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ADP points to stronger payrolls

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The overnight session was relatively non-descript for financial markets in the bigger picture. Equity and currency markets moved sideways, as did precious metals, with only energy markets exciting as oil continued to push towards $60.00 a barrel. That is not to say that individual corners of the financial world didn't have busy days, Alphabet, for example, had a banner day after its results yesterday. 

The loss of momentum is likely temporary, with US stimulus developments having a quiet day as the Democrats attempt to bludgeon the package through the Senate. There were some intriguing data releases overnight, and the fact that markets didn't really react to them strongly emphasises that we all remain on stimulus watch.

European inflation data leapt higher, with both core and headline inflation outperforming. Core Inflation YoY rose to 1.40% versus 0.90% expected. Headline Inflation YoY rose to 0.90% versus 0.50% expected. Much of the increase in core inflation can be attributed to the VAT cut's reversal in Germany. Elsewhere, higher oil prices are making their presence felt, and this will be a continuing trend in 2021. Services prices rose, reflecting logistical logjams and higher transport costs due to energy.

Given that European growth is easing due to a pandemic induced double-dip recession, the sniff of stagflation will be turning a few more hairs grey in Frankfurt. There is, unsurprisingly though, no evidence of wage cost inflation, meaning we shouldn't expect the inflation hunter gnomes of Northern Europe to do something stupid like tightening monetary policy. Oh wait, this is Europe. Some inflation components evidenced last night are here to stay, notably German VAT and energy prices. Bond markets didn't blink, but the numbers are likely to keep the pressure upon the Euro.

US data also outperformed overnight. Markit Services PMI rose to 589.3, while the ISM Non-Manufacturing PMI rose to 58.7, with the New Orders, and Employment sub-indexes showing impressive gains. Being an index of expectations, it does suggest that business in the US sees better times ahead, and I cannot disagree. The most notable beat was ADP Employment, which climbed to 174,000, blasting the 58,000 expectations out of the water. 

The ADP number has had a strong correlation to the Non-Farm Payrolls over recent months. And that has seen markets rapidly reassessing this tomorrow's Non-Farm Payrolls print. Expectations are rising that the Non-Farms could print around the 150,000+ mark as well, up from a 50,000 expectation as of last week. If the correlation holds this month, and assuming we have no stimulus road bumps, equity markets could be in for a strong finish to the week on the US recovery/stimulus story. US yields moved higher on the US data overnight, and that trend could also continue if we see a healthy number on Friday.

The data calendar is quiet in Asia today, which seems content to trade sideways after receiving no strong lead from the US overnight. Australia's Trade Balance rose by more than expected to AUD 6.785 billion. The headline is flattered by lower imports, but more importantly, exports held firm at 3.0%. That suggests that despite the China trade restrictions, the Lucky Country remains lucky, and by default, so does its recovery. AUD/USD has moved slightly higher this morning but still looks vulnerable to US Dollar strength.

Pan-Europe Retail Sales and Construction PMI data are expected to be weaker this afternoon for obvious reasons. Most of the attention will be on the first Bank of England rate decision for the year. We expect rates to remain unchanged at 0.10%, and for the QE target to also be unchanged at GBP875 billion. Attention will be focused on whether the BoE puts negative rates to bed and leaves it there. My distaste for negative rates is well known, but if the BoE agrees with me, it should be positive for Sterling. UK data of late has shown a bulldog-like resilience despite the pandemic restrictions. The UK is also well ahead with its vaccination programme, meaning there are more than a few reasons to be positive on Boris-Britannia, at the moment. 

Weekly US Initial Jobless Claims are released this evening and will generate some short-term volatility. Asia's highlight tomorrow will be the Reserve Bank of India rate decision, coming after the fiscally expansionary budget on Monday. With inflationary forces ebbing, and a strong need to keep Government borrowing costs manageable domestically - the budget threatens India's international credit rating - the RBI may chip in with a rate cut. That should be another positive for Indian equities which have had a banner week.

Other than that, and headline risk aside, it is hurry up and wait for tomorrow night’s US Non-Farm Payrolls.

Asian equities take risk off the table

The loss of momentum on Wall Street overnight was enough to tempt Asian investors to book profits this morning, with regional markets mostly lower. On Wall Street, the S&P 500 and Nasdaq were almost unchanged, with the Dow Jones creeping 0.11% higher. Futures on all three have edged higher in directionless trade this morning.

In Asia, the Nikkei 225 has fallen 0.61%, with the Kospi down 1.0% despite news that Apple is nearing a car production deal with Hyundai-Kia. In China, the Shanghai Composite has fallen 0.55%, with the CSI 300 down 0.65%. Profit-taking is evident in Hong Kong as the Hang Seng slides by 1.60%. The creation of a financial holding company to house Ant Financial could be weighing on sentiment, as its growth prospects are likely to be lower under that regulatory regime.

Singapore is down 0.45% with Kuala Lumpur 0.11% lower and Taipei flat for the day. Jakarta is bucking the trend, rising 1.0 today with Bangkok also 0.25% higher. Australian markets have ignored the trade data and headed South. The ASX 200 has fallen 0.70%, and the All Ordinaries is 0.40% lower.

Overall, the markets in Asia today have a pre-Non-Farm-Payrolls risk reduction look about them, after strong gains earlier in the week. That sentiment is likely to flow into Europe as well, with UK markets the most likely to buck the trend after the BoE policy decision.

Currency markets drift

A gentle rise in US bond yields was enough to sustain early US Dollar gains, with robust US data raising economic expansion expectations. The dollar index finished almost unchanged at 91.17, having tested 91.30 earlier in the session. However, it remains above previous resistance at 91.00 for the third day in a row, suggesting that US strength has not yet run its course. 

The inflation data overnight in Europe was enough to push the Euro lower though, and it looks the most vulnerable of the major currencies to further Dollar strength. EUR/USD fell slightly to 1.2035, easing to 1.2025 in Asia. EUR/USD has now spent two full sessions below critical support at 1.2055, and a fall through 1.2000 should spark more stop-loss selling. In the bigger picture, EUR/USD has the potential to fall as far as 1.1600 if Dollar strength persists. 

USD/JPY could yet surprise as well, consolidating around 105.00 for the past few sessions, after breaking out of its long-term down channel at 104.25 last week. It targets its 200-day moving average (DMA) at 105.60 initially, but could potentially move as high as 107.00 is short Dollar positioning globally, is squeezed.

Among the commodity currencies, NZD/USD is poised to break out of the top of its symmetrical triangle. This week's robust economic data has the market calling the bottom of interest rates, and talk is now turning to when the RBNZ will tighten. It is likely to be the first DM central bank to do so. NZD/USD is at 0.7200 today, just below the triangle at 0.7220 which it tested overnight. A breakout targets a rally to the 0.7500 region. 

Asian currencies remain immune to any sort of moves, up or down this week. The main reason for that is because the PBOC has kept USD/CNY rock steady around 6.4600 this week. The PBOC appears intent on confining USD/CNY to a 6.4000/6.5000 ahead of the Lunar New Year holidays. Given that China, and almost all of Asia, runs some sort of dirty peg to the US Dollar, unless USD/CNY moves, the rest of Asia is unlikely to either.

Oil's rally powers on

Positive US data and a fall in EIA crude inventories were enough to maintain oil's upward momentum overnight. OPEC+'s JTC produced no surprises, and the EIA said total crude inventory stocks have fallen to a 10-month low. Brent crude powered 1.50% higher to $58.10 a barrel, and WTI rallied 1.60% to $55.95 a barrel.

Asian markets have added another 0.25% to both contracts this morning as global recovery hopes take a front seat once again, and gold weather persists in Northern Asiana in the United States. 

Brent crude's next technical target is $60.00 a barrel, with previous resistance levels at $57.40 and $56.60 providing support. WTI's technical picture also targets the $60.00 a barrel region, with previous resistance levels at $54.45 and $54.00 a barrel its crucial pivot level.

Golds soggy price action continues

Although silver eked out a minuscule 0.75% gain overnight, gold's lethargic price action continued. Gold fell 0.22% to $1834.00 a barrel overnight. It has eased another 0.55% to $1824.00 an ounce in Asia as Silver falls by over 1.0%.

The momentum in silver has vanished as quickly as it began as the Reddit army learned a harsh lesson attempting to squeeze liquid assets. The rear-guard talk that silver represented an undervalued asset is complete nonsense. Silver is undervalued only in that it is cheaper per ounce than gold. A look at the gold/silver ratio, today at 68.50, shows it is not far from its multi-year average, even stripping out the March 2020 spike. Additionally, I do not doubt that producers were falling over themselves to hedge future production into the Reddit-driven spike, yet another harsh lesson in demand and supply. 

Notably, gold continues to fall faster when silver drops, then when silver rises. US yields rose overnight, dealing another blow to gold longs, and if they continue to move higher into tomorrow’s US data, gold will suffer. 

Although gold has fallen through support at $1830.00 an ounce this morning, no doubt triggering some stop-losses, I still expect it to trade in a $1800.00 to $1850.00 an ounce range for the rest of the week. The Reddit carnage in silver will also continue, capping gains. The cyclical low and 61.80% Fibonacci at $1760.00 remains golds must hold zone.

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