Gold sends for spandau ballet

US yields firmed overnight, notably in the 30-year tenor. Hopes rose overnight that the Biden stimulus would pass through the US Senate relatively intact. The prospect of a juicy wave of government spending and borrowing sent longer yields higher, boosting the US Dollar, but also lifted US equities, with Wall Street's rally resuming.

Significant casualties of note were the Euro and the Australian Dollar, both of whom were looking wobbly of late anyway. But it was gold that really felt the pain of higher US yields and a stronger greenback. Gold fell 2.20% to $1793.00 an ounce, leaving it desperately wanting someone to call it indestructible and to believe in its soul as an inflation hedge. 

Gold may be bound to return, but with the longer-term market structurally long, and a higher dollar eroding its foundations, gold may feel less Spandau Ballet, and more Spandau Prison in the short-term. Critical support remains the 50.0% Fibonacci of the March to August rally at $1760.00 an ounce. Failure sets up a capitulation trade into next week. Gold, something I should have learned, you're indestructible, but you will look even more indestructible when your price starts with a 15 or 16.

80's reminiscences aside, with it's centre-part and flat-top haircuts and narrow legged shiny grey suits and green screen monitors, tonight’s US Non-Farm Payrolls assumes a greater than expected prominence after the rise in 30-year yields. The ADP Employment survey released earlier this week impressively outperformed, and if recent correlations hold intact, points to a much higher NFP number then the markets consensus of 50,000 jobs added. A print well above 100,000 could spur another hike in longer-end yields on the US curve, with more Dollar strength exacerbating the steady short squeeze through much of January. Equities won't take fright at this stage as more job’s equal faster recovery, equals higher growth equals buy everything. FOMO, Economics, 101.

In Asia, the data picture has been more mixed, but not enough to knock markets off their post-Wall Street afterglow. Japan Household Spending and South Korea's Trade Balance outperformed, but Indonesian GDP disappointed. YOY growth coming in at -2.19% and QoQ missing badly at -0.42%. Philippines CPI has a distinctly stagflationary smell about it, with interest rates at record lows, growth falling but prices rising. January CPI YOY rose by a much higher 4.20% versus 3.50% expected. 

That should take any further rate cuts off the table by the central bank now. Both Indonesia and the Philippines continue to struggle badly with Covid-19, and the data this morning highlights the recovery gap between North Asia and ASEAN, so prevalent in 2020. ASEAN will return but isn't likely to accelerate until mid-year.

Today's highlight in Asia is the Reserve Bank of India rate decision, coming just four days after the fiscally expansionary 2021 budget. That government's borrowing requirements may well endanger its investment-grade credit rating. That said, in a zero per cent world, I suspect that any offshore borrowing by the India Government will have bond investors forming a less than an orderly queue. The RBI will be under pressure to cap domestic borrowing costs though, and with stagflationary pressures easing recently, a 50-basis point cut could emerge today. The SENSEX is up nearly 8.0% for the week, powered by the budget largesse. It could jump again if the RBI delivers. 

Asian equities rise

The stimulus fever that swept Wall Street overnight has spilt over into Asian markets today. On Wall Street, the S&P 500 rose 1.09%, the Nasdaq climbed 1.23%, and the Dow Jones gained 1.08%. Aftermarket futures are climbing around 0.20% across all three this morning.

The bullish sentiment has lifted Asian markets with the Nikkei 225 climbing by 1.35%, and the Kospi by 0.55%. Mainland China's Shanghai Composite has rallied 0.90% with the CSI 300 jumping by 1.10%. The Hang Seng has risen 0.80% with tech IPO fever supporting sentiment in Chinese markets. 

Regionally, Singapore is up just 0.15% ahead of Retail Sales this afternoon, with Kuala Lumpur falling 0.20% and Jakarta up just 0.15%. Taipei is 0.90% higher with Bangkok up 0.50% and Manilla up only 0.20%. Australian markets have slavishly followed the US stimulus buzz, the ASX 200 and All Ordinaries rising 1.0%.

Although the tone is generally positive today, the North/South East Asia divide is starkly revealed. ASEAN markets are struggling to buy into the global recovery story with their less tech and manufacturing heavy indices, being heavily weighted to banks, property and commodities, which have been soft this week ex-energy. European equities are likely to open higher although gains may also be limited ahead of the US payroll data.

The US Dollar boosted by yield curve steepening

The rise in the US 30-year yields overnight gave the Dollar short-squeeze renewed momentum. The dollar index rose by 0.40% to 91.50, lifting it well clear of support at 91.00. The Euro and Yen were notable index component casualties. EUR/USD has fallen 0.60% to 1.1955, its 100-day moving average (DMA), and well clear of resistance at 1.2055. A fall through 1.1900 potentially targets 1.1600 over the coming weeks. 

USD/JPY has risen 0.53% overnight to its 200-day moving average (DMA) at 105.60. A daily close above the 200-DMA signal more gains targeting 107.00 initially as short Dollar positioning globally, gets squeezed. Both the cyclical Australian and New Zealand Dollars are flirting with support in Asia this morning, setting both up for potentially 300 point moves lower next week. USD/CAD is testing resistance at 1.2825 today, and it could rally to 1.3000 early next week if US Dollar strength continues.

Asian currencies remain immune to any sort of moves, up or down this week. The main reason for that is the PBOC is keeping USD/CNY rock steady around a 6.4500 midpoint. The PBOC appears intent on confining USD/CNY to a 6.4000/6.5000 ahead of the Lunar New Year holidays. Unless USD/CNY moves, the rest of Asia is unlikely to either.

Currencies markets are delicately poised this morning, with the charts generally pointing to another leg of Dollar strength ex-Asia. Everything will depend on what US yields do this evening post the Non-Farm Payrolls. With the world structurally short the US Dollar, rising yields tonight could make things interesting next week.

Oil edges higher

Oil continued to push higher overnight, although the rally's pace being slowed by a rising US Dollar. Nevertheless, Brent crude rose 0.65% to $59.00 a barrel, and WTI rose 0.95% to $56.45 a barrel. Both contracts have continued moving higher this morning, adding 20 cents a barrel each.

With inflation sentiment rising in the US, partially due to higher government borrowing, adding a tailwind to the economic recovery, the conditions still remain supportive for oil markets. Brent crude's next target is the $60.00 a barrel mark, and the technical picture suggests it is WTI's target as well. 

However, the Relative Strength Averages (RSI) on both contracts have now moved into overbought territory. A higher than expected Non-Farm Payrolls, and ensuing moves higher by US yields and the Dollar this evening could set the market up for a short-term correction lower. Oil should find plenty of willing buyers on any material dip though. Brent crude has support at $58.00 and $56.00 a barrel. WTI has support at $55.00 and $54.00 a barrel. 

Gold pummelled overnight

As I wrote above, gold suffered an ignominious end overnight as rising US yields saw it fall by 2.20% to $1793.00 an ounce. Some profit-taking and weekend risk hedging has emerged in Asia, but gold has only risen by two dollars to $1795.00 an ounce and looks very much like a dead cat bounce. 

The risks are skewed towards more downside pain for a structurally long gold market as the weekend approaches. If US payrolls data outperforms, gold will almost certainly test long-term support at the 50.0% Fibonacci level at $1760.00 an ounce. Failure signals a much deeper correction will occur over the coming week(S). 

Gold has interim support at the overnight low at $1785.00 an ounce, followed by $1760.00 an ounce. Resistance is at the $1803.00 an ounce breakout followed by the $1830.00 an ounce area. A market print of 50,000 jobs or less tonight is probably gold's best hope of redemption.