Asian markets drift higher

Asia has a pre-New Year’s Eve look about it today, as an empty data calendar combined with an ever-present headline risk leaves the region's financial markets content to drift on the currents. Overnight, US equity markets retreated after Senate Republican Leader McConnell effectively blocked increasing direct payments to $2000. Instead of just saying no, Senator McConnell was much more cunning. He introduced legislation that upped the payments but tied it to provisions regarding social media liability shields and election fraud investigations. None of the latter will be acceptable to the Democrat-controlled House of Representatives. 

The move was a master class of political cunning. With one eye on the Georgia election next week, Mr McConnell said yes while actually saying no, whilst simultaneously dodging any potential political blowback next week. The increased fiscal payments never had a serious chance of making it through the Senate, although markets had been pricing a slim hope they would. As reality set in, US equities retreated to a modestly negative close.

The data calendar is empty globally until US Initial Jobless Claims tomorrow evening. It is unlikely that there will be anybody left at their screens to react to it. Markets are likely to drift in this scenario and be more vulnerable than usual to headline surprises. Such scenarios tend to spur risk reduction, and I would not be surprised at all to see equities, precious metals, and commodities ease slightly into tomorrow. It should also be noted that many markets will either partially or fully closed tomorrow. Today, for example, being the last trading day of the year for Japanese and South Korean stocks.

Next week promises to be more exciting. Most prominently, but surprisingly little mentioned, is the dual US Senate seat runoff in Georgia. That will determine who controls the Senate, with a win by the Democrats effectively handing control of all three legislative arms. That result will initially be market negative as those at the top of the K-shaped recovery start calling their tax advisors. However, it will almost certainly mean more fiscal stimulus is on the way in the US, a strong positive for markets. Any dip in equity markets on a Democrat victory will be short-lived. 

If all goes to form though, the Republicans will pick up at least one seat handing them control of the Senate. That will make President-elect Biden's legislative task infinitely tougher to achieve, if not impossible. Mr Biden risks becoming a lame-duck President from the get-go, leaving the Democrat's to rue, yet again, snatching defeat from the jaws of victory. However, markets will regard the Republican victory as a positive, nullifying a more aggressive regulatory and spending agenda from the White House. 

With politics the only real driver of market direction into the year-end tomorrow evening, I am devoting more energy to pondering how best to slow cook tomorrow night’s leg of lamb, a hard to find commodity here in Jakarta. Wise investors should probably take the same path and enjoy the show from the side-lines; sans the silencing of the lamb.

Equity markets rise in Asia

US equities gave up their intra-day gains overnight as the US Senate disappointed on the fiscal stimulus front. The S&P 500 and Dow Jones eased -0.22% lower, and the Nasdaq fell -0.38%. In after-hours trading though, the futures on all three indexes have rebounded sharply, perhaps acknowledging the fact that increased fiscal payments were always likely to fail in the Senate. The Dow Jones and S&P e-mini futures have risen 0.20%, while Nasdaq futures have jumped 0.55% as tech stocks power higher on Chinese markets today. There may also be an element of big tech as the new haven, attracting invest money as a year-end risk hedge.

In Asia, today is the last trading day for Japan and South Korea. After an outsized rally yesterday, profit-taking has hit the Nikkei 225, which has fallen by 0.52%. The Kospi though has jumped 1.10% as investors pile into technology stocks across the region today. Hong Kong has leapt by 1.50% this morning, led by Alibaba which staged an impressive rally in the US overnight and continued in the same vein in Hong Kong today. Looking at the gainers, Hong Kong-listed China tech stocks are leading the way. That has flowed into the Shanghai Composite and CSI 300, which have jumped 0.70% and 1.10% respectively. 

Tech-heavy Taipei has risen 0.55%, but ASEAN exchanges, although modestly higher, are lagging. In much the same theme of 2020, those markets, heavy in non-tech legacy industries have struggled to match their new economy peers. Singapore is 0.38% higher, with Kuala Lumpur and Jakarta just 0.05% higher.

Australian stock markets are suffering Covid-19 fright today. Cases are increasing in Sydney and are spreading out of their Northern beaches enclave. Looking at the crowds in the shopping malls and on Bondi beach, I am not surprised. The threat of increased lockdowns and more interstate travel restrictions has seen the All Ordinaires and ASX 200 fall 0.80% today so far.

US Dollar grinds lower

The US Dollar continued to beat a modest retreat overnight, weakening across the board versus G-10 and Asian currencies. The dollar index fell 0.38% to 90.00 and has fallen by 0.25% this morning to 89.76. Today's fall has left the dollar index testing support at 89.75. A daily close below 89.75 tonight signals that further losses to 89.00 are on the cards next week.

EUR/USD is testing multi-month highs today, rising to 1.2285 this morning. A daily close at these levels signals further gains to 1.2400 next week. The New Zealand Dollar has risen over 1.0% in the past 24 hours to 0.7170 this morning, with the cyclical Australian and Canadian Dollars also rising to 0.7645 and 1.2800 respectively. Both the AUD/USD and NZD/USD are testing monthly resistances, and the strong year-end finish suggests forex markets are preparing to send commodity currencies higher into the new year.

The same pattern is repeating across Asia, with Chinese Yuan, Singapore Dollar, Malaysian Ringgit, Indonesian Rupiah and Philippine Peso all at or very near 2020 highs. Although its Covid-19 outbreak is increasing at an alarming rate and limiting further gains, the Thai Baht remains well supported.

It is clear that currency markets are pricing in a potentially powerful move lower by the US Dollar as soon as the new trading year begins next week. I agree with the overall view but not that the unidirectional move in the US Dollar lower this week, suggests that positioning is heavily one-way. Markets face a heavy data week next week, and a significant risk event in the shape of the Georgia Senate runoff elections. That could lead to some two-way volatility, especially with currency markets so obviously short US Dollars. The US Dollar will resolve lower in 2021, but bitter experience tells me that throwing the kitchen sink at that view at the start of the trading year, rarely pays immediate dividends.

Oil markets drifting ahead of year-end

Oil markets continued to range trade overnight and this morning in Asia, preferring to wait for more directional input next week. That said, both Brent crude and WTI remain near the top of their 9-month ranges, suggesting that markets believe the global recovery trade will resume in earnest sooner rather than later.

Brent crude rose 0.45% overnight to $51.10 a barrel, with WTI rising 0.85% to $48.10 a barrel after EIA Crude Inventories fell much more than expected. In Asia today, the more positive sentiment sweeping across markets has lifted both contracts. Brent crude has risen 0.30% to $51.30 a barrel, with WTI climbing 0.35% to $48.25 a barrel.

With liquidity sharply reduced, the risk increases that a heavily long speculative market could see some position reduction into the close tomorrow, especially if official US Crude Inventories unexpectedly rise this evening. US data and the Georgia Senate vote also loom as potential risks, although a backtrack by the US Senate Republicans on stimulus payments would be a strong positive. 

Brent crude will probably range between $50.50 and $52.00 a barrel into New York, with WTI likely confined to a $47.50 to $49.00 a barrel range.

Gold consolidation continues

Gold rose 0.25% to $1875.00 an ounce overnight, pushing 0.30% higher to $1884.00 an ounce in Asian trading this morning. It appears that some year-end risk hedging by investors is supporting prices in Asia. Nevertheless, even after the rise today, gold remains content to drift in the middle of its range for the week.

Gold is lacking momentum to make a directional move one way or the other for now. It is likely to remain confined within a $1860.00 to $1900.00 range into the close of the week. Next week brings more event risk, which should see volatility increase. Resistance lies at $1896.00 an ounce, its 100-day moving average, followed by $1905.00 an ounce. Support appears initially at $1870.00 an ounce, followed by the $1855.00 to $1860.00 an ounce region.