Fed's gospel choir off-key with markets

By my count, the Federal Reserve Chairman and five regional presidents formed an impromptu choir overnight. All six were singing from the same song sheet, the fiscal stimulus lament. To financial markets though, the harmony was off-key, and the audience took fright, with stock markets being sold heavily.

Notably, US treasury yields rose modestly as US bonds were also sold, and energy and precious metals were also marked heavily lower. About the only thing that rallied was the US Dollar, which notably outperformed against the pro-cyclical Australian, Canadian and New Zealand Dollars. Even Bitcoin ended the day lower.

Given the price action across various asset classes, notably the rise in US treasury yields, markets experienced a full risk-off event last night. The significant difference this time versus recent corrections is that is really was sell-everything and move into cash; in this case, US Dollar cash. The price action overnight suggests markets are now in a heightened state of alert, with any upside price corrections likely to be rallies to sell into, not dips to buy.

The consistent song sang by the Federal Reserve officials overnight should not be discounted. Although that message has been consistent in recent months, the Federal Reserve has dialled up the volume to eardrum splitting levels. The Fed may have quietly despaired at the bi-partisan logjam in Washington DC, but the death of Supreme Court Judge Ruth Ginsburg may have indirectly forced its hand. The tragic passing of Mrs Ginsburg, and the process of her replacement, is threatening to consume the Republicans and Democrats ahead of the US elections, thus taking their eye off the ball regarding the economy.

Whether the Federal Reserve's fiscal gospel is heard in Washington DC remains to be seen. President Trump this morning, has called on GOP negotiators to "go for higher numbers' in stimulus talks. Whether this translates into a mature and productive discussion by both sides for once remains uncertain. The FOMO gnomes of Wall Street are already voting with their feet and leaving the building.

The rot had already started earlier in the day in the shape of the pan-European and US PMI data. Manufacturing data across both continents was robust. The services data told another story. It universally disappointed, notably so in both Europe and the UK. As governments in Europe and the UK impose new restrictions to contain a resurgent Covid-19, it appears to be making its presence felt almost immediately in the services PMI's. Similarly, Covid-19 and the run-off of the previous US fiscal package seems to be eroding the momentum of US consumer discretionary spending.

The healthy dose of reality bites continues to sweep financial markets, and not before time. It is a stark reminder also to the limits of monetary policy, and any government using the old playbook of letting the central bank do the heavy lifting in isolation could find that coming back to bite them at the ballot box amongst other places.

Today in Asia, we are likely again, to be at the tender mercies of short-term directional moves in US equity index futures. I suspect though, Asia will be less inclined to follow this path of least resistance today, than they have over the previous week. The data calendar is bare, with only Singapore Industrial Production at 1300 SGT. A notoriously volatile dataset, it is expected to show a continued recovery. With the domestic economy mired in a deep recession, the data will not be market moving.

Germany's IFO Business Sentiment and US Initial Jobless Claims round out the day. With markets on edge, a disappointing print by either could spark an outsized negative effect. Otherwise, markets will continue to be dominated by headlines and sentiment, none of which look set to be supportive for markets today. We will probably need a US fiscal package breakthrough to turn that sentiment around.

Asia follows Wall Street south

Wall Street suffered steep falls overnight, as investors appeared to accelerate their move into cash awaiting further developments on several fronts. The S&P 500 finished 2.37% lower, the Nasdaq slumped by 3.02%, and the Down Jones fell 1.92%.

Despite small gains in US after-market index futures this morning, on short-term profit-taking, Asia has refused to follow the playbook of the past week, with regional bourse all in the red. Japan has fallen 0.65% with South Korea down 2.15%. Mainland China's Shanghai Composite and CSI 300 are both down 1.0%, with Hong Kong down 2.0% and Singapore down 1.0%. The fall in the Australian Dollar overnight has given no solace to local markets with the ASX200 and All Ordinaries 1.0% lower.

The falls overnight and today have left quite a few significant indices precariously placed from a technical perspective. The Hang Seng is at 31/2 month lows this morning, with the Straits Times set to test 6-month support at 280.00. The Nikkei, Shanghai Composite and CSI 300 have edged towards the lower end of their three-month ranges, although no downside break is yet confirmed.

The S&P 500 is nearing critical monthly support at 3,200.00, near the July lows and also now its 100-day moving average. (DMA) A close below 3200.00 sets up further losses to the 3,000.00 region. The Nasdaq is approaching its 100-DMA at 10,560.00, just ahead of its July lows around 10.400.00. A close below the later signals more losses towards 9,600.00, its 200-DMA. Notably, the Dow Jones is has traced out a bearish head and shoulders formation, and is testing the neckline at 26,660.00, just ahead of its 100-DMA. A failure targets a further loss to 24,000.00.

The harsh dose of Covid-19 reality, a situation I have mentioned extensively as a significant risk factor to the buy everything trade, and US Government fiscal impotence will keep equity markets on the back foot throughout the Asian session and into Europe. Another gloomy day on the scale of that seen on Wall Street overnight will trigger medium-term sell signals around the world.

The US Dollar climbs on the rush for cash

The US Dollar rallied again overnight, notably outperforming pro-cyclical currencies as investors appear to move aggressively into US Dollar cash and selling down position in every other asset class. The dollar index broke through monthly resistance at 94.00 overnight, rising 0.40% to 94.34. The strong risk-off nature of the US Dollar rally overnight implies further gains for the dollar index, with an initial target of 94.65.

Although the Euro and British Pound retreated only slightly overnight, the sell-off in pro-cyclical "risk" currencies was much more pronounced. Both the Australian and New Zealand Dollars fell by over 1.0% overnight and have resumed losses this morning. The AUD/USD has fallen to 0.7057 this morning and has critical support at 0.7000, its 100-DMA. A loss is implying further drops to 0.6800. The NZD/USD has fallen to 0.6540 today, with its two-month low and its 100-DMA nearby at 0.6500. A loss of this level should see the Kiwi test its triple bottom at 0.6380, which is also its 200-DMA.

An almost unchanged PBOC USD/CNY fix at 6.8028 has spread Asian regional currencies blushes today. The CNY, THB, SGD and PHP all unchanged, defying US strength thanks to the PBOC. The PBOC looks set to keep USD/CNY in a 7.7500/6.8500 range in the near-term, despite the turmoil elsewhere. That will offer a measure of support to regional Asian currencies.

There are exceptions, of course. USD/MYR has risen again today, climbing 0.30% to 4.1640 as an opposition leader said yesterday, he has enough support in Parliament to topple the present government. Politics have always been Malaysia's Achilles heel, and the MYR looks set for further losses, possibly as far at 4.2000, until the political situation in Kuala Lumpur clarifies. An oxymoron is ever I have said one.

Indonesia's Finance Minister said yesterday that the country wouldn't escape a recession. As one of the most vulnerable currencies in the region, and with high beta to global economic confidence, USD/IDR has risen to 14,900.00 this morning. That has prompted Bank Indonesia to directly intervene in forex markets, selling the US Dollar versus the Rupiah. 

Bank Indonesia's line in the sand has for some time appeared to be 15,000, and it has not hesitated to intervene each time USD/IDR has threatened this level. Maintaining the Rupiah's strength is a key pillar for investor confidence in Indonesia, something that central bank and Ministry of Finance are both acutely aware. If the global rush to US Dollar cash continues, Indonesia faces a much sterner test of its resolve then any time since March.

Oil is lower despite crude inventory falls

Oil edged lower overnight, ignoring above expected falls in US crude, gasoline and distillate inventories, which is concerning for prices in itself. Any premium from the inventory effect got drowned out by a stronger US Dollar and clear risk-off flows out of multiple asset classes. 

Brent crude edged 0.65% lower to $41.50 a barrel, its rally having failed ahead of $43.00 a barrel earlier in the day. WTI also attempted a rally yesterday, but it too fell short, running out of steam ahead of $41.00 a barrel and finishing 0.40% lower at $39.60 a barrel. Both contracts have continued lower in Asia, falling a further 15 cents to $41.35 and $39.45 a barrel respectively.

Oil prices are wilting as product for immediate delivery remains plentiful. Consumption outlook concerns are rising as Covid-19 restrictions return in Europe, and the clamour from the Federal Reserve for more US fiscal stimulus, undermines the global recovery case, the lynchpin for oil's price recovery. 

The dead cat bounces on oil prices look set to continue in this environment. Brent crude continues to flirt with support at $41.30 a barrel, its 100-DMA. WTI is much the same, its 100-DMA being just below present levels at $38.70 a barrel. 

With the US Dollar rampant, an unable to maintain price gains in the face of falling US crude inventories, the oil will almost certainly test its September lows in the days ahead.

Silver sell-off drags gold under the surface

Precious metals continued their sell-off overnight after a day of consolidation. Silver once again led the way, falling 6.70% overnight, and another 2.75% to $22.1500 an ounce this morning. Gold duly followed suit, falling nearly 2.0% and breaking its August lows. It has edged another 0.30% lower in Asia today to $1857.00 an ounce. 

It is clear from the price action across markets overnight that the slump in equities has sparked a general move out of other asset classes and into US cash. Thus, gold and silver failed to gain any safe-haven premium with both metals finishing near their lows, an ominous development.

Silver has tested its 100-DMA this morning at $21.7000, and this level, for now, appears to be providing some support. The rally though is modest, suggesting another test lower is imminent. The next target being its 200-DMA at $19.0900 an ounce.

Gold's close below its August low at $1863.00 an ounce is significant, and it is now testing its overnight lows at $1855.00 an ounce. The 100-DMA nearby at $1843.00 an ounce should provide the same initial support as it did with silver. Both metals are now entering oversold territory on their technical indicators as well, also modestly supportive.

Both gold and silver are likely to consolidate at their lows in Asia and early Europe, awaiting direction from New York. If the Wall Street sell-off resumes, it is almost inevitable that gold and silver will follow suit as the world looks to park money in US cash to the exclusion of everything else. If Wall Street rediscovers its mojo, both metals should receive a stay of execution. It may just be that though, a stay of execution.