Deficits be damned

The Financial Times reports that Treasury Secretary Nominee Janet Yellen, the Federal Reserve's former head, will state that the US risks a more prolonged recession and long-term scarring if it did not inject more government spending into the economy. The prepared remarks obtained by the FT ahead of Ms Yellen's testimony today outlined that Ms Yellen feels that with interest rates at historical lows, now was the time to "act big," with the benefits outweighing the challenges of a larger deficit.

With US markets mostly closed for a public holiday, Asian markets appear to have seized on Ms Yellen's remarks as further vindication for President-elect Biden's $1.90 trillion stimulus package. And as we know from 2020, any mention of stimulus is usually good for asset prices. That seems to be the case in Asia, with most equity markets across the region opening up much stronger.

I can't argue with Ms Yellen's premise. The US government can issue 10-year debt at 1.10%, and 30-year debt at 1.80%. Despite the hand wringing of the inflationistas as 10-year yields climbed back through 1.0% (it's a strange world we live in when 1.0% borrowing costs worry people), that is still effectively free money. If inflation and interest rates were to rise notably in the years ahead, the US Government could repurchase the debt cheaper than originally issued. (bond prices fall as yields go higher) What's not to like? 

Of course, the Senate Republicans, and possibly some more centrist Democrat ones, as well as the Byrd Rule, are likely to have something to say about that. But with one eye on deteriorating US employment and domestic consumption data, the Senate may not be as inclined to slim down the package as they would have been previously. The concerns over the Presidential inauguration tomorrow, which weighed on sentiments yesterday have receded with fiscal stimulus business as usual regaining ascendancy.

That has yet to flow through to US Dollar weakness though, with the CFTC Commitment of Traders data showing multi-year highs in speculative short Dollar positioning in currency futures markets. The data is released a week in arrears, and I suspect some of that positioning was dialled back last week. Nevertheless, having spent all of 2020 selling the US Dollar, markets remain heavily short. If it can withstand stimulus talk and debt issuance speculation, the short squeeze is likely to continue into early February. If Senate Republicans indicate early hostility to the programme, and some of Mr Biden's wish list requires a Byrd Rule/Reconciliation 60-vote pass, the squeeze could get quite messy. 

Today's calendar in Asia is literally a bare cupboard, with only German Inflation to break the monotony this afternoon. China's Loan Prime Rate and Bank Negara interest rate decisions are released tomorrow. Of the two, Bank Negara will be the more interesting. As one of the few regional central banks with anything left in the rate cut tank, tomorrow could see another cut after a 6-month hiatus to support growth which is suffering under a resurgent Covid-19. That should be positive for Malaysian equities although the Ringgit's direction driven by the US Dollar and the Asian bloc as a whole. The Ringgit may weaken in the short term though.

The Bank of Japan and Bank Indonesia both release their latest decisions on Thursday along with the European Central Bank (ECB). Much of the Japanese Yen's recent strength has been due to a spike in JGB yields with speculation rife in Tokyo that the BOJ may adjust their yield curve control programme. I am not sure why the BOJ would do that in all honesty at this time, and no change from the BOJ should see Yen weakness return. Bank Indonesia is likely to sit this one out, as will the ECB, which has many moving parts to monitor Europe and the United States before contemplating its next move. 

That is a very long way of saying that Asian markets will continue to trade the US fiscal stimulus trade winds, but that headline risk dominates the potential causes of short-term volatility spikes. I couldn't have put it better myself.

Equities move higher on Yellen stimulus tailwinds

With Federal Reserve officials confirming their dovish bias last week, and incoming Treasury Secretary Yellen set to do the same today, Asian equity markets have jumped aboard the stimulus train this morning, sending most regional markets higher. The bullish tone has been assisted by a US headline culling overnight headline risk.

Aftermarket US index futures have rallied in Asia, with S&P 500 e-minis and Dow Jones futures climbing 0.50%, while Nasdaq futures have risen 0.75%. That has propelled Asia to a strong start, with the Nikkei 225 jumping 1.45% and the Kospi leaping 2.55% higher with the Hang Seng rallying by an impressive 2.65%.

Mainland China markets are having another circumspect day though, with investors appearing to favour Hong Kong equities at local ones' expense. The Shanghai Composite is barely changed, with the CSI 300 lower by 0.45%.

Singapore and Kuala Lumpur have risen 0.35%, with Bangkok higher by 0.95% with only Jakarta in retreat, falling 0.85% this morning. Australian markets love a stimulus narrative and have duly responded in like. The ASX 200 and All Ordinaries have rallied 1.10% today.

With Ms Yellen set to reinforce Mr Biden's stimulus narrative at hearings today, equities should maintain a favourable tailwind in the absence of any other news. 

US Dollar edges lower in Asia

The dollar index spiked higher overnight, testing resistance at 91.00 before falling back to finish the session almost unchanged at 90.75. In Asia, the index has eased to 90.68 in subdued trading. The 50-day moving average (DMA) at 91.00 capped gains precisely, and this morning resides at 90.93. A daily close now above 91.00 will initially set the scene for further Dollar gains targeting the 92.00 area. Support remains distant at 90.00.

Among the majors, EUR/USD continues to edge lower, trading at 1.2097 this morning, having broken out of its uptrend in the early part of last week. The charts suggest that EUR/USD could extend its fall to near 1.1900 and the 100-DMA over the next week. Similar formations are evident on fellow currency darlings, the AUD/USD and NZD/USD although both have risen 0.35% to 0.7710 and 0.7135 today on a stimulus tailwind.

GBP/USD has traced out an impressive multi-day resistance zone at 1.3700. Sterling fell 80 points at one stage to 1.3520, before regaining all of those losses to finish the day at 1.3585. It has crept higher to 1.3605 in Asia, but a loss of its rising support line, today at 1.3530, presages deeper losses targeting the 1.3200 regions, long-term support and also the 100-DMA.

Asian currencies are modestly stronger across the board today on the US stimulus narrative. The US Dollar has unwound its overnight rally just as quickly as it began in overnight trading. Notably, the Malaysian Ringgit has failed to join in regional strength seen today, USD/MYR anchored near its overnight highs as it trades at 4.0490 this morning. With the odds of Bank Negara easing this week rising. The Ringgit is set to underperform its regional neighbours this week, and USD/MYR could rally to 4.0850 if BNM cuts. 

The abrupt rise, and equally steep fall of the US Dollar overnight is suggestive of stop-loss price action in a US holiday-thinned market. For all the noise though, the greenback is broadly only back to where it started trading yesterday versus most currencies. That suggests that a higher Dollar is still the weaker side in the near-term.

Oil barely changed in Asia

Oil prices barely moved overnight with trading curtailed by the US public holiday. Like other asset classes, oil has received a gentle US stimulus tailwind in Asia, with both Brent and WTI futures moving modestly higher. Brent crude has risen 0.55% to $55.00 a barrel, and WTI has risen 0.40% to $52.25 a barrel.

Further Dollar strength could extend oil's correction lower—the $53.00 a barrel level being a critical pivot level for Brent crude. WTI's support is nearer, at $51.50 a barrel although only a loss of $49.30 calls the overall rally into concern. Longs could continue to be trimmed into the Biden inauguration and the expected flurry of executive orders shortly after. 

In Asia today, though, the massive rise in natural gas prices should ensure that oil finds plenty of willing buyers on any dips.

Gold survives intra-day sell-off

Gold spiked lower by $26 to $1803.00 at one point yesterday, before regaining its poise and rising rapidly to close at $1838.00 an ounce, a 0.50% gain for the day. Like currency markets, the price action was reminiscent of stop-loss selling being triggered in a US holiday-thinned market.

Gold has now fallen through its 200-DMA at $1843.00 an ounce, and this level will be an intra-day pivot in the days to come with initial resistance at $1860 an ounce, its 50-DMA, $1865.00 an ounce and then the 100-DMA at $1886.50 an ounce. Having crashed through support at $1817.00 an ounce overnight, support now becomes the overnight low at $1803.00 an ounce. The critical level for the longer-term uptrend remains $1760.00 an ounce. 

Beleaguered bullish gold traders (including the author), can take heart at the overnight price action. The rapid recovery from the overnight lows suggests that plenty of buyers are clustered around the $1800.00 region. The overnight recovery still leaves gold near the bottom end of its January range, and a rise in US yields, and/or Dollar strength will test gold's resolve. 

With the US on holiday overnight, trading in Asia has been moribund, with gold unchanged at $1838.00 an ounce.