A minor tantrum

Financial markets experienced a minor taper tantrum overnight, although my mother, having endured years of bringing up a highly-strung devil child, would even rate it as a minor flesh wound. Equity markets retreated overnight, and the US Dollar rallied, as the FOMC didn't assuage the normalisers and Boeing's poor results sparked a rush for the door. US bond yields also edged lower surprisingly, suggesting that much of the overnight price action was haven related as no one wanted to be holding stocks when the music stopped.

US equity markets had their biggest fall in 3-months, falling over 2.0%. Even stellar results from Apple and Facebook couldn't lift the malaise. Much of that was probably due to their outlooks, with Apple declining to offer 2021 guidance and Facebook highlighting regulatory risks and the challenges of repeating 2020's growth. Tesla missed earnings expectations and declined to provide a guess at how many cars they would deliver in 2021, Which is fair enough, as they never seem to hit it and investors don't seem to care.

The FOMC left rates unchanged as expected but downgraded their outlook due to vaccine delays and risks. Chairman Powell said afterwards that a reduction in quantitative easing was not even a conversation worth having as yet. That is entirely consistent with the Fed's lower for longer mantra, but it seems that the market was looking for something more concrete. Disappointed inflationista's headed for the exit to lick their wounds, although frankly, they should have expected nothing less from the Fed.

The overnight moves have everything to do with positioning and a loss of momentum, then a structural change. Since March of last year, markets have been long equities, and short of US Dollars to the eyeballs, floating on an ocean of central bank largesse. The Dollar rally was confined to the G-7 and commodity currencies, Asian EM has hardly budged. Notably, neither oil not precious metals have moved much either. The price action suggests that the moves overnight are merely corrective and not the end of the buy everything trade. That would be a well overdue development, and in the currency developed market space, could still have further to run looking at the charts this morning.

That will mean that US Q4 GDP and Initial Jobless Claims will assume greater importance this evening. If Q4 QoQ GDP prints under 4.0% or Initial Jobless Claims rises over 900k, we could see another move lower in equity markets and more US Dollar strength. That said, salvation could come in the shape of Johnson &Johnson. Dr Anthony Faucci saying overnight he expects the initial Covid-19 vaccine results this week. With vaccine deployment running into logistical problems in the US and Europe, J&J could spur renewed antibodies as it is a one-shot vaccine. Something logistically, the world desperately needs.

Finally, I have had a packed media schedule this morning. With a face made for radio and a thick Kiwi accent, it is always a pleasure when a small queue forms to hear the words of the voice of reason. Today, front and centre, has been GameStop and the army of retail Redditinators giving Wall Street some of its own medicine allegedly. I'll not dwell on whether it is beginners’ luck or a digital "Money Heist" on steroids. (thankfully without all the hours of millennials-like feedback, emotional reflection and conversation between action scenes. Perhaps it's a European thing?)

The Redditinators have been with us in force since March of last year. The democratisation of access to the financial markets through technology is a real super trend. The FOMO herd will continue to storm the Bastille gates because they rightly feel that they to should be allowed to eat cake. Regulators should tread carefully in making "orderly market" decisions. I say this because for every angry peasant buying a call option, a nobleman makes a market and sells them those call options. I hear no stories of woe from the delta-hedging gentry regarding GameStop or AMC.

CEO's should also note that it works both ways. Cromwell's Redditinator army can just as easily buy put options as they can call options. Snout's in the bonus and "incentive plan" trough, insensitive comments, or some other perceived corporate injustice could well find the army camped at their gates, waving put option sabres. We may well be entering a new age of corporate governance enforcement with summary justice that would make Chuck Norris smile. (Sorry Mr Norris, I didn't mean to say you smiled, please don't hurt me.)

Asian equities stabilise

Wall Street has its biggest drop in 3-months overnight with the S&P 500 falling 2.57%, the Nasdaq dropping 2.61%, and the Dow Jones slipping 2.16%. Notably, the index futures on all three though, have held their own this morning, being mostly unchanged.

The picture is a sea of red in Asia, but major exchanges have managed to take back some of their early losses. The Nikkei 225 is down 1.25%, with the Kospi falling 1.60%. In China, the Shanghai Composite is 1.45% down, with the CSI 300 1.25% lower. Hong Kong is down 2.0% as Mainland retail fast money exits, but Singapore and Taipei are only 1.0% lower. Jakarta has eased only 0.50%, while Kuala Lumper has bucked the trend, edging 0.30% higher. Australia has done what it does best, slavishly follow Wall Street. Both the ASX 200 and All Ordinaries being around 2.15% lower.

Although the mood is sombre in Asia, the price action does not suggest that panicked investors are running for the exit door. In fact, most of Asia is outperforming Wall Street in a relative sense. Part of that is likely due to the stabilisation of US index futures this morning. All-in-all the price action hints that today's falls are a correction of extended long positioning as momentum temporarily ebbs.

This evening, the US GDP is the equity markets next significant risk point, with an underwhelming number likely to extend the malaise. That could all change if J&J releases positive vaccine data in the next two days. 

The US Dollar remains firm in Asia

The US Dollar rallied overnight despite a dovish FOMC, in what looks like a combination of a short-squeeze and risk aversion flows into the US bond market. Notably, most of the Dollar strength appears to be against the major and commodity currencies, and not emerging Asian currencies, which have held their ground overnight and today. That further suggests Dollar strength could be temporary and we are not on the verge of a change in trend.

The dollar index rallied 0.53% to 90.65 overnight, leaving it still trading in the middle of its 3-week 90.00 to 91.00 range. This morning, it has risen another 0.13% to 90.75, driven by weakness in the Japanese Yen and Euro. The overnight price action has left an intriguing technical picture with a daily close above the 91.00 resistance, opening up further gains to 92.00 initially. 

Among the majors and commodity currencies, the technical picture suggests the chances of a larger US Dollar short squeeze have risen markedly. EUR/USD has fallen to 1.2090 today, with a loss of support at 1.2040 possibly extending to 1.1800. USD/JPY has risen through its 9-month downtrend at 104.35 today. A breakout through its nearby 100-day moving average (DMA) targets 105.70 initially, its 200-DMA. 

The Australian Dollar has fallen 1.60% in the last 24 hours to 0.7625. A loss of 0.7600 targets 0.7400. The New Zealand Dollar has fallen by 1.40% in the past 24 hours to 0.7135, just above support at 0.7100. A failure of 0.7100 targeting an initial move lower to 0.7000. With their high beta to the vaccine-led recovery story, the FOMC's vaccine caution overnight has left them and the Canadian Dollar especially vulnerable to further US Dollar strength.

Asian currencies are surprisingly resilient, suggesting that the Dollar short unwind is confined to the developed market space for now. The USD/CNY rose only 0.30% overnight and is unchanged at 6.4800 this morning. The Singapore Dollar and Indonesian Rupiah have eased 0.25% today, but the Malaysian Ringgit, Thai Baht and Philippine Peso are unchanged. It will likely take a series of weaker CNY fixes by the PBOC to make the rest of Asia blink.

Only the Korean Won is looking vulnerable today. USD/KRW has been weak of late anyway, thanks to aggressive Bank of Korea intervention. The Won fell has fallen 1.20% in the past 24 hours, and USD/KRW has risen through resistance at 1110.00 to 1115.30 today, just shy of resistance at 1120.00. A loss of 1120.00 could extend the Dollar rally to 1140.00.

Oil prices remain firm

The Dollar rally overnight saw modest only modest falls by Brent crude and WTI, which can probably thank lower than expected official US crude inventories for limiting the damage. Brent crude fell 0.84% to $55.55 a barrel, and WTI fell only 0.24% to $52.60 a barrel. Both contracts are unchanged in the Asian session.

Oil rallied back quickly from its intra-day lows overnight, suggesting that there is plenty of physical buying interest even at these levels. That is in keeping with the Asian recovery and its correlation to very high Asian gas prices at the moment. If the US Dollar continues to rally, nerves increase about the US recovery pace, and equity markets fall further, then oil prices will face further downside pressure. The price action overnight, though, suggests any steep falls will be short-lived.

Brent crude is bound by resistance at $56.60 and $57.40 a barrel, with support at $54.50 a barrel. WTI has resistance at $54.00 a barrel, and support at $51.60 a barrel. Clearance of those levels, either way, will signal oil's next directional move. 

Gold holding its own

Although gold fell overnight with equity markets, and in the face of a stronger US Dollar, its fall was modest. Gold fell just 0.34% to $1844.50 an ounce, edging another 0.53% lower to $1837.60 an ounce in Asia this morning. 

Bullish gold traders can take some heart from the price action of the last 24 hours, however. Gold performed much better overnight in the face of a sharp fall in equity markets; then it has for many a month. That suggests that gold is benefitting from some haven demand, boosted by US yields moving slightly lower overnight. 

Gold has resistance at $1875.00 an ounce, followed by the 100-day moving average (DMA) at $1880.40 an ounce. It has fallen through the 200-DMA at $1847.50, which becomes an intra-day pivot point. Support is at the overnight low at $1831.50, followed by the January 18th spike to $1802.50 an ounce.

With the 100 and 200-DMA's slowly but surely converging, a large directional move by gold is in the offing. The FOMC decision did not provide the strong directional movement I expected, but the close below the 200-DMA suggests gold will now edge lower. The overnight price action, though, signals that plenty of buyers await dips. Any retreat in gold will be a slow move lower and not an aggressive capitulation.