A taxing Friday

A wave of risk aversion swept US markets overnight after US President Biden signalled his intention to increase capital gains tax on high-income earners massively. That undid the excellent work of the US weekly Initial Jobless Claims, which unexpectedly retreated for the second week in a row to 547,000. Despite the spike in Covid-19 cases in parts of the US, the jobless claims data suggest that recovery momentum in America continues to accelerate.

Of course, what President Biden wants, and what he will get, could be two totally different things, especially when it comes to tax rates. Goldman Sachs suggests the tax hike will be watered down to 28% from above 40%, an entirely reasonable conclusion. Although the major US indices retreated by around 1.0% as the story hit the major wires, already in Asia, US stock index futures are staging a recovery, suggesting the knee jerk is running out of steam already.

It was yet another murky development that has contributed to a very noisy week for financial markets without any tier-1 data to get their teeth stuck into. The resultant tail-chasing market moves have been there for all to see. Although major US indices are down by between one and two per cent for the week, they are all at or very near record highs still. The same can also be said for European markets, so despite this week leaving investors' ears ringing, the recovery theme remains on track.

Overnight the European Central Bank was more neutral than a bottle of distilled water, as it left its bond-buying programme unadjusted, rates unchanged and gave no real clue as to its future intentions. That left the Euro mostly untouched versus the US Dollar, with most of the action in EUR/GBP, which rallied powerfully on a vaccine catch-up play.

If this week has proved anything, it is the value of not trading one's portfolio intra-day based on press generated headlines in a slow data week. Everything appears mostly it was this time last Friday within a couple of per cent. All you would have achieved for your troubles was frazzled nerves and a large commission bill.

One exception is my good friend Bitcoin. The future of finance (Allegedly) flash-crashed while I was having a few days off earlier this week. Notably, it broke out of a two-month rising wedge at 56,000 of tax-payer backed fiat US Dollars last weekend. Subsequent corrective rallies have failed at the bottom of the rising wedge, and today Bitcoin has fallen to around $50,000. Dogecoin rose 110% last week in a day, I believe; it may have lost that by now, I don't know. I am sure a crypto "institutional expert" will be around to say that the falls in both a merely "technical corrections" to overbought short-term markets. 

It is clear that Bitcoin is more sensitive to capital gains tax threats than most "asset" classes. The threat of regulation, either directly in developed markets or indirectly via the taxman, has always been crypto's Achilles’s heel, in my opinion. Yes, you could store those juicy capital gains offshore as a US citizen, but we know how the G-Man treats tax evaders. It is not pretty.

Back to the charts, the downside breakout of Bitcoin through $56,000.00 has a target of $42,000.00. That might come this weekend, or next week or perhaps not at all. Hopefully, we will hear as many "experts" saying this is a sign of Bitcoin becoming a "maturing mainstream asset" if it falls 10% this weekend, as we do when it rises, or a Crypto-exchange chooses to IPO. That indeed would be a sign of mainstream maturity, in my opinion. In the meantime, don't hate me for being bearish Bitcoin in the near term; I'm just following the charts, as I often do on other mainstream asset classes.

Although Asian stock markets may receive a temporary US capital gains tax hiccup to finish the week, the data calendar does contain a few morsels. Japan's Jibun Flash Manufacturing PMI for April improved slightly to 53.30, while Services Flash PMI remained unchanged at 48.80. 

Japan's Inflation and Core Inflation were uninspiring, with inflation as elusive in Japan as it has been for the last 25 years. Taken with a Services PMI still in the contractionary territory and likely to take another hit from the Covid-19 regional states of emergency starting this weekend, The Bank of Japan is unlikely to move next week at their midweek meeting. 

More intriguing will be Malaysia and Singapore's Inflation rates, both released in a couple of hours. Headline Inflation for March YoY should rise to 1.40% and 1.25%, respectively, albeit from very low base effects from this time last year. Surprises to the upside could weigh on equities in both markets, although the next MAS decision is now six months away. 

India Foreign Exchange Reserves this evening will be interesting to note. The Indian Rupee has been crushed under the surprise Reserve Bank of India QE announcement recently. Also, the tragic explosion of Covid-19 across the country. It will be interesting to see if foreign currency reserves have dropped notably, indicating that the RBI has intervened heavily to defend the Rupee. A significant fall in reserves could negatively affect the local currency, suggesting investors are leaving the country. That oversimplifies that actual process. In all honesty, the relationship isn't that linear. But in a market with itchy trigger fingers, such details won't count for much.

The US and Europe release Market PMI's later today, with the data expected to show improvements in Manufacturing and Service, less so on the services front in Europe for obvious reasons. With the week entirely dominated by the sentiment du jour, they are unlikely to be market impacting unless we have some considerable deviations from the market expectations.

Asian equity markets mixed after Biden tax proposals

US equity markets fell overnight after President Biden signalled, he wished to increase capital gains tax for high-income earners. The S&P 500 fell by 0.92%, while the Nasdaq and Dow Jones retreated by 0.94%. The reaction appeared more knee-jerk than structural, very much in keeping with the wax-on, wax-off price action that has defined the week's price action. US index futures have risen by around 0.20% in aftermarket trading, limiting the fallout in Asia.

The Nikkei 225 is down 0.80%, retail investors chasing their tails once again, and the start of Covid-19 restrictions also weighing on sentiment. The Kospi is up just 0.10%, while Taipei has climbed by 0.40%. Mainland China markets are also green; the Shanghai Composite has risen 0.20%, while the CSI 300 has leapt by 0.80%, with the Hang Seng 0.85% higher. The South China Morning Post reported yesterday that bearish short positions had reached a record high on the Shanghai and Shenzhen exchanges, so there may be a hint of an end of week short-squeeze occurring today.

Across Asia, Singapore has fallen 0.40% this morning, but Kuala Lumpur and Jakarta are 0.10% higher as regional markets ease into the end of the week. In Australia, the ASX 200 and All Ordinaries are lower by just 0.20%, with Westpac upgrading employment and, notably, bringing the RBA tapering timing forward, seemingly weighing modestly on local markets.

Asia's reluctance to blindly follow the US overnight move South today suggests that the Biden tax fears remain overblown. With the week defined by noisy range trading, regional investors appear content to await the heavyweight data calendar emerging over the next two weeks, for more concrete signs of direction. Covid-19 nerves around India, Japan and Thailand, along with new cases in Singapore, also give local investors reasons to pause and await developments.

Currency markets stuck in neutral

The Biden capital gains tax headline prompted a modest wave of risk aversion in New York overnight, lifting the US Dollar even as US longer-term yields continued to ease slightly. The risk barometer Australian and New Zealand Dollars retreated by 0.60%, but the dollar index rose just 0.18% to 91.27%. Sterling was the worst performer among the majors, GBP/USD falling 0.65% to 1.3840 on EUR/GBP buying post ECB.

EUR/USD and USD/JPY were almost unchanged from the previous days, and despite the noise in the risk-sensitive Commonwealths, the G-10 grouping, and the dollar index enter the last day of the week, still trading within their narrow weekly ranges. The bullish falling wedge formations on EUR/USD/GBP/USD, AUD/USD and NZD/USD all remain intact.

That state of affairs is set to continue into the close tonight unless US long-dated Treasury yields stage a sudden significant move. The data calendar over the next two weeks thickens up substantially, with an FOMC meeting next week. The Covid-19 situation in India and places elsewhere should also resolve more clearly, for better or worse, over the next fortnight. That will allow currency markets to more readily price in a continuing global recovery, or a delayed one. Or, more accurately, the US bond market to do so.

In Asia, regional currencies continue to remain firm, with the PBOC USD/CNY fixing almost unchanged from yesterday. The China FX Regulator also stated that the Yuan exchange rate remained stable. With little to move currency markets on the horizon today, regional currencies look content to glide into the weekend.

Oil edges higher on Libya concerns

Oil edged higher overnight, with the Biden capital gains tax plans having no noticeable effect on sentiment. News that Libyan oil production was falling due to cashflow constraints lifted prices modestly. Energy markets remain in a holding pattern ahead of the next OPEC+JTC next week, and with India consumption concerns capping gains.

Overnight Brent crude rose 1.0% to $65.70 a barrel and remain unchanged in Asia. WTI rose 0.95% to $61.65 a barrel, adding 10 cents to $61.75 a barrel in muted Asian trading. The price action leaves both contracts roughly in the middle of their one-week ranges, albeit with noisy intra-day moves. Like currency markets, energy markets appear content to await stronger directional signals next week.

Brent crude has support at $64.00 a barrel and resistance at $68.00 a barrel. WTI has support at $60.50 a barrel, with resistance around $64.00 a barrel. At this stage, the chart patterns suggest the downside remains the weaker side of the price equation into next week.

Gold retreats ahead of $1800.00

Gold rose to near $1800.00 an ounce yesterday but could not sustain the momentum as the US Dollar strengthened after the Biden capital gains tax story hit the news wires. For once, gold disconnected from the US 10-year Treasury, with yields there also easing ever so slightly. However, one day does not a structural disconnect make, and gold's rally will come under a severe test if the US 10-year yield spikes higher.

That aside, the technical picture of gold in isolation remains compellingly bullish. Gold fell 0.55% to $1784.00 an ounce overnight but has rallied to $1787.00 an ounce today—weekend risk hedging by Asian investors lifting prices.

Gold has formed a double bottom just ahead of $1775.00 an ounce, which will provide intra-day support. Similarly, it has developed a double top at $1798.00, just ahead of the 100-day moving average at $1803.00 an ounce. A break of $1775.00 or $1803.00 should see a 15 to 20 dollar move; otherwise, gold looks rangebound into the end of the week.