McConnell-Putin Double Act: The Squid Game

McConnell-Putin Double Act: The Squid Game

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

You know we are living in strange times when US Republic Senate Leader McConnell, and Russia’s President Putin, dangle potential rewards from their tentacles and lift markets vigorously, but here we are. Like the compulsively viewable, but ridiculously premised Netflix hit, both men have juicy rewards that millions want, all you have to do is play a few games to get it. Of course, there is some small print, but don’t worry about that.

In the case of Mr McConnell, it is money to fund the US Government, lots of it. Sen. McConnell offered a short-term debt ceiling extension to the Democrats to December to allow them to use reconciliation to pass a more permanent measure. Note that word reconciliation. Republicans have no intention of any bi-partisanship regarding a more permanent measure. It will also coincide with trying to pass the equally acrimonious build back better multi-trillion-dollar spending package. The fixture congestion would probably kick the latter into touch. Planning for the mid-terms in 2022 is alive and well. The announcement of a two-month kick-the-can-down-the-road offer was enough for desperate buy-the-dippers to reverse course and lift US equities into positive territory.

In President Putin’s case it is energy, namely natural gas. He sparked a near 10% sell-off in natural gas prices overnight after he offered to “stabilise” the natural gas market in Europe by potentially pumping more supplies through the Ukraine. The Russian Vice-President also mentioned certifying Nord Stream 2 once again as a potential solution to Europe’s gaseous woes. President Putin also alluded to the benefit of long-term as to short-term supply contracts. Mr Putin’s comments were high on rhetoric but very low on detail such as how much and when. The message is fairly clear though, you can have all the gas you want in the future, you just need to sign here….

Taken in context, the jump in Wall Street equities overnight didn’t make a dent in the scale of the sell-off on a weekly basis. In the case of natural gases, the 10% fall only unwound the 10% hike in prices from the day before. Rays of hope, yes, but that's all. Notably, US yields at the long end only flattened marginally and the US Dollar kept on rallying, while gold continued to find safety dance bids ahead of the US data tomorrow.

And that brings me back, once again to the US Non-Farm Payrolls. Despite the market chasing its tail and tying itself up in knots each day this week, thanks in part, to a slow data calendar, all roads lead to tomorrows US Non-Farm Payrolls. The price reversals were either modest or non-existent on the overnight Squid Game double act. The underlying factor making markets nervous is the trajectory of Federal Reserve monetary policy. In this case, will the Fed taper start in December, or get pushed back into 2022 along with the dot plot. Tomorrows US Non-Farm Payroll data should go a long way to answering that question with a print north of 500,000 jobs added locking and loading the taper. I am not expecting a taper-tantrum, but the signs are there to see in the Asian currency space, and I continue to believe the potential taper has not even started to be fully priced into markets. The world will still be a zero per cent one after the taper, but there will be a lot less money free money sloshing around looking for a home. Don’t sell those US Dollars just yet.

Today’s data calendars in Asia and Europe are even more non-existent than yesterday. South Korea’s Current Account and Japan’s Foreign Bond Investment have had no market impact, while the Bank OF Japan’s Kuroda said he expects Japan’s CPI to pick up slowly, entirely consistent with the last 25 years I suppose. Patience is a virtue. Japan equity markets are entirely focused on Wall Street’s movements now anyway.

Tonight’s weekly US Initial Jobless Claims will allow some last minute rejigging of Non-Farm forecasts for tomorrow. Overnight, the ADP Employment number rose sharply to 568,000 jobs, well above forecasts. The ADP has been a poor indicator for the Non-Farms of late, is this the month we see a return to the mean?

Otherwise, I expect the headline-driven chop-fest to continue into tomorrow nights US employment data. All I can say is to be careful accepting the market’s seemingly easy rewards until then, the currency, bond and gold markets are telling us just that. Like the Squid Game, those rewards come with conditions attached and you may not get that perfectly charred calamari.

Debt-ceiling offer tempts Asian equities higher

Asian equity markets are to a positive start today after hopes of a US debt ceiling compromise saw Wall Street sharply reverse losses overnight and move into positive territory. The S&P 500 finished 0.41% higher, the Nasdaq closed 0.47% higher, and the Dow Jones ended 0.30% higher overnight. Interestingly, the US rally continues vigorously in Asia, with US index futures staging powerful gains. Nasdaq futures have jumped 0.75% higher, while S&P 500 and Dow futures have climbed by 0.50%. No one wants to be the FOMO-gnome left behind in US markets.

The strong showing by US markets has been enough to lift animal spirits in Japan and South Korea, which have shown a high correlation to Wall Street of late. The Nikkei 225 is 0.95% higher, while the Kospi has leapt 1.55% higher today. Mainland China remains closed until tomorrow, but Hong Kong is also rallying powerfully today, with Evergrande stock resuming trading. News that the Hong Kong Government will build 90,000 new homes has been received positively and the Hang Seng has leapt 2.15% higher today.

Singapore has climbed by a healthy 0.90% with Taipei up only 0.15%. Gains in Taiwan are perhaps being limited because China’s President Xi is due to make a speech about the island on Saturday. Bangkok has jumped 0.95% higher while Jakarta is 0.40% higher ahead of an important tax law vote today. Falling oil prices have pushed Kuala Lumpur down by 0.20%, while Manilla is 0.50% lower.

Australian markets have only rallied modestly, with New South Wales reopening news offset by lower energy prices overnight and the tightening of mortgage lending criteria by the prudential regulator. Still, markets down under are in the green, the ASX 200 and All Ordinaries climbing by 0.55%.

After a horror story day yesterday for European equities, which missed out on the goodies dangled by McConnell and Putin, markets are likely to rebound sharply today. Given the headline driven nature of the equity moves we have seen this week, I would suggest caution though. We are only one negative headline away from the herd stampeding back the way it came. President Putin’s gas offer was high on rhetoric and short on execution details, and a Democrat rejection of the Republican short-term debt ceiling extension could see normal service resuming.

US Dollar ignores debt ceiling hopes

Currency markets reacted only marginally to the short-term debt ceiling compromise from the US Republicans overnight. Risk sentiment currencies such as the AUD and NZD narrowed losses, but overall, the US Dollar continued marching higher, despite US long-dated yields easing slightly. The dollar index rose 0.27% to 94.23, where it remains in Asia today. Although the dollar index continues o rise, my earlier view remains the same, the 93.50 to 94.50 range will contain until the US employment data is released tomorrow night.

EUR/USD faded 0.35% to 1.1555 overnight, and the single currency has failed to meaningfully test resistance at 1.1650, with 1.1600 now forming a short-term barrier. The Euro still looks vulnerable to further pricing of the Fed taper, and a weekly close under 1.1500 tomorrow night will be a powerful bearish signal. GBP/USD continues to just keep its head above water, trading at 1.3585 today. It has failed to recapture its downside breakout line, today at 1.3620, and it is probably only EUR/GBP selling keeping it afloat. GBP/USD remains vulnerable to further falls that retest last weeks 1.3415 lows, as the energy/logistic crisis continues, and the circling wolves of the European Union Brexit lawyers sharpen their pencils. ¬†With US yields hardly moving overnight, USD/JOY remains anchored around 111.50. A weekly close above 112.00, or below 109.00, is required to signal USD/JPY’s next directional move.

AUD/USD has now reclaimed all of yesterday’s losses by rising 0.20% to 0.7285 today. The technical picture suggests that gains above 0.7300 will be challenging. However, a soft US Non-Farms tomorrow should see risk sentiment jump, which could propel AUD/USD back towards a 0.7400 handle. NZD/USD looks the more vulnerable right now, remaining 0.70% lower from yesterday at 0.6920. New Zealand’s level 3 virus containment zone was widened to areas South of Auckland today, and I believe delta’s escape from the metropolis is causing disquiet and is limiting NZD gains. The Kiwi remains vulnerable on the AUD/NZD cross and could test 0.6800 if the virus situation darkens or the US Non-Farms outperform.

The Republican debt ceiling compromise offer has given Asian currencies a temporary respite from US Dollar strength. Overall, however, regional currencies remain near recent lows versus the greenback. Regional Asian currencies are almost unchanged from yesterdays open and will have little incentive to move far today, with the major currency space trading quietly, China due to return tomorrow, and with US Non-Farm payroll data due tomorrow night. The US data will determine Asia FX’s next directional move, although high energy prices, that are mostly priced and transacted in US Dollars, are likely to limit any possible gains, with most of Asia being an energy price taker.

Oil prices fall on Russia and US Crude Inventories

The offer by Russia to pump more natural gas to Europe, while short on detail, was enough to send natural gas prices 10% lower overnight, capping oil’s potential gains. That was followed by official US Crude Inventory data which showed a large jump of 3.25 million barrels. Heating oil, gasoline and distillate inventories showed equally large jumps, suggesting that US production is now back on track after Hurricane Ida. That was enough to spark a sell-off by oil which was already heavily long.

Brent crude fell by 2.10% to $80.80, and WTI slumped by 2.70% to $76.90 a barrel. Oil prices Have continued easing slightly in Asia, with Brent crude trading at $80.70 and WTI at $76.70 a barrel. For context however, both contracts remain comfortably higher for the week.

I am looking at the overnight slump as a technical move that was overdue, with fast money speculative longs pushing the relative strength indexes (RSIs) on both contracts into heavily overbought territory. The RSIs are usually a good indicator of technical r price reversals when they move into deep overbought or oversold territory. The Northern hemisphere energy crisis has not magically vanished overnight, and nor can it be magically solved overnight. Russia’s gas proposal, for example, was high on rhetoric, but low on specific details of how much, how, and when. China also returns to work tomorrow, and you can guarantee they won’t be feeling any more comfortable about their energy situation than before the long break.

The fall overnight looks more like a speculative washout of short-term positioning, and as I have contended all week, the dip in prices is likely to be short in duration. Natural gases prices would have to fall a very long way still to change my mind. I fully expect China buyers to take advantage of this price dip in line with their “at any costs” instruction from the central government.

On Brent crude, I expect physical buyers to be lining up between $79.00 and $76.00 a barrel, while WTI should find support between $76.00 and $73.00 a barrel. A few days of sideways price action would further reduce overbought RSI technical indicators, allowing for a retest of $83.00 by Brent crude, and $80.00 a barrel for WTI, by early next week.

Gold remains side-lined but supported

Gold prices continue showing resilience, trading sideways once again overnight despite a stronger US Dollar. Gold rose slightly to $1763.00 overnight, slipping to $1760.00 an ounce in Asia as listless trading continues. Despite gold seemingly slipping off the radar, its refusal to retreat in the face of firm US yields, a continuing rally by the US Dollar and short-term exuberance in the equity market, is telling. Gold’s refusal to roll over in the face of usually bearish headwinds suggests that nervous investors are continuing to quietly hedge risks via long gold positions. If anything, golds tenaciousness at these levels signals that today’s equity rally has very shaky foundations.

Gold appears set to retain its haven bid into tomorrow US employment data, although that data will cause a very binary outcome for gold into the end of the week. A firm US Payrolls should see gold head south once again and potentially test $1720.00 an ounce. A weak number could spur a rally through $1780.00 to $1800.00 an ounce.

In the meantime, gold looks set to continue finding support into $1750.00, with gains limited to $1770.00 an ounce. That narrow range will probably persist into the US data, although pre-weekend Asian buyers tomorrow could keep it near the upper end of that.

Jeffrey Halley
Jeffrey Halley Senior Market Analyst, Asia Pacific, OANDA

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