The Dust Settles

The dust is settling on central bank week, with the Bank of Japan leaving policy rates and its 10-year JGB yield target of 0.0% unchanged. It has announced it will scale back its pandemic bond and commercial buying programs in 2022 while extending the SME relief program. USD/JPY is sharply unchanged, unsurprising given that the US/Japan yield differential is its key driver.

The BOJ’s announcement follows in a similar vein to the ECB’s “the lady is not for tapering” tapering not tapering announcement yesterday. Policy rates remained unchanged, but tapering of the PEPP was announced, although it replaced that by that with, you guessed it, more QE under the old APP scheme, as well as continuing with the TLTRO’s. A very European compromise overall with the ECB acknowledging inflationary pressures, but well and truly hedging its bets. Overall, the QE forever family of the BOJ and ECB made plenty of noise but did very little tinkering under the bonnet. Both the Yen and the Euro are likely to have a tough Q1 versus the US Dollar.

Elsewhere, it was a mixed result. Norway and Britain have hiked modestly, while Australia and Southeast Asia remain cemented to unchanged, inflation be damned. Latin America, Eastern Europe and Russia have seen a series of hikes continuing and this will spare them the worst of the ravages of a stronger US Dollar in H1 2022. Turkey, meanwhile, cut rates under Erdoganomics. President Erdogan also fired a couple of people, and the Turkish Lira looks to have lost another 12% while I have been away this week. I might have to pencil in USD/TRY at 20.000 by early January at this rate. It would be comical if it wasn’t so sad for the people of Turkey.

The FOMC has swung to hawkish, as per the hints from Jerome Powell pre-FOMC. A faster taper and three rate hikes “dot-plotted” into 2022 are the new reality now. I wasn’t the least surprised at the equity and bond market reaction. The “buy everything” story rules the roost and annoying things like reality won’t get in the way of it. The FOMC flip was interpreted by the perpetual mega-bulls as proactively anchoring future inflation expectations, something long-dated bond markets have been pricing in forever, so buy big-tech, I mean growth. How bonds and equities will weather the Fed not buying billions of bonds each month remains to be seen. The story looks to be running out of steam already looking at equity markets overnight. The US yield curve will maintain a healthy attraction if you are a fund manager in QE-forever Europe or Japan, so I am not expecting long-dated yields to explode higher. It does, however, reinforce my thoughts that the US Dollar will be the winner in H1 2022.

I will reiterate once again, however, that V for Volatility, and not directional trends, will continue to be the winner in December. I am also quietly hoping that the US Dollar falls, and equities rise in January as well. The new budget year usually brings a group-think kitchen-sink rush in a particular thematic trade. Unfortunately, bitter experience tells me that the first big move of the year in January is usually the wrong one. So, keep going on the “buy-everything” trade, it’s all part of my cunning plan, and I love it when a plan comes together.

In Asia today, Singapore posted robust non-oil exports. Overall, omicron has not caused the global economy to blink yet it seems, but that appears to be because the world is fed up with lockdowns and restrictions, rather than the virus itself. The news from China continues to concern, however. The bottom-pickers buy recommendations are flowing thick and fast on China property companies. As I said last week, there’s never just one cockroach.

Having vaccinated its population with Sinovac, which doesn’t appear to work against omicron, we can safely assume China won’t be opening borders in 2022. That, along with the still-developing property sector woes will crimp growth. Additionally, the US has added another 34 Chinese entities to its blacklist, so US/China relations are going nowhere in a hurry. Hopefully, the rest of the world can pick up some of the slack in 2022.

I note that the YouTuber’s tool of choice, drone maker DJI, is one of those entities. Are YouTubers about to suffer a Christmas Black Swan? Hit the like and subscribe buttons to see.

A mixed day for Asian equities

The post-FOMC “inflation expectations are now anchored” rally has petered out. Technology, or growth, took a bath overnight as the Nasdaq plummeted by 2.47%, while the S&P 500 fell 0.87%, with the “value-heavy” Dow Jones easing just 0.09%. In Asia, futures on all three indexes continue to ease, shedding around 0.30%. With multiple expires on equity instruments occurring this evening in the US, some distortion because of that could be in play, as could end of yearbook squaring etc. I expect the choppy price action to continue to spoof fast-money players into the year-end, both in the US and elsewhere.

The Wall Street tech retreat overnight has had a similar effect on Asian markets with similar weightings, with the US addition of another swath of Chinese companies to their entity lists also weighing on sentiment. The Nikkei 225 is 1.55% lower, with markets completely ignoring the Bank of Japan. South Korea’s Kospi has eased by 0.25%. Mainland China is also lower, the Shanghai Composite falling by 0.95%, and the CSI 300 has retreated by 0.70%. Meanwhile, the Hang Seng is 1.25% in the red.

Regionally, Singapore has eased 0.30% lower while Kuala Lumpur has climbed 0.30%. Jakarta has retreated 0.40%, with Taipei easing just 0.15%. Bangkok and Manila have fallen by 0.40%. Australia is bucking the trend with local markets rising. The All Ordinaries has risen 0.25%, while the ASX has rallied by 0.35%.

Softer post-FOMC US Dollar continues

The US Dollar fell after the FOMC meeting as investors priced in lower longer-term inflation expectations thanks to a pro-active FOMC. Longer-dated yields continue to trade on the softer side, although volatility remains at the shorter end of the curve. There is also likely to be some end of year book-squaring flows that will weigh on the greenback over the next two weeks. It will be interesting to see if we get the usual squeeze on overnight offshore dollar funding rates over the New Year turn this year, which should be greenback supportive next week.

Also weighing on sentiment is the failure of the Biden Build Back Better Bill to make it through the US Congress this year; if it ever does. Technically, that should mean less government borrowing, and less upward pressure on US bond yields and thus, less upward pressure on the US Dollar. Risk sentiment is also steadier in currency versus equity markets right now, particularly6 regarding omicron. Currency markets are pricing in no virus dip from the new variant, most notable in strength in Asian EM and the commonwealths.

The dollar index fell sharply again overnight by 0.34% to 96.00, easing to 95.92 in Asia. Support at 95.50 could well be tested into the year-end, and I would not be surprised to see that continue into January before the FOMC monetary reality hits markets. EUR/USD rose sharply overnight to 1.1340 after a taper, not taper, announcement from the ECB. The rally remains asthmatic though, unable to reclaim 1.1350, and the Euro, along with the Yen, remain highly vulnerable to US Dollar strength and rate differentials going forward.

A 10 basis point hike from the Bank of England overnight has lifted GBP/USD to 1.3330 today with the street pricing in future hikes after yesterday’s surprise. However, until we close above 1.3500, Sterling remains in a technical downtrend and the UK could yet suffer an omicron upset. AUD, CAD and NZD all outperformed overnight thanks to steady risk sentiment, much like Asian FX.

Asian currencies have had a mixed performance. The Yuan continues to strengthen despite weaker fixes from the PBOC. With China borders likely closed for all of 2022, the trade surplus flows will continue underpinning Yuan strength. The SGD, THB, PHP, and IDR have all performed well post-FOMC, most likely because omicron has been discounted as a risk factor by investors. Although the INR and KRW have failed to rally, they are still holding steady. Both currencies are likely to feel the heat of fast-money outflows into the year-end, limiting gains.

Oil searches for equilibrium

Oil prices have endured another choppy range-trading week, although, by the standards of early December, the volatility remains modest. A continuing recovery ex-China and the threat of OPEC+ moving suddenly, is offset by an easing energy crunch in China and omicron growth fears. That has left oil markets looking for a more settled equilibrium price until the narrative convincingly changes one way or the other.

Brent crude rose 0.40% to $74.60 overnight, easing to $74.30 in Asia. It looks set to trade between its 100 and 200-day moving averages (DMAs) at $76.80 and $73.20 into the year-end. WTI climbed by 0.70% to $71.95 overnight, easing to $71.60 in Asia. It has clearly denoted resistance above $73.00 a barrel, followed by its 100-DMA at $74.00. Its 200-DMA at $70.50, and technical support at $69.50 a barrel, should contain any sell-offs.

Gold’s recovery continues

Gold spiked higher overnight, continues its post-FOMC recovery. Gold finished 1.25% higher at $1799.00 an ounce, an impressive rally in two days from its post-FOMC lows around $1753.00 an ounce. In Asia, the rally has continued, with gold rising 0.30% to $1805.00 an ounce as local investors put on risk insurance for the weekend.

Gold has now cleared and closed above its 50, 100 and 200-DMAs at $1789.00, $1795.00 and $1786.50, an ostensibly bullish technical move. As ever, though, the rally overnight has more than a small hint of desperate fast-money to it. Gold bulls have been led to water before, only to find a massive Nile crocodile awaiting them in the watering hole.

The jury is still out on whether the rally is sustainable, although is US Dollar weakness continues, combined with year-end risk hedging, there may still be juice left in it. Gold has resistance at $1810.00 and $1820.00 an ounce and that could possibly extend to $1840.00 an ounce. Readers should tread with extreme caution if we see that level before the month-end.


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