Powell renomination puts taper trade in spotlight
It was a frisky session on Wall Street overnight as President Biden renominated Jerome Powell for another term as Fed Chairman while elevating his rival, Lael Brainard, to Vice-Chair. Ms Brainard is very much a dove, and it appears that stock and bond markets, in particular, had been simmering near recent highs in case Ms Brainard got the nod for the top job.
With Mr Powell nominated, Europe was knocked off the front page as the new J-La combination saw US markets rush to price in faster tapering by the Fed and earlier rate hikes. The US yield curve steepened as long-dated bond yields from ten years out rose sharply, notably in the 30-year tenor. The US dollar recorded another impressive rise, with the yield differential-sensitive USD/JPY jumping nearly 90 points. Rate-sensitive technology stocks didn’t like the J-La song, thanks to their galactic valuations, and headed south, while gold plummeted as it was shown who its boss was, thanks to US yields finally reacting to the reel-in-inflation chorus. Of course, being bullish on gold yesterday, after returning from holiday, should have been a major warning sign to readers. Short gold is my happy place, and to there, I shall return like MacArthur wading ashore in the Philippines.
The moves overnight did bitcoin no favours either, with the digital Dutch tulip looking wobbly at USD 56,800.00 this morning. Failure of USD 55,500.00 could see USD 53.300.00 tested and failure there sets up a deeper move lower targeting the 100 and 200-day moving averages lurking under USD 49,000.00. Momentum appears to have stalled between USD 60,000.00 and USD 61,000.00 for now. As usual, tee-shirt-clad frontiers of finance-istas, don’t fill up my inbox with mail extolling how you bought Bitcoin at USD 1.0, someone also paid USD 67,000.00 and they’re not as happy. Cryptos remain a tradeable, but not investable asset in my mind, and I haven’t changed my mind.
Whether the Fed taper trade has legs or not, I do not yet know. Long-time readers will know that this is my favoured view into the year-end and early 2022, but I have been led numerous times to water only to find a giant crocodile in the watering hole. Currency markets seem to agree with me, helped by external factors like Europe, but central bank repression in the bond markets and bottomless zero per cent world FOMO in equities continues to frustrate. Given that global central banks will hit the wimp/ease button at the first hint of trouble, I wouldn’t bet against either right now, but I am sure that we are in for a lot more two-way directional volatility into December.
In Asia, Japan is on holiday today reducing trading volumes. Market chatter seems to be focused on a Reuters report that China has instructed some banks to lend a bit more to the property sector projects. Additionally, the noise is increasing around a possible RRR cut in December after the PBOC changed some wording in its latest quarterly report. The PBOC set another weaker CNY fixing versus the US dollar today as well, after hinting that the CNY rally had become too one-way over the weekend. Mainland stocks rose yesterday on the weaker yuan story, but the jury is out on whether that will continue. China equities will remain a challenging market into 2022 thanks to the “shared prosperity” policies of Beijing. I do not believe the process of repricing of China equity prices to reflect that policy, or the “there’s never just one cockroach” in the property sector, is complete.
The data calendar is quiet in Asia, with Australian PMIs and New Zealand Retail Sales already out. Singapore inflation will remain benign, while Taiwan Industrial Production, if it prints lower than 11.0% YoY for October, could spark more peak-recovery nerves in regional markets where the collapse in coal and base metal prices continues to be mostly ignored.
Circling back to Australia and New Zealand, Australian Markit Manufacturing PMI held steady at 58.20, but Markit Services PMI for November disappointed at 51.80. With the RBA sitting dovishly on the hawkish fence, and the border and domestic reopening proceeding at breakneck speed, the Services PMI should improve rapidly, and today’s number will have little impact.
With an RBNZ policy decision tomorrow, today’s Retail Sales have gone a long way towards whether they hike by 0.25% or 0.50%. The data was very weak, thanks to the extended Auckland lockdown. YoY for Q3 fell -5.20%, and QoQ by an even uglier -8.10%, both huge misses. With 0.25% priced into the New Zealand dollar, and no RBNZ meeting until February after tomorrow, the New Zealand dollar has lost its rate-hike premium and is now entirely at the mercy of development in the greenback.
This afternoon sees pan-Europe and United Kingdom Markit Manufacturing and Services PMIs. I expect the UK to continue to surprise to the upside, in line with recent data releases. Given Europe’s already vulnerable outlook, thanks to virus restrictions and riots, low readings from heavyweights Germany and France are likely to see another wave of investors head for the exit door in European stocks and the Euro. The US also releases Markit PMIs this evening, but I wouldn’t bet in them disappointing. High prints should keep the taper trade alive for another day, while low numbers will likely see a short-term pause.
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