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Monday, November 28, 2022

Gold carnage on Asian holiday

Ahh, the perils of liquidity on a Monday morning in Asia, when margin servers are switched on in the US at 7 am Tokyo time. I’ve seen a few of these moments over the years/decades and been caught up in more than a few Monday morning Asia twilight zone liquidity events myself as the unfortunate trader on the graveyard shift. The aftermath almost always involves lots of paperwork, more than a little finger pointing and hindsight genius, a speciality of financial markets everywhere, and quite a few angry customers.

Throw in a Japan and Tokyo holiday, further hollowing out liquidity, Australia and New Zealand being but a pale shadow of their market-making risk-seeking wheeling-dealing trading selves now, and conditions are ripe for a liquidity “event.

On Friday, gold closed at around $1760.00, just above critical support at $1750.00 an ounce. Having been stretchered off the field post a blockbuster US Non-Farm Payrolls print of 943,000 jobs (with a tasty 119,000 revision to June), the FOMC taper bells were a ringing, with a taper now very likely to start before the Christmas Bells. With liquidity at zero to non-existent this morning, it is clear that when gold moved through $1750.00 an ounce, it set off a cascading negative feedback loop of stop-loss selling into a market with no bids. Gold, according to my charts, fell $87 from $1764.00 to $1677.00-ish, just ahead of long-term mega support of $1675.00 an ounce, and also that 61.80% Fibonacci around $1686.00 an ounce. 

Silver also plummeted from $24.3460 to $$22.1020 an ounce, by the looks of it, in sympathy with gold with some cross-metal liquidation probably occurring. Both have staged equally spectacular rebounds as the rest of Asia walked in and went on a Monday-morning bargain hunt frenzy. As I write, gold is trading at $1640.00, down 1.30% on the day, while silver is at $23.8675 an ounce, still 2.0% lower for the session. More on the technical outlook below, but as a hint, it isn’t good.

Asia is unlikely to find much solace from Friday’s US employment data after China released its Trade Balance over the weekend. The Balance of Trade for July expanded to $56.58 billion, slightly above expectations. That was at the expense, though, of plunging imports, which rose by “only” 28.10% (33.0% exp), while exports grew by “only” 19.30% (20.80% exp). Both numbers were substantially lower from June as baseline effects ease in the data. China Inflation released this morning climbed by 1.0% YoY for July, higher than the 0.80% expected, while PPI rose by 9.0% for July versus 0.80% expected.

Unwrought copper, iron ore, and crude imports all plunged in the trade data as higher freight and primary input costs soar. So, we have a picture of slowing growth and higher prices in China, which we would call stagflation usually, but like Voldemort, it’s a word we shouldn’t say too often. Unsurprisingly, iron ore futures have been clubbed this morning, my information robot saying 4.75% down and probably near circuit breaker level. Pop in delta-variant risks in China and stocks in China and around the region will likely counterintuitively rise today, as the markets price in monetary easing and stimulus for China and sooner.

Interesting, the problem seems to be the opposite for the United States. Another huge Non-Fam Payrolls number on Friday and last Thursday’s NFIB survey saying the small businesses can’t find workers, and when they do, they need to pay them a lot more. Output has recovered to pre-pandemic levels apparently, and the only missing piece is 6 million fewer Americans in work. Despite the delta-variant wreaking havoc amongst the non-vaccinated in the US, there is no way it is going to close down again. If anything, the vaccination rates are probably going to accelerate once more after a lull. 

It will leave financial markets with an interesting conundrum over the coming months. If the Federal Reserve is now much closer to the start of tapering, something that was outlined in some detail by Fed Vice-Chairman Clarida last week, bond yields may finally start moving higher, along with more strength in the US Dollar. Suppose China is moved to begin adding stimulus to offset a slowing recovery and given that no country in the Asia-Pacific, except for New Zealand, is anywhere near monetary normalisation. In that case, it is not unreasonable to surmise that regional Asian currencies could be in for a period of sustained weakness for the rest of the year. We can throw the Euro, Australian Dollar, Japanese Yen and possibly Sterling into that mix as well. With most of Asia running some sort of dirty peg to the US Dollar, weaker currencies will hamper the ability of regional central banks to support economies via monetary policy. Q4 could be challenging for much of Asia if little progress is made on Covid-19.

Back to the here and now, the Asian data calendar is light as the China data is out of the way. Indonesian Consumer Confidence is likely to ease; no surprises there for obvious reasons. Malaysian Industrial Production YoY for July is also expected to plunge as, like Indonesia, it deals with its delta-variant tragedy. The Malaysian Ringgit will remain under pressure as a result.

Germany’s Trade Balance will be of passing interest but unlikely to move the needle on a weak Euro. The US data calendar is bare, although the June JOLTs Job Openings will increase the tapering noise if it prints much higher than the 9.27 million expected. Most interest is likely to focus on whether the US infrastructure legislation finally emerges and comes to the US Senate for a vote, which should boost the Dow and the US Dollar.

Asian equities are modestly positive despite weaker China trade data

On Friday, blockbuster US jobs data put the economic recovery back on track with investors and saw the S&P 500 and Dow Jones finish higher while the pandemic-darling Nasdaq eased slightly. The S&P 500 rose 0.17%, with the Nasdaq falling by 0.40%, while the Dow Jones climbed by 0.41%. To put it in context, though, all three major indices remain at or near record highs.

US index futures have eased in Asia, with Nasdaq futures notably down by 0.35%. That has not dampened spirits in Asia, where a Japan and Singapore holiday has thinned out the trading volume. Investors are focusing on China, where the weakness in the weekend trade data has seen commodity prices, notably iron ore, fall today. It has also raised expectations that China will look to ease monetary conditions or enact more stimulus as the week import data raise fears that domestic demand is falling.

That sees China’s Shanghai Composite rising 0.85%, with the CSI 300 climbing by 0.80% and the Hang Seng jumping by 1.15%. The rally in China has lifted regional equities slightly, offsetting the taper nerves from the US and Asia’s ongoing pandemic woes. The Kospi is just 0.10% higher, while Taipei has followed the Nasdaq South, falling by 0.50%. However, Kuala Lumpur is 0.45% higher, with Manila jumping 0.80% and Bangkok rising 0.65%, with Jakarta 0.20% higher. Australian markets are also cautious with lockdowns extending to regional New South Wales today. The ASX 200 and All Ordinaries are just 0.10% higher.

China regulatory risk has not gone away and is likely to limit the cautious gains today, which will also cap gains in regional markets. Pandemic nervousness will also temper spirits, particularly in China, where a rapid spread of the delta variant would be a game-changer for the region’s recovery outlook. Today’s fall in iron ore and other base metal prices may also only be temporary.

European markets will likely open unchanged to slightly lower, with falling China Imports rattling some nerves in Germany in particular. That will be, to some extent, offset by the fall in the Euro on Friday, making Eurozone export pricing more attractive. With a thin calendar in Europe and the US, markets will likely spend the session chasing their tails on news headlines.

The US Dollar rallies powerfully

Friday’s Non-Farm Payrolls data put Fed tapering back in the middle of the dinner table, sending US yields and the US Dollar higher. The dollar index staged an impressive 0.57% rally, carving through resistance at 92.60 on the way to a 92.78 close. In Asia, the dollar index has crept slightly higher to 92.80. Activity in Asia will be much reduced in currency markets due to national holidays in Singapore and Japan.

With a divergence in monetary policy direction seemingly inevitable over the next quarter, the Euro plunged, finishing the session 0.60% lower at 1.1760, where it remains this morning. EUR/USD’s nearest resistance is distant at 1.1835, with today’s low at 1.1743 initial support. A failure of key support at 1.1700 opens up further losses to 1.1600 initially. Sterling failed at its 100-day moving average (DMA) at 1.3865 once again on Friday, finished the day 0.40% lower at 1.3672. It has eased to 1.3565 today and while the 100-DMA caps rallies, it could extend falls to the 200-DMA at 1.3760. Sterling will likely fare better than the Euro with the ECB solidly anchored in QE forever territory with the Bank of England hinting at tighter policy ahead.

A stronger US Dollar generally and a spike in US bond yields post US data on Friday saw USD/JPY jump 0.43% to 110.22. As I have said recently, USD/JPY has dissolved into a pure yield differential play, and if US bond yields continue to climb, USD/JPY will, by default, also rise. USD/JPY has resistance at 110.65, and failure opens further rallies to 111.50 in the days/weeks ahead. If US yields turn down, USD/JPY should fall to test the 100-DMA at 109.65. A passing of the US infrastructure bills this week should put upward pressure on US yields and, by default, USD/JPY.

On Friday, a stronger US Dollar saw China set a much weaker CNY fix today at 6.4840. USD/CNY has headed South to 6.4770 this morning but remains nestled in its wider 6.4500 to 6.4900 range of the past six weeks, except for two days. That has eased the selling pressure on Asian currencies this morning, although that is only likely to be temporary. Assuming no miraculous change in regional Asia’s Covid-19 fight, and if Fed tapering now becomes increasingly expected in Q4, which I believe, the pressure on Asian regional currencies will resume in earnest, sooner rather than later. As outlined above, a divergence in the direction of US monetary policy with most of the rest of the world will pose particular challenges for Asia, leaving central banks here hamstrung on more monetary policy easing if that becomes needed.

Oil remains under pressure

Despite impressive US employment data on Friday, oil prices fell as the US Dollar rallied strongly. What are disturbing oil markets the most, though, is the delta-variant Covid-19 strain which has vast swathes of the planet in its grip. That is increasing fears that the global recovery will stutter and become very uneven, thus reducing oil consumption even as OPEC+ continues to increase production.

The declining pace of China Imports released over the weekend, which featured a massive fall in crude imports, has darkened the mood further in Asia today. Markets are also nervously watching the track of delta-variant Covid-19 on the mainland, where lockdowns and travel restrictions already in place have oil traders on edge.

Trading liquidity is being hampered in Asia, with both Japan and Singapore on holiday. Brent crude fell by 1.30% to $70.30 a barrel on Friday, falling another 1.30% to $70.35 in Asia today. WTI fell by 1.60% to $68.00 a barrel on Friday before falling another 1.55% to $66.95 in Asia today.

Both contracts look vulnerable to more bad news on the virus front, focusing on Mainland China. Markets will be sensitive to headlines suggesting that China’s economic recovering is peaking as well after the weekend trade data. 

Both Brent and WTI have fallen through their 100-DMAs this morning at $69.85 and $67.25, respectively. These form intra-day resistance followed by $70.00 for Brent and $68.00 for WTI. The capitulation sell-off lows from the 20th of July are immediate support. That is $67.50 for Brent and $65.10 for WTI. Failure targets $64.50 and $62.00 a barrel, respectively.

Unlike the massive sell-off of the 19th and 20th of July, oils fall this time is not driven by a mass culling of speculative longs, but rather, fears that the economic recovery is faltering or could falter badly. That is an underlying structural premise of oil’s rally this year, and as such, both contracts remain vulnerable to more bad news on that front and could well move into new medium-term ranges well below $70.00 a barrel.

Gold collapses and rebounds in Asia

As I wrote earlier, a liquidity black hole, exacerbated by a Japan and Singapore holiday, saw gold plummet $87.00 to around $1680.00 an ounce in a stop-loss and algorithmic selling negative feedback loop. The trigger appears to be a fall through critical support at $1750.00 an ounce after US futures margin servers were turned on at 7 am Tokyo time. There is also likely to be a vast discrepancy in what gold’s actual low was today, as the lack of a centralised trading venue mean a low in one venue could be utterly different to that in another. Think the GBP/USD low post-Brexit vote, or EUR/CHF post-SNB. Sales desks around the world will no doubt enjoy sorting that out today.

Bargain hunters have quickly appeared post the sell-off, and gold and silver have both recovered much of their losses as liquidity proved equally elusive on the way back up. Gold is now just 1.45% lower at 1738.00 an ounce, and silver is 1.95% lower at $23.8775 an ounce. Among the tears, some lucky few have picked up some intra-day bargains today. As the saying goes, one man’s muck is another man’s treasure.

Notably, gold has failed to recapture the critical $1750.00 an ounce region, which now forms initial resistance. That is a negative technical development, and as the dust settles, gold looks to be a sell on rallies. Support is between $1675.00 and $1680.00 an ounce, a series of notable daily lows from both this morning and back in March and April. 

With Fed tapering now much likely to start in Q4 after the Friday Non-Farm Payroll data, strengthening the US Dollar, and lifting US bond yields higher, gold faces some severe structural headwinds. As noted last week, and I will bake in the rays of my genius/luck for just a moment, gold had been trading very poorly in the face of greenback strength, even before the Tyson-like knock-out punch of Friday.

With that in mind, gold is unlikely to rally above the $1800.00 region anytime soon but does look overdone under $1700.00 for now. In gold’s defence, the relative strength index (RSI) is entering oversold territory, which usually provides some shorter-term support over a few days. I expect gold to trade in a choppy $1700.00 to $1800.00 an ounce ranges this week.

Failure of the critical $1675.00 to $1680.00 an ounce long-term support zone will be a game-changer. A weekly close under this area will signal more losses targeting the $1500.00 an ounce region.

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