Who doesn't love a good auction?

The rotational games continued with Wall Street overnight and are continuing to some extent in Asia this morning. Stock markets heavy with the winners of 2020 are suffering, while previously unloved markets heavy with boring banks, consumer staples, resource and property companies are catching more of the global recovery trade winds.

Overnight, the tech-heavy Nasdaq was stretchered off the field, while the S&P 500, containing a mixture of both, limped off. The Dow Jones, as legacy as you get, meanwhile, enjoyed another warm day in the rotational sun. In Asia today, Mainland China markets are under pressure, along with South Korea and Taiwan, while ASEAN markets outperform once again. The North/South divide in Asia was laid bare in 2020, but a correction seems to now be underway, in line with my thoughts that ASEAN would outperform in 2021.

The US Dollar short squeeze has found a new lease of life, with the greenback powering higher overnight. In the bigger picture, I am adamant that this is a potentially painful correction in a longer-term bear market for the US Dollar. The January squeeze disappointed me with its longevity, but it is back with a vengeance thanks to inflation fears.

All of these sudden doses of valuation reality can be laid at the US bond market door. The impressive firming of US yields on the back of the Biden-stimulus, a procession of improving data, as well as vaccination progress, has delivered a long overdue dose on the efficient allocation of capital when its cost isn't quite zero per cent anymore.

More event risk lies ahead this week in the form of auctions. Many readers will know what a dangerous place an auction can be. Be it bidding for a home, or some alcohol-fuelled holiday or sports memorabilia, for a good cause, of course. I personally own a rugby ball signed by all of the 1995 All Blacks team.

If auction exuberance can be dangerous for your bank balance when the hangover clears the next day, financial markets face a similar peril this week. Starting today, tomorrow and Thursday, the US Treasury will hold a total of $120 billion auctions of government bonds in the 3-year, 10-year, and 30-year tenors. 

All eyes will be on the bid-to-cover ratios after a recent 7-year auction saw that ratio slump. If markets' appetite for US government debt at these levels disappoints, we can expect more equity market carnage for a start, and US Dollar strength. Although the US Treasury already has the balances available to start disbursing the $1.90 trillion Biden stimulus, the government was already running eye-watering deficits anyway. A trillion dollars per annum in the latter half of the Trump term. So even setting stimulus packages aside, the US government has an impressive underlying borrowing appetite. 

Once President Biden signs of on the latest stimulus package, probably this week, the talk will turn to his $3.0 trillion remake America New Deal, or whatever it is called. Even the mere thought it could happen is likely to have inflationistas breaking into a cold sweat in the current environment. With markets on edge, a soft bid-to-cover ratio at the auctions this week, either singly or as a whole, is going to spark another inflationary rush for the exit door on selective asset classes. 

The direct correlation to the US bond market for everything is there to see in Asia today. US 10-year futures have rallied ever so slightly (yields lower), and sure enough, EUR/USD and GBP have perked up, and gold has rallied modestly. Base metals and oil have risen, although they are probably going to no matter what. 

With the US bond market, the fixation of financial myopia for the week, some Asian data has slipped in under the radar this morning. Japan GDP for Q4 and Household Spending for January did what Japanese data does best, disappoint. That may leave the Bank of Japan with a quandary at next week's policy meeting regarding whether to tolerate higher JGB yields. My guess is the answer will be no, meaning USD/JPY will probably be well above 110.00 next week.

South Korea's Current Account for January also disappointed, coming in at a $7.06 billion surplus. The primary culprit will be increased energy prices. It will be a factor making itself felt in energy-hungry North Asia's data in the coming months.

Reports are coming in that the CSI 300 is seeing China's "national team" coming in to buy stocks this morning, as reported by Livesquawk. The tech-heavy CSI 300 has suddenly reversed 3.0% losses on alleged state fund buying. The joys of a centrally planned and controlled economy aside, China's disquiet at the pace of the stock retreat over the past few sessions may be indicative of alarms sounding elsewhere in the world, as I circle back to my comments on Japan above. Unfortunately, not every country can order its pension funds to buy equities to prop up the market. Although China's alleged actions today have slapped a band-aid on, it further reinforces just how important for equity markets these three US bond auctions are this week.

Equities in Asia are very mixed

Rotational plays are the order of the day in Asia, with North Asian markets under heavy pressure, while ASEAN and Australasian markets stay afloat on the recovery rotation tailwind. That is a repeat of the flows seen on Wall Street where the S&P 500 fell 0.54%, the Nasdaq tumbled by 2.54%, while the Dow Jones climbed by 0.97%.

China state funds have allegedly intervened on the CSI 300 this morning, buying stocks and reversing their earlier 3.0% losses. The CSI 300 broke below its multi-month uptrend support yesterday, as well as its 100-day moving average. (DMA) the failure and daily close below 5260.00 was an ominous technical signal for the index, and it remains well below that level now, at 5093.00. its next technical target being the 4800.00 regions.

The rally in the CSI 300, now 0.20% higher on the day, has lifted the Shanghai Composite to unchanged, and the Nikkei 225 now 0.90% higher. US index futures have also rallied aggressively, with Nasdaq futures 1.25% higher. South Korea's Kospi was down 3.0% at one stage today but has climbed back to be just -0.90% lower.

Hong Kong is 1.50% higher and seems to have been the recipient of Mainland retail investor flows down the Shenzhen and Shanghai pipes this morning. ASEAN markets had started the day in the green and remain so. Singapore is 1.50% higher, with Kuala Lumpur up 0.75% and Jakarta 0.20% higher. Australia's All Ordinaries is 0.40% higher, while the ASX 200 has climbed 0.50%.

The S&P 500 continues to flirt with its March 2020 uptrend, today at 3838.00. The 100-DMA at 3705.00 becomes the initial target if we get an extended break lower. The Nasdaq has now closed under its 100-DMA at 12,630.00, having fallen comprehensively through its March 2020 two weeks ago. It now targets the 200-DMA at 11,777.00. The rotation darling, the Dow Jones, set record highs overnight, but its March 2020 support line is creeping closer to current levels as well. 

Despite the China-driven jump today, markets remain acutely vulnerable to further downside correction, especially those heavy in 2020 pandemic darlings. Cyclical markets less so. Today's sudden bounce looks like one to sell in to.

The US Dollar pushes higher again

The dollar index pushed higher again overnight, rising 0.37% to 92.31. Rising US yields, structurally short positioning and a myopic fixation on growth driven inflation continue to lift the greenback, notably versus G-7 and commodity currencies.

Nowhere is that more apparent then EUR/USD, where the single currency has fallen to a 4-month low at 1.1800. With the ECB expected to be dovish this week, in contrast to Federal Reserve Governors' nonchalance, the downward pressure is expected to continue. EUR/USD will target 1.1600 over the coming week if it breaks materially through 1.1800. 

GBP/USD is also testing the bottom of its multi-month rising wedge channel, today at 1.3830. Failure of channel support suggests further losses that could extend as far as 1.3400. Having paid all of daughter two's UK university and apartment fees now, I feel the odds of this are rising.

The Australian and New Zealand Dollars have both staged technical breakouts lower now, with multi-month support failing. AUD/USD is trading at 0.7660 today, with support at 0.7600 followed by 0.7400. NZD/USD is trading at 0.7130, just above support at 0.7100. Failure opens up further losses to 0.7000 and 0.6800. USD/CAD is testing its one-year falling resistance line at 1.2670 today and could rally to 1.2900 in the coming days.

In Asia, USD/CNY has moved higher to 6.5210, with the offshore USD/CNH rising to 6.5350. The next resistance level for USD/CNY is a multi-day top at 6.5550. The fall by the CNY overnight has pressured regional Asian currencies, which all retreated overnight in the face of US Dollar strength. As I mentioned yesterday, Asian currencies face specific challenges in a rising yield environment due to their proliferation of dirty pegs to the Dollar. 

The Korean Won, Singapore Dollar and Philippines Peso have all rallied today as equities staged a China-driven comeback. However, these moves look corrective and are unlikely to last. Notably, the Ringgit, Rupiah, and Baht have all continued lower today, the former two despite higher oil prices. Regional Asian currencies will be acutely sensitive to the fallout from poor US bond auctions this week, should that occur.

Oil markets consolidate gains

Oil markets fell overnight as investors locked in recent profits and started turning their attention to next month’s OPEC+ technical meeting, where expectations are that the grouping will ease supply curbs. Brent crude fell by 2.30% to 67.95 a barrel, and WTI fell by 2.45% to $64.65 a barrel.

The price action looks consolidative in the bigger picture, and oil markets have duly rallied in Asia as equity markets trimmed early losses. Brent crude has risen 1.25% to $68.80 a barrel, and WTI has risen 1.30% to $65.50 a barrel.

Brent crude rose briefly through $70.00 a barrel to $71.30 a barrel yesterday, tracing out a double top with the January high. That is initial resistance followed by the $76.00 a barrel region. Initial support is at $67.60 a barrel. WTI spiked to $67.90 a barrel overnight, and becomes initial resistance with support at $63.70 a barrel.

The double top traced out by Brent crude could signal that oil will spend the subsequent few sessions consolidating at these price levels, and a meaningful three- or four-dollar correction cannot be ruled out. However, with a structural undersupply in the physical market now, any dips in oil prices are likely to attract physical buyers' attention and be short in duration.

Gold takes a standing eight count

Gold prices remain on the ropes, with the yellow metal falling 1.20% to $1683.50 an ounce overnight, breaking yet another significant support at $1689.00 an ounce. The squeeze in US yields, and the ensuing US Dollar strength, continue to undermine any hopes of recovery.

Short covering has lifted gold modestly back to $1689.00 an ounce this morning after equities staged a recovery from earlier losses. The technical picture remains grim, however.

One hope of respite lies in gold's relative strength index (RSI), which has moved into oversold territory. Because of this, I suspect that gold will limit losses to $1680.00 an ounce over the subsequent few sessions as markets negotiate this week's US bond auctions. That said, I believe we are entering into a range-trading scenario, and it is hard to see gold managing to rise through $1720.00 an ounce this week.

Strong demand at the US bond auctions this week will support gold prices. However, the most likely scenario remains some side-ways consolidation followed by another significant fall targeting the $1600.00 an ounce area.