 trillion reasons on that front. As is financial markets want, however, they ignored what didn't fit that narrative. Namely, taxes would rise on corporations and the rich, and that a rapprochement in relations with China was off the table. Ms Yellen mentioned China's trade practices and the incoming Biden administration has signalled that the China tariffs will remain untouched.

Asian equity markets seemed to have taken the China position rather more seriously. After a rocky start, Asian equities are creeping into the green this morning, but the rally has more of a circumspect pragmatic look to it. Part of that will, of course, be due to the uncertainty surrounding the US Presidential inauguration this evening. I suspect that increased security across the country will nullify that risk.

China left it's one and five-year Loan Prime Rates unchanged today as expected. At this stage, I do not see the PBOC looking to materially tighten monetary policy until late in 2021. With a creeping series of lockdowns in parts of Beijing and its surrounding provinces as Covid-19 cases stubbornly appear, the PBOC is likely to be more concerned right now with slowdowns and not excess leverage.

Bank Negara Malaysia will announce its latest rate decision today, and with most of the country now likely to be under movement control orders, I expect them to cut by 25 basis points to 1.50%. Through luck or design, Malaysia has found itself with monetary ammunition to deploy to support the domestic economy, which will take an inevitable hit because of the nationwide restrictions. That may lead to some weakness in the Ringgit but should be supportive of local equities.

The Bank of Japan and Bank Indonesia also announce rate decisions tomorrow. Speculation continues that the BOJ will tinker with its quantitative easing programme and may explain the Yen strength seen this week and the gloomy start to equity trading today. Frankly, I would be shocked if they did, if anything, with Covid-19 restrictions in force now, they would be looking for more ways to inject money into the domestic economy. By contrast, Bank Indonesia is likely to remain unchanged at 3.75%, especially with USD/IDR creeping back above 14,000.00. 

The European Central Bank and the Bank of Canada also announce rate decisions over the next 24 hours. I expect no change from either, but the ECB may note the increasing risks to the European recovery due to the sweeping national lockdowns across the bloc. Neither decision should have much market impact.

Although we have a lot of data still due this week globally, notably Markit PMI's on Friday, it is mostly second tier and will have a low market impact. Markets will default to the US stimulus story and act accordingly with one eye on the Presidential inauguration, and the expected flurry of executive orders from the Biden administration, starting tomorrow. 

Asian equities edge higher on stimulus story

Incoming Treasury Secretary Janet Yellen made all the right noises as far as Wall Street was concerned at her confirmation hearing overnight. The $1.9 trillion stimulus storey was music to the ears of the FOMO crowd, and Wall Street responded in kind, propelling US equities higher. The S&P 500 rose 0.81%, the Nasdaq got Netflix-boosted by 1.53%, and the Dow Jones lumbered 0.38% higher, with index futures on all three edging higher today in Asia.

After a rocky start, Asian equities are staying on message and following Wall Street higher. The exception is Japan, where the Nikkei 225 has fallen 0.45% ahead of the BOJ decision tomorrow. The Kospi has now crawled to a 0.20% gain on the day. Mainland China markets have shrugged of Covid-19 restrictions and the Yellen comments on trade overnight. The Shanghai Composite is 0.40% higher, with the CSI 300 rising 0.50% and Hong Kong is up 0.30%.

Regionally, Taipei is 0.10% higher, with trade-sensitive Singapore down 0.30% and Kuala Lumpur climbing 0.55% ahead of an expected Bank Negara rate cut. Bangkok is 0.90% higher as government stimulus is distributed, while Manilla has retreated 0.70% and Jakarta remains unchanged. In Australia, US stimulus talk, and lofty natural gas and iron ore prices have lifted local markets. The ASX 200 0.50% and the All Ordinaries are climbing 0.60%.

Until the US Senate Republicans reveal their hand, US stimulus talk and dovishly unchanged central bank decisions around the world should continue to support equity prices.

Yellen sends the Dollar lower

The US Dollar edged lower as Ms Yellen's "go big or go home" testimony on fiscal stimulus increased risk appetite generally. That fed through to a slightly weaker US Dollar, with the dollar index falling 0.29% to 90.50. The index has eased again this morning with regional Asian currencies outperforming, falling another 0.15% to 90.36. The dollar index has been content to range between 90.00 and 91.00 over the past week. A daily close above or below those points will set the next direction for the US Dollar. 

The major currencies all rallied overnight, notably the Euro, Australian and New Zealand Dollars, which continue higher this morning, along with Sterling. However, all still remain firmly in downside breakout patterns suggesting that the US Dollar short squeeze has not done with markets yet. EUR/USD needs to reclaim 1.2300, AUD/USD 0.7700, NZD/USD 0.7300 and GBP/USD 1.3700 to change that technical outlook. 

The US stimulus talk, and a new US President has been more keenly felt in Asia with regional currencies rallying strongly today. That suggests that much of the new-found positive sentiment is flowing to Asian, not major currencies. USD/CNY is 0.15% lower at 6.4700 with the Yuan's range trading set to continue. The Singapore Dollar and Indonesian Rupiah are 0.20 higher today, with the Malaysian Ringgit unchanged ahead of the Bank Negara decision.

Oil rises on Yellen testimony

A downgrade of the global oil consumption outlook by the IEA overnight was not enough to dampen spirits in oil markets, who remain target-fixated on the proposed US fiscal stimulus package to the exclusion of all else. A fall in the US Dollar overnight for the same reasons also helped oil to rally. Brent crude rose 2.05% to $55.85 a barrel, and WTI jumped 1.80% to $53.00 a barrel.

With cold weather in North Asia and Europe squeezing gas prices higher, oil is likely to remain bid on dips by correlation. In general, oil should retain a positive outlook until such a time as US Senate Republicans signal how supportive, or not; they will be of the proposed Biden stimulus initiatives. Belligerence on their part could be the signal for a short-term correction lower.

Oil has continued moving higher in Asia as the risk environment continues to ride the stimulus sentiment wave. Brent crude and WTI adding 40 cents each to $56.25 and $53.40 a barrel respectively. Critical resistance for Brent crude remains last week’s high at $57.40 a barrel which opens the door for further gains to $60.00 a barrel. WTI must overcome resistance at $54.00 and $54.50 a barrel, but a daily close above the latter leaves the charts clear until the $60.00 a barrel zone as well. 

Gold gets a modest Yellen boost

The effervescence seen in other markets after the Yellen testimony was not a bubbly in gold markets overnight. Nevertheless, gold still managed to eke out a modest 0.12% gain on a tranquil day, to close at $1840.00 an ounce. Momentum has picked up in Asia with gold climbing 0.55% to $1850.00 an ounce.

The rally leaves gold still locked in a broader $1800.00 to $1865.00 an ounce range, albeit nearer the topside. The 200-day moving average (DMA) at $1844.00 an ounce, will continue to act as an intraday pivot point. The 50-DMA at $1859.00, and then the $1865.00 an ounce area continuing to act as a barrier to further gains. The overnight low at $1834.00 an ounce, followed by Tuesday's downside spike to $1803.00 an ounce, form interim support levels. 

Overall, gold lacks the momentum to stage a meaningful rally, with investors still nursing their wounds from the new year collapse. The US Dollar would have to retreat meaningfully, and US yields continue to fall to energise the bull market. Although it is clear that plenty of buyers were out in force on the drop to the $1800.00 an ounce regions, the risks remain weighted to the downside for gold. In all likelihood, gold will trade in a choppy $1820.00 to $1870.00 an ounce range for the rest of the week.or any of its affiliates, subsidiaries, officers or directors.