Outside Reversals

Readers can relax; this is not another flying story. I am referring to the technical reversal pattern, which in the case of asset classes overnight, refers to financial instruments making a fresh high before closing below the low price traded the previous day. That is a bearish formation, and quite a few of them have appeared overnight.

By my reckoning, the S&P 500, Nasdaq and Dow Jones, both Brent crude and WTI, GBP/USD, AUD/USD and NZD/USD all traced out bearish outside reversal days. I suspect there may be more, but I ran out of fingers to count them on. Notably, all of the group mentioned above are at the wavefront of the global recovery, zero percent money forever, buy everything trade. 

I will admit that outside reversal days in 2020 were somewhat of a fools' errand. This time, the difference is that today in the United States, we have the dual Senate seat election runoff in Georgia. A double win by the Democrats will hand control of all three legislative organs of government to them, and an almost unfettered ability to adjust taxation and enact fiscal stimulus. Conversely, just one win for the Republicans will leave them with a blocking stake in the Senate to any Biden legislative agenda. 

Quite clearly, all the financial instruments above, with perhaps the exception of oil, retreated overnight ahead of today's elections. Elections I note, that are too close to call, and whose final result could drag on for days. A Democrat win is being perceived as a negative for markets, in the short-term at least. No doubt in part, as many at the top of the K-shaped recovery, are working in the financial markets space. Markets never react well to the prospect of tax increases.

With the world long to the eyeballs on the global recovery trade across multiple asset classes, uncertainty in the Georgia election today could create a fertile breeding ground for some emotional pullbacks. 

In breaking news, we have a reversal of a different kind. The New York Stock Exchange (NYSE) has just announced it is cancelling the decision the delist three Chinese telecommunications companies. The statement from NYSE's parent Intercontinental Exchange reads as follows, 

"NEW YORK, January 4, 2021 – In light of further consultation with relevant regulatory authorities in connection with Office of Foreign Assets Control FAQ 857, available here, the New York Stock Exchange LLC ("NYSE") announced today that NYSE Regulation no longer intends to move forward with the delisting action in relation to the three issuers enumerated below (the "Issuers") which was announced on December 31, 2020."

The announcement has seen Chinese Mainland stock markets immediately reverse their day's losses thus far and move into positive territory. The statement reveals little detail about the reasons for the sudden volte-face. Still, it will boost China equity markets and likely spill over into regional ones, all of which were in a pre-Georgia risk reduction mode this morning. It also boosted the Chinese Yuan, which proved spectacularly immune to Georgia concerns overnight, as it rallied strongly through 6.5000 versus the US Dollar.

In oil markets overnight, OPEC+'s first monthly meeting to decide future oil production levels finished the day with no agreement between members. Both Brent and WTI retreated with talks set to continue into today. Russia appears keen to increase production, while Saudi Arabia and many other members are concerned about thrusting more product onto fragile markets in the short-term. Given the event risk from OPEC+, the Georgia runoffs, and the technical picture traced out last night, oil markets are more vulnerable than most to an aggressive short-term correction lower.

The data calendar in Asia today is strictly B-team. In Australia, ANZ Job Advertisements rose 9.20% in December, less than the previous month, but impressive nevertheless with distortions caused by Christmas holidays. Philippines Inflation YoY rose to 3.50%, with Covid-19 disruptions continuing to push food inflation higher. With the BSP reference rate set at 2.0%, Philippine real interest rates must be some of the world's most negative. It should not get in the way of further appreciation by the currency in 2021 though. Further Indonesian-style "burden-sharing" whereby the central bank directly monetises government debt might though.

Singapore Retail Sales are likely to remain anaemic as the domestic consumption remains torpedoed by the Covid-19 recession. German Retail Sales are set to fall by 2.0% in November as Germany ratcheted up its Covid-19 lockdowns. Likely, though, today's Georgia Senate elections will dominate markets, drowning out any data releases.

On the Covid-19 front, Japan is set to announce on Thursday, whether it will declare a State of Emergency in parts of the country enabling more substantial Covid-19 restrictions. With the Arctic polar cap melting faster than Japan can make a decision, they could cast an eye to the UK, Europe and other parts of the world for lessons in vacillation. The desperation to have your cake and eat it by restricting some movement, while desperately trying to keep large parts of the economy open, has bitten Europe, Britain and North America in a big way. Britain announced overnight that it would re-enter a full national lockdown, Germany is extending restrictions, and the US speaks for itself. We're all experts in hindsight but watching countries around the world make the same mistakes over and over again are a bit frustrating.

NYSE announcement lifts China markets.

The NYSE announcement this morning reversing its decision to delist three Chinese telcos has had an immediate impact in Asia. China markets have abruptly reversed out of negative territory and into the green. The Shanghai Composite are 0.10% higher, with Hong Kong now unchanged on the day. I do note that the initial rallies were greater in scope and have quickly started to fade.

Risk reduction ahead of the Georgia Senate runoffs today dominated North American trading. The S&P 500 fell 1.48%, while the Nasdaq lost 1.47% and the Dow Jones retreated 1.27%. All three indices traced out bearish outside reversal day patterns.

Asia has followed the US example with markets modestly retreating across the region. The Nikkei 225 has fallen 0.20 with the Kospi just 0.05% higher. Singapore has declined 0.30%, with Kuala Lumpur falling 0.50%. A potential merger between Gojek and Tokopedia has lifted Jakarta by 0.30%, with Thailand the day's outperformer, the SET rising 0.90% as the government eased some Covid-19 restrictions.

Australian markets have tracked slightly lower as investors Downunder await the Georgia elections tomorrow Asian time. The ASX 200 has fall 0.40%, with the All Ordinaries falling 0.20%.

It is notable that the sharp rally in Chinese markets after the NYSE announcement has very quickly faded. That suggests that potential concerns over the Georgia elections today remains topmost in investors’ minds. I expect European equities to open lower with that in mind, with UK markets under greater than average pressure due to the imposition of a new national lockdown. With positioning so heavily weighted to the long side, equity markets could potentially correct much lower if the Georgia election results are delayed, inconclusive or if the Democrats sweep both seats. 

Asian currencies appear to be the new havens.

Across the G-10 and commodity currency space overnight, multiple currencies traced out dangerous-looking potential reversal formations. The reason being today's Georgia Senate elections, with markets reducing short US Dollar positioning into today's event. A Democrat clean sweep will almost certainly see a potentially abrupt reversal of the gains seen recently in currencies such as the Euro, British Pound, Australian and New Zealand Dollars, to name but a few. 

USD/JPY narrowly avoided an outside reversal day overnight, that would have signalled Dollar gains versus the Yen. USD/JPY is hovering at 103.00 this morning, and further US Dollar gains are being tempered by the Japan Government's decision on Thursday regarding Covid-19 states of emergency. If the government follows that course, USD/JPY will likely fall to near 102.00 on repatriation flows. 

Asian currencies are bucking the trend, notably the Chinese Yuan, with both the onshore and offshore variants rallying through 6.5000 versus the Dollar overnight. The fall of USD/CNY and USD/CNH through 6.5000 appears to have sparked stop-loss selling and algorithmic traders adding to US Dollar shorts. There may also be an element of haven buying in play, with the Yuan finding favour as a hedge against US markets volatility. That will be an intriguing development for currency markets if proven correct.

The PBOC set a firm USD/CNY fixing at 6.4760 this morning, signalling that it remains comfortable with further CNY strength. I suspect that as long as CNY remains sensibly priced on a TWI basis from the PBOC's perspective, they will continue to allow the US Dollar to fall versus the Yuan. USD/CNY is trading at 6.4500 this morning, of its session’s lows at 6.4300. Although some US Dollar retracement can be expected ahead of the elections today in Georgia, the technical picture suggests that longer-term, USD/CNY will now target the 2028 lows around 6.2500. 

Oil retreats on OPEC+ opaqueness.

Oil markets retreated overnight after OPEC+ could not decide at their monthly meeting, on new production targets. Broadly speaking, it appears that Russia wishes to increase production, while other members, led by Saudi Arabia, remain more cautious about adding supply. Discussions will now drag on into today, which isn't a huge surprise but was enough to topple oil markets of recent highs overnight.

Brent crude fell by 1.40% to $50.75 a barrel, and WTI fell by 1.75% to $47.35 a barrel. In Asia today, dip buying has been notable, with both contracts climbing by 0.40% to $51.00 and $47.60 a barrel respectively. The rally though looks corrective and driven by physical buyers in a thin market liquidity wise. 

Both Brent crude and WTI made new highs overnight, before falling to close under Friday's lows, tracing out bearish outside reversal day technical patterns. With oil prices having rallied around 30% in two months, it is clear that oil speculators are heavily long. Uncertainty around the Georgia Senate elections, or further disagreements amongst OPEC+, dragging out discussions into Wednesday, could be the spark for a long-overdue correction lower.

The outside reversal patterns are a warning that the downside is vulnerable, although I note, neither contract is overbought on its relative strength index. (RSI) F0or Brent crude, the overnight high at $53.50 a barrel is resistance. Support is nearby at %50.50 a barrel followed by $49.00 a barrel. A failure of $49.00 a barrel opens up a much deeper potential correction to $47.00 a barrel initially.

WTI has resistance at $50.00 a barrel and initial support nearby at $47.00 a barrel. Failure opens up more profound losses that could extend as far as $44.00 a barrel. 

Gold soars overnight.

Gold exploded higher overnight, with Bitcoin's holiday rally appearing to be the spark that lit the fire. Gold finished the session 2.35% higher at $1943.00 an ounce, a $45 an ounce gain for the session. The rally through $1900.00 an ounce appears to have trigger stop-losses and dragged model buyers into the market, propelling both it and silver, much higher. The uncertainty surrounding the Georgia election saw risk-hedging buyers emerge and gave more momentum to the rally. It notably, ignored Bitcoin's near 20% intraday pullback, suggesting that the flows were not only speculative in gold. 

Gold has been much quieter in Asia, with some profit-taking emerging to push it slightly lower to $1938.00 an ounce. The fate of the gold rally in the short-term now rests entirely on the Georgia Senate election outcome. A Republican gain of just one seat will likely be regarded as a market positive and should see some of the risk-hedging based gold buying unwound. Conversely, a resounding double win by the Democrats will probably see gold rally towards $2000.00 an ounce. 

Gold has clear technical support at $1900.00 an ounce, and $1895.00 an ounce, the 100-day moving average. Unfortunately, given the rally yesterday's pace, there is nothing but clear air between $1900.00 and its current level. A series of highs between $1965.00 and $1975.00 an ounce denotes initial resistance, followed by $2000.00 an ounce, where I expect heavy option-related selling to cap gains initially.

I expect gold to trade in a noisy $1910.00 to $1960.00 an ounce range over the next 24 hours as we await the Georgia Senate runoff outcome.