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Federal Reserve Rides to the Rescue

Federal Reserve Rides to the Rescue

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The Federal Reserve became an accidental Lone Ranger overnight, riding in to rescue beleaguered financial markets that had circled the wagons over secondary outbreak COVID-19 fears. Europe and Wall Street had followed Asia South before the Fed announced an expansion of its direct lending programme to small and medium businesses, and more significantly, that it would commence buying individual corporate bonds in the market.

 

The timing was accidental rather than deliberate. But with the Federal Reserve back in business backstopping corporate credit, and printing money to lend to companies directly, it was immediately back to business as usual for the peak-virus, buy everything herd. Wall Street equities unwound losses, finishing in the green, the US Dollar sagged, and energy and commodities rallied. 

 

Until such a time that the reality of the economic fallout of COVID-19 is felt in credit markets that central banks aren’t propping up, life will move blissfully on. I can only envisage that massive shutdowns of parts of China or the US, could knock the buy everything rally off course for any sustained amount of time. There is a noticeable trend around the world now by governments choosing growth over graves. 

 

The Fed’s largesse has flowed into Asia this morning, with equity markets powering higher, as yesterday’s worries are consigned to history. The RBA minutes were published early, with the central bank reiterating that interest rates will remain lower for longer, until its employment and inflation targets were in sight. That Fed-like mantra will be repeated across the globe for a long time to come. In that context, we should not be surprised by the overnight price action. Resistance is futile. 

 

The data calendar is light in Asia today. The Bank of Japan has just announced an unchanged rate decision at -0.10%. It has left its yield curve control target constant at 0.00%, maintaining its target purchases across a myriad of instruments, ranging from J-Reit’s to corporate bonds. It has raised its Special Lending Programme target to Yen 110 trillion from Yen 75 trillion. With no surprises, USD/JPY is sharply unchanged at 107.40.

 

Tonight, UK Claimant Counts and Unemployment, along with US Retail Sales and Industrial Production are the highlights of the session. In the UK, claimant counts are expected to halve to around 400,000, with unemployment rising to about 5.0%. Any fallout is likely to be limited to Sterling though. US Retail Sales are forecast to recover to 8.0% from a 16.40% drop last week. Industrial Production is expected to improve to 2.90% MoM but remain lower by 18.0% YoY.

 

Just announced, and likely to further boost markets is news that the Trump administration is working on a $1.0 trillion infrastructure fund to boost the economy. If we recall back to President Trump’s election triumph oh so long ago, an almost identical policy initiative was the centrepiece of his platform. That quietly died a death with nothing heard for four years. Anyone would think there is a Presidential election in November.

 

Asia equities jump on Federal Reserve stimulus and Trump infrastructure.

 

Yesterday’s concerns have dropped quickly from the hive memory, with Asia recovering back those losses with interest this morning. Wall Street rallied impressively from deep in the red after the Federal Reserve announced the start of its small business lending, and corporate bond-buying programmes. The S&P 500 finished 0.66% higher, the Nasdaq 1.44% higher, and the Dow Jones 0.66% higher.

 

The Nikkei is 4.0% higher, with the Kospi spiking 4.50% higher. Mainland China sees the Shanghai Composite and CSI 300 both 1.0% higher, with the Hang Seng jumping 3.0% higher. Singapore and Jakarta are recording gains of 2.50%, while Kuala Lumpur is up 2.0%. It is all hands to the wheels in Australia as well, the ASX 200 and All Ordinaries both 4.0% higher.

 

The impressive gains in Asia will continue throughout the remainder of the session, with Europe sure to climb aboard as well. The Trump infrastructure plan will turbo-boost any individual companies and sectors, likely to have even a sniff of part of the action.

 

Markets return to selling US Dollars.

 

Business as usual returned to currency markets as well after the Federal Reserve announced it would start buying corporate bonds. COVID-19 was quickly consigned to the dustbin as the rotation out of US Dollars got back on track, the dollar index of major currencies falling 0.60% to 96.73.

 

Having been hit hard yesterday, the commodity currencies have recorded outsized gains over the last 12 hours. AUD, ZAR, MXN, CAD, NZD and RUB are all in the green today, with MXN and RUB notable outperformers, both higher by over 0.50% in Asia.

 

The EUR/USD has risen 0.80% in the past 12 hours to 1.1340 in Asia and looks set to retest 1.1400. GBP/USD rose 0.50% in New York, and is 0.50% higher Asian in Asia at 1.2665, and looks set to retest its 200-day moving average at 1.2685. Gains in the Pound may be limited by nerves over Brexit talks, however.

 

Across Asia, local currencies have edged higher versus the dollar. MYR is a notable outperformer, climbing 0.50% to 4.2590 this morning, boosted by the rise in oil prices overnight. 

 

The US Dollar sell-off looks to have resumed in earnest, backstopped by the Federal Reserve and the Trump infrastructure project.

 

Oil rebounds sharply on Fed stimulus measures.

 

Oil enjoyed an impressive rebound overnight, as the Federal Reserve announced the start of its corporate bond-buying programme. Oil reclaimed all its COVID-19 losses with Brent crude finishing 2.70% higher at $39.80 a barrel, and WTI was finishing 2.30% higher at $37.10 a barrel.

 

Yesterday in Asia, it was notable that Asian buyers appeared as buyers of the dip. Oil is unchanged in Asia today from the New York close, and it seems that local buyers again, prefer to wait for dips to buy, rather than chasing markets higher.

 

The news that President Trump is considering a $1.0 trillion infrastructure programme will almost certainly boost prices on both crudes again once Europe arrives. Brent crude has an initial target around $43.00 a barrel, followed by $45.00 a barrel, the top of its chart gap from March. WTI will find strong resistance at $40.00 a barrel though.

 

Gold treads water after surviving a Fed sell-off.

 

The Federal Reserve announcements saw gold fall in a robust kneejerk reaction overnight before recovering. At one stage, gold fell $30.0 an ounce to $1705.50 an ounce before recovering to $1725.00 an ounce, 0.35% lower on the day. In directionless trading, gold has risen in Asia by 0.30% to $1730.00 an ounce.

 

The speed of gold’s recovery overnight suggests that there are now a lot of buyers waiting in the wings to pounce on significant dips. Support now lies between $1700.00 to $1705.00 an ounce. That said, gold now has several daily tops forming strong resistance at $1745.00 an ounce, ahead of the $1765.00 an ounce region, the top of its multi-month range.

 

Despite the noisy price action, gold remains marooned in its three-month 100-dollar range. If markets are about to receive another Federal Reserve sugar hit, gold may find the topside challenging going forward still. 

 

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Government

China Shortens Travel Quarantine In COVID Zero Shift

China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one…

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China Shortens Travel Quarantine In COVID Zero Shift

China unexpectedly slashed quarantine times for international travelers, to just one week, which suggests Beijing is easing COVID zero policies. The nationwide relaxation of pandemic restrictions led investors to buy Chinese stocks.

Inbound travelers will only quarantine for ten days, down from three weeks, which shows local authorities are easing draconian curbs on travel and economic activity as they worry about slumping economic growth sparked by restrictive COVID zero policies earlier this year that locked down Beijing and Shanghai for months (Shanghai finally lifted its lockdown measures on May 31). 

"This relaxation sends the signal that the economy comes first ... It is a sign of importance of the economy at this point," Li Changmin, Managing Director at Snowball Wealth in Guangzhou, told Bloomberg

At the peak of the COVID outbreak, many residents in China's largest city, Shanghai, were quarantined in their homes for two months, while international travelers were under "hard quarantines" for three weeks. The strict curbs appear to have suppressed the outbreak, but the tradeoff came at the cost of faltering economic growth. 

The announcement of the shorter quarantine period suggests a potentially more optimistic outlook for the Chinese economy. Bullish price action lifted CSI 300 Index by 1%, led by tourism-related stocks (LVMH shares rose as much as 2.5%, Richemont +3.1%, Kering +3%, Moncler +3%). 

"The reduction of travel restrictions will be positive for the luxury sector, and may boost consumer sentiment and confidence following months of lockdowns in China's biggest cities," Barclays analysts Carole Madjo wrote in a note. 

CSI 300 is up 19% from April's low, nearing bull market territory. 

Jane Foley, a strategist at Rabobank in London, commented that "this news suggests that perhaps the authorities will not be as stringent with Covid controls as has been expected." 

"The news also coincides with reports that the PBOC is pledging to keep monetary policy supportive," Foley pointed out, referring to Governor Yi Gang's latest comment. 

She said, "this suggests a potentially more optimistic outlook for the Chinese economy, which is good news generally for commodity exporters such as Australia and all of China's trading partners." 

Even though the move is the right step in the right direction, Joerg Wuttke, head of the European Chamber of Commerce in China, said, "the country cannot open its borders completely due to relatively low vaccination rates ... This, in conjunction with a slow introduction of mRNA vaccines, means that China may have to maintain a restricted immigration policy beyond the summer of 2023." 

Alvin Tan, head of Asia currency strategy in Singapore for RBC Markets, also said shortening quarantine time for inbound visitors shouldn't be a gamechanger, and "there's nothing to say that it won't be raised tomorrow." 

Tyler Durden Tue, 06/28/2022 - 07:38

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Economics

Energy Stocks Are Down, But Remain Top Sector Performer

High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s…

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High-flying energy shares have hit turbulence in recent weeks but remain, by far, the leading performer for US equity sectors so far in 2022, as of yesterday’s close (June 27), based on a set of ETFs. But with global growth slowing, and recession risk rising, analysts are debating if it’s time to cut and run.

The broad-based correction in stocks has weighed on energy shares lately. Energy Sector SPDR (XLE) has fallen sharply after reaching a record high on June 8. Despite the slide, XLE remains the best-performing sector by a wide margin year to date via a near-36% gain in 2022.

By contrast, the overall US stock market is still in the red via SPDR S&P 500 (SPY), which is down nearly 18% year to date. The worst-performing US sector: Consumer Discretionary Sector SPDR (XLY), which is in the hole by almost 29% this year.

The case for, and against, seeing energy’s recent weakness as a buying opportunity can be filtered through two competing narratives. The bullish view is that the Ukraine war continues to disrupt energy exports from Russia, a major source of oil and gas. As a result, pinched supply will continue to exert upward pressure on prices in a world that struggles to quickly find replacements for lost energy sources. The question is whether growing headwinds from inflation, rising interest rates and other factors will take a toll on global economic growth to the point the energy demand tumbles, driving prices down.

The market seems to be entertaining both possibilities at the moment and is still processing the odds that one or the other scenario prevails, or not. Meanwhile, energy bulls predict that the pullback in oil and gas prices is only a temporary run of weakness in an ongoing bull market for energy.

Goldman Sachs, in particular, remains bullish on energy and advises that the potential for more prices gains in crude oil and other products “is tremendously high right now,” according to Jeffrey Currie, the bank’s global head of commodities research. “The bottom line is the situation across the energy space is incredibly bullish right now. The pullback in prices we would view as a buying opportunity,” he says. “At the core of our bullish view of energy is the underinvestment thesis. And that applies more today than it did two weeks, three weeks ago, because we’ve just seen exodus of money from the space… investment continues to run from the space at a time it should be coming to the space.”

Meanwhile, a bit of historical perspective on momentum for all the sector ETFs listed above reminds that the trend direction remains bearish overall. But contrarians take note: the downside bias is close to the lowest levels since the pandemic first took a hefty bite out of market action back in March 2020 (see chart below). This may or may not be a long-term buying opportunity, but the odds for a bounce, however, temporary, look relatively strong at the moment.


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Commodities

Gold as an investment; a long-term perspective

To many investors, gold was a disappointment during the COVID-19 pandemic and the high-inflation period that followed. Instead of protecting a portfolio…

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To many investors, gold was a disappointment during the COVID-19 pandemic and the high-inflation period that followed. Instead of protecting a portfolio from inflation, the price of gold declined from its all-time high reached in 2020.

At the same time, inflation in the US and other advanced economies kept rising. Nowadays, inflation in the UK is expected to reach double-digit territory at the end of this year and runs at more than four decades high in the US.

Moreover, the news that a huge gold deposit was discovered in Uganda made many wonder what the point of investing in gold is if it isn’t so scarce. The new deposit has some 320,000 tonnes of extractable pure gold.

But time is on gold’s side. As an uncorrelated asset with the main financial markets, gold has its place in an investment portfolio.

Because of that, an analysis of the price of gold from a long-term perspective is useful as it helps filter the noise. After the bullish breakout in the early 2000s, the price of gold is in a bullish run, unlikely to end despite the recent underperformance.

Only bullish patterns followed the early 2000s bullish breakout

In the early 2000s, gold traded below $400/ounce. A bullish breakout led to several bullish patterns – including the current one, which may end up being bullish after all.

First, it was a pennant – a continuation pattern that was responsible for sending the gold price to $1000/ounce for the first time ever. What followed was an ascending triangle.

After the market had cleared the horizontal resistance given by the $1,000 level, it did not stop all the way to $1,900 in 2012. The move was reversed in the years to follow, but an inverse head and shoulders pattern propelled the price to a new all-time high in 2020, as uncertainty during the COVID-19 pandemic reigned on financial markets.

From that moment on, gold is in a consolidation area. Because it hesitated at horizontal resistance, one may argue that the price of gold forms an ascending triangle. The last time it did so, the market traveled more than $900, so bears might want to watch the current pattern closely.

Gold price’s resilience against the dollar has been impressive

Perhaps the best way to interpret the market is through the eyes of the US dollar. The gold price has been resilient against a rising US dollar, and the chart below shows it accurately.

From June 2020, the gold price did not move much, while the US dollar declined initially, only to recover the lost ground. Hence, gold’s price resilience in an environment of a rising US dollar adds strength to the yellow metal because a strong dollar limits the effects of inflation by offsetting the price of imports.

To sum up, gold is consolidating. A move to a new all-time high should trigger more strength, and a higher dollar might accompany it.

The post Gold as an investment; a long-term perspective appeared first on Invezz.

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