Don’t dream it’s over?

Wall Street rallies, ECB rate decision looms

Although the buy everything FOMO trade on Wall Street had looked more like a crowded house these past three sessions, the online trading democratisation gnomes refused to dream it’s over. With the news front relatively quiet, the herd could not resist something so strong as buying the dip. Equities bounced overnight, causing inevitable lockstep moves across currency energy and precious metals markets.

As Wall Street basked in the distant sun, the question is was that the correction? In all honesty, I do not have a definitive answer to that one. Guaranteed profits don’t just fall at your feet, and the price action of the past few days has delivered a harsh lesson in that respect. If short-term call spread options volume has indeed been the underlying driver of the equity rally in the US, then all the herd have lost so far is a few recent premiums, not a hole below the balance sheet waterline. I suspect the answer will be more two-way volatility, from now on, in Wall Street’s private universe. The underlying drivers of asset price appreciation remain in place. The rally may be more non-linear going forward, with four seasons in one-day price action becoming more the norm as opposed to the exception.

Overnight, the Jakarta Governor announced the return of full-scale movement restrictions from this Monday, after two months of semi-freedom. Covid-19 cases have been rampant and the re-imposition of lockdowns in Jakarta is likely to weigh on Indonesian equities and the rupiah today.

Also, in Asia today, Bank Negara Malaysia announces its latest rate decision at 1500 SGT. Unlike other regional compatriots, Bank Negara still has some easing fuel in the tank, with its reference rate currently at 1.75%. With oil’s recent price fall flowing into ringgit weakness, and with the threat of removal from the FTSE Russell World Government Bond Index later this month, analysts are split 50/50 on whether the central bank will shave another 25 basis points of rates. My thruppence-worth is that Bank Negara will keep its powder dry to ride out the near-term event risk and support the currency.

The European Central Bank (ECB) also announces its latest rate decision this evening. The unanimous word on the street is that the Deposit Facility Rate will be left unchanged at -0.50%, and the reference rate at 0.00%. Much more attention will be focused on the press conference at 2030 SGT. Markets will be looking for possible signs of displeasure over the rise of the euro and the outlook for recovery. Any downward pressure on the euro caused by the ECB is likely to be transitory though; this is a weak US dollar story, not a strong euro one.

US Initial and Continuing Employment Claims, tonight, are expected to fall to 850,000 and 12.9 million, respectively. With the newly introduced concept of two-way price risk to equity markets, unimpressive numbers could see the equity rally halt again, with the lockstep reaction across other asset classes. With oil prices wobbling, US Crude Inventory data will assume elevated importance as well. A rise in crude and gasoline inventories could deepen oil’s price correction lower and decouple it from equity markets.

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