December 7, 2023


Discover The Difference

Currency and precious markets are the most notable casualties of the divergence in market sentiment

President-elect Biden signalled his intention to spend “trillions of dollars” on Friday, notably increasing direct payments to American taxpayers to $2000.00. As I have touched on previously, the Byrd Rule will make that harder than the markets want to acknowledge unless the Democrats can muster 60 votes in the Senate. Not least because some of the Democrats Senators themselves are very much more to the centre-right of the political spectrum.

The stimulus talk was music to the ears of the equity market buy-everything, global recovery, FOMO-nistas, with Wall Street enjoying another positive session. The response was less enthusiastic in the US bond markets, where US yields continued to grind higher, with the key US 10-year rising above 1.10% to nearly 1.12%. Someone must pay for those trillions. The expectation that the US Government will become the Caligula’s of bond issuance is fraying nerves and causing the buy-everything trade to diverge into just almost-everything.

Energy markets continued to track higher with the Biden “New Deal” expected to boost US consumption, dovetailing nicely with the anticipated vaccine-led global recovery. Mostly, it is because of Saudi Arabia’s unilateral production cut, which is squeezing backwardation in the futures markets. Base metals also remain near highs, driven by the consumption-boosting factors outlined above. 

Rate-sensitive currency and precious marks though are diverging from the script. It is a strange world we live in, when a rise through 1.0% by a US yield benchmark sparks panic in some corners of the financial world. In nominal; terms, let alone real terms, that is still almost free money the US Government can borrow at for ten years. Still, it is expectations that count, and some parts of the financial markets are clearly worried that the rise in yields is just starting. Above market expectations for US inflation prints later this week would likely to increase the disquiet. 

Currency and precious markets are the most notable casualties of the divergence in market sentiment. As US yields have risen in the past week, so has the US Dollar. With the next FOMC meeting not until the end of January, the squeeze in US yields and by default, the US Dollar could still have a few weeks to run. If no signal emerges from that meeting about where the Fed is happy for rates to rise to, the pain could continue for US Dollar shorts well into February. That pain is, in no small part, driven by the world being short US Dollars to the eyeballs against everything, having been happy sellers for most of 2020. 

One small consolation to Dollar bears is that in my experience, which dates to before mobile phones- sorry I mean devices – the first big move of the year is almost always the wrong one. As a proud US Dollar bear, a two-month washout of long positions to start 2021 will perversely, make me a happy bunny.

Precious metals are also suffering, with gold extremely sensitive to the real interest rate differential versus US yields. US real interest rates became less negative on Friday. That pushed gold down through $1900.00 an ounce with a short-term market having got itself very long last Monday. That produced a chart that looked very Bitcoin-esque on Friday, with gold plunging $64 an ounce, or 3.35% to $1840.00 an ounce. The misery continues today, but more on that later.

President Trump is now a higher risk factor than ever. I fear that markets are not pricing in just how much of a finale President Trump intends to make his last nine days in office. Ties with Taiwan were eased over the weekend, and I have a sinking feeling this story may have more to give. The President will almost certainly generate more fireworks this week. That could spur flows into haven US Dollars, possibly cause equities to wobble, but may provide a lifeline to a beleaguered gold market. 

We could talk about the nuances of the world inflation releases this week. I’ll summarise though so we can move on quickly. China’s appears to have bottomed this morning, driven by commodities. Europe and Japan have none, and Godot will probably arrive before it does. The US should print around 1.60% but may print higher. Oh yes, US earnings season starts on Friday.

With that incisive analysis now out of the way, we can concentrate on where the real source of risk and volatility this week lies. And that, dear readers, is well and truly centred on the White House and Washington DC.

Equity markets paint a mixed picture

Asian markets had a positive start this morning, but those rallies have quickly given most of those gains back after the US said its ambassador to the UN would meet with Taiwan’s President. 

US index futures have fallen this morning, unwinding much of Friday’s gains. There appears to be no one driver for the sell-off, with the easing of relations with Taiwan over the weekend by the US perhaps increasing concerns that more surprises are on the way from the White House this week. The Nasdaq futures have fallen 0.25%, with the S&P e-minis falling 0.45%, and the Dow Jones futures tumbling by 0.65%.

In Asia, the South Korean Kospi has given back all of its initial gains, spurred by Samsung and tech stocks’ surge, to be unchanged for the session. China markets though have shrugged of Taiwan concerns and the US backlisting’s of Chinese companies and payment apps. Mainland markets seem less concerned by any Trump actions this week than in weeks past. The Shanghai Composite and CSI 300 are unchanged. The Hang Seng, meanwhile, is up 0.60%, some way of its earlier highs.

Taipei is flat for the session, while Singapore has fallen 0.30$, although Jakarta has risen by 1.15%. Bangkok is 0.50% higher, but Malaysia has fallen by 1.10% today as markets there await an announcement from the Prime Minister today regarding expanded Covid-19 lockdowns. In Australia, markets have been in the red all day, led lower by banking, resources and gold miners. The ASX 200 and All Ordinaries are down 0.90%.

The US Dollar continues to squeeze higher

Rising US yields saw the US Dollar continue to squeeze higher on Friday, the dollar index rising 0.30% to 90.10. That theme has continued today, with the dollar index marching another 0.35% higher to 90.40 in Asia. The dollar index has critical resistance at 91.00. A daily close above that level signals that the US Dollar short squeeze had the potential to extend much further.

The pro-cyclical Australian and New Zealand Dollars have both lost 0.65% today and broken technical supports in the process. The AUD/USD has moved through support at 0.7750 to 0.7705 today, signalling further losses to 0.7600 initially. NZD/USD’s fall to 0.7200 broke technical support at 0.7240, signalling further losses to 0.7000. 

USD/JPY had risen 0.20% to 104.15 today, 160 points higher than its lows last week. It is clear that the widening interest rate differential is behind the rally by USD/JPY, which is now approaching resistance at 104.50, a downtrend line that dates back to July 2020. A rise through the 100-day moving average, just behind at 104.75, signals further gains by USD/JPY to 106.00 and potentially 107.00. 

In Asia, regional currencies are all in retreat, notably the Indonesian Rupiah which has fallen 1.05 to 14,125.00 today. USD/SGD has risen 0.45% to 1.3315, with USD/MYR rising 0.25% to 4.0400. USD/CNY has risen 0.20% to 6.4850 after the PBOC left the official fix almost unchanged at 6.4764. At this point, a move higher by USD/CNY through 6.5600 would be required to signal that the Yuan’s 7-month rally has ended for now. Regional currencies are likely to remain under pressure for the rest of the session, as equities retreat and concerns rise over what surprises the White House may throw out this week. 

The US Dollar rally should continue in Europe where EUR/USD suffered a sharp reversal on Friday, falling through monthly support at 1.2250, to 1.2220. It has declined 0.50% to 1.2270 this morning, and its losses could extend to 1.2000 in the coming days. By contrast, Sterling fell only modestly to 1.3550 on Friday, although it has retreated another 50 points to 1.3500 this morning. A loss of 1.3400 would signal a much deeper correction to long-term support at 1.3175, its trendline and the 100-day moving average. 

Oil’s rally fades in Asia

Oil had a positive session on Friday, both Brent and WTI recording over 3.0% gains boosted by Biden stimulus hopes. Risk aversion seen in other asset classes has set in on energy markets today in Asia though. Brent crude has fallen 1.70% to $55.30 a barrel, and WTI has declined 1.55% to $51.80 a barrel. 

Although the White House’s easing of diplomatic ties with Taiwan has spooked markets in Asia, oil’s rally is not in danger at this stage, even as the US Dollar rises. Brent crude would need to fall through $53.50 a barrel to signal a much deeper correction. Similarly, WTI would need to retreat through $50.00 a barrel. The oil rally is driven by the physical change of supply from Saudi Arabia’s unilateral 1 million barrel per day production cut. As such, in what may be famous last words, oil markets should have more structural support then other suffering from speculative largesse.

Brent crude has formed a double top at $56.30 a barrel, and if $53.50 a barrel fails, could extend losses back to the $50.00 region. WTI has traced out a double top at $52.70 a barrel, with a loss of $50.00 a barrel potentially extending losses to $46.00 a barrel. 

Gold’s bonfire of the vanities continues

Gold markets suffered a judgement day Arnold Schwarzenegger would have been proud of on Friday. The rise in US yields pushed gold down through its 100-day moving average (DMA), at $1895.00 an ounce. That sparked a disorderly rush for the exit doors by speculative longs that had been remorselessly squeezed since the rally of last Monday. Gold collapsed by 3.35% to $1840.00 an ounce as the New York session finished.

The rout has continued in Asia, with gold unable to find any friends even as the risk aversion winds seem to be getting more assertive on other asset classes. Gold has fallen by 1.0% to $1831.50 an ounce, having sipped briefly below $1820.00 an ounce earlier in the session.

Gold is now flirting with its 200-DMA, today at $1837.00 an ounce. A daily close below this is a signal that the downward correction will continue. Much will depend on US bond markets, which open later in London. If US yields continue moving higher, gold will face more selling pressure into a market that looks like it is still speculatively long. 

Gold’s resistance is now far distance at $1892.50 an ounce, its 100-DMA. Support appears in the $1820.00 an ounce region with critical long-term support at $1760.00 an ounce, its 61.8% Fibonacci, traced out in November. I have highlighted $1760.00 an ounce as a long-term structural low for gold prices previously. As long as $1760.00 an ounce remains intact, gold remains itself in a longer-term uptrend. However, the reaction to the modest rise in US yields has surprised me. A failure of $1760.00 an ounce would call for a reassessment and golds losses in that scenario could extend to $1650.00 an ounce initially.