Variable side effects

The response by the markets to the FOMC dot plot shock has been variable, to say the least, and not a little surprising to me. Equities did their duty and eased, but not, thankfully, with any sign of panic. Much of that is being laid at the door of the quadruple “witching hour” of option a and futures expiries today, but we shall see.

US Dollar extends rally

The US dollar posted another strong performance overnight, with the most prominent casualty being gold, which slumped through USD1800.00 an ounce as investors booked a weekend stay at the Heartbreak Hotel. Commodities, in general, didn’t have a good night. China’s price control measures added to the woes from a stronger US dollar with copper’s selloff continuing. Its overnight tumble saw it close below its 200-day moving average (DMA), suggesting more pain ahead for the fast-money gnomes still long.

Oil continued to ease, spiking lower intra-day before recovering some poise. That move continues to look like an unwind of the overbought short-term technical picture, which is well on the way to running its course now. Some blame can be laid at the US dollar’s feet, and some at the surprise rise in Initial Jobless Claims. The latter, I believe, is only a temporary blip in an improving trend and the mass culling of speculative longs seen elsewhere is the likely reason. Oil is approaching appealing levels now, given the recoveries remain on track in the Northern Hemisphere giants, and the futures curves remain heavily backwardationated. (Or is that backwardated? It’s Friday, a fine day for new words.)

The bond market continues to be my nemesis, as it is for so many who look at real US interest rates and scratch their heads waiting for the bond market version of the French revolution. The US bond market continues to eat cake instead of guillotines, with US yields falling overnight, plunging, in fact, if you look at the 30-year tenor. The US yield curve seriously flattened overnight, which I am sure delighted the FOMC as they removed the kevlar plates from under their tapering tee-shirts.

Some talk suggests that a disorderly unwinding of pre-FOMC curve steepeners was happening. There is merit to this thesis, although given how dovish Fed officials were in the weeks leading up to this week’s FOMC, I am not sure it is all the answer. I suspect that a large part lies in the recent TICS data, which shows foreigners are still piling into the US securities market, and the rise of the US dollar this overnight. Foreigners are still piling into the US bond market, where US nominal yields look spectacular compared to European or Japanese ones. Swapping those negative yield bonds into US ones with at least a positive headline number involves buying a lot of US dollars. Hence the greenback’s strength. Many of those flows may have found their way into the long end of the US curve overnight. There may also be some rotation out of the high yield corners of the market, which have been pimped up by global central bank largesse.

Those are the best reasons I can come up with to explain the divergence. Until the FOMC starts saying the word taper, it is likely to be the state of affairs going forward, famous last words. That’s my story, it’s Friday, and I’m sticking to it.

You know it’s a strange day when I say inflation rose in Japan, but I am saying just that. Before we get all excited after 30 years, I need to put it in context. Inflation this morning rose to -0.10% YoY for May, versus -0.40% expected. Inflation for May MoM rose by 0.30% versus 0.10% expected. However, strip out energy and food, and the YoY number moves back to -0.20%, right on forecasts. Nothing to see here, move along, ladies and gentlemen. It certainly won’t move the dial of the Bank of Japan policy decision due any time now. The policy rate will remain unchanged at -0.10%, and the only tweaks might be an extension to the pandemic-relief scheme. Quick update-BoJ is out, and that is exactly was has happened.

The rest of the day’s global data calendar is a yawn-fest with only UK Retail Sales of passing interest. However, Monday’s Australian Retail Sales and China’s one and five-year Loan Prime Rate decisions may raise temperatures slightly. Otherwise, markets today will be driven by headlines with more than a few eyes watching how US equities finish the week.

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