Reddit-mania continued to hog the headlines overnight, with silver briefly trading above $30.00 an ounce before easing to 29.0300 an ounce, still a 7.55% gain on the day. Momentum is ebbing though, as the CME raised margin requirements on silver futures by 18.0% overnight, which will have a knock-on effect through retail derivatives across the world. Even pre-Reddit, Comex silver futures traded a rough average of around $11 billion per day in 2020, (source CME ADV and Statista average silver price 2020), so we are not talking about a peripheral thinly traded stock here.
Unfortunately, despite that impressive number, silver's liquidity tends to be very one way when momentum is strong, and traders' speculative is myopic. So, while the retail hoards may be enjoying the momentum-driven day in the sun at the moment, they will also discover that the silver exit door is tiny when a large proportion of that $11.0 bio per day runs for it at the same time. The fact that silver retreated quickly from above $30.00 an ounce is a warning sign. Another is the Relative Strength Index (RSI), which edged into overbought territory overnight. RSI's work pretty well on precious metals and oil when it comes to predicting corrections.
I also note that Copper and Iron Ore are struggling at present levels, iron ore notably, gapping lower last week. Gold also remains locked between its converging 100 and 200-day moving averages, receiving an infinitesimal silver afterglow.
The base metal weakness is mostly due to a stronger US Dollar, which powered higher again overnight after the ISM Manufacturing Prices sub-Index powered to multi-year highs. That raised the hairs on the back of the inflation hunters' necks once again, even if equity markets completely ignored it. Nevertheless, a stronger US Dollar will make further progress by silver and gold higher challenging in the short-term.
All of the above suggests that the retail herd may be heading to a Waterloo moment with silver-mania. The Reddit Army is yelling "pump and pump", but reality will say "pump and dump." In that case, Reddit is likely to become bled it.
South Korean inflation also edged higher this morning, with the YoY for January hitting 0.60%, much higher than the 0.30% expected. It won't be enough to sound the alarms at the Bank of Korea and may be transitory. Reuters is reporting that the South Korean Government is preparing a fourth round of cash handouts and an extra budget to counteract the stubborn, Covid-19-induced contraction in domestic consumption. Much of that is likely to be saved though, and although inflationary pressures may rise, like elsewhere, I feel they are still very much overdone. Only wage-price inflation around the world will set my inflation alarms off, and we are a long way from that.
The Reserve Bank of Australia is certainly not worried about inflation in the near-term either. It has just announced its latest rate decision which left the benchmark unchanged at 0.10% as expected. Things get interesting after that, though. The RBA has committed to buying another AUD 100 billion of Government and State bonds once its present programme is completed in January.
It also noted that while the domestic recovery is pleasing "The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest."
That all sounds pretty dovish to me and is in keeping with similar outlooks from the Federal Reserve and is in some respects even more dovish. In the near-term, the statement should negative for the Australian Dollar, something that will please the RBA, but be bullish for local equity markets.
To cut, or not to cut, will be something the Reserve Bank of India will need to confront on Friday as well after the Government duly announced a massive fiscally expansive budget for 2021. Concerns within Government about India's investment-grade credit rating have been thrust aside to prioritise a Covid-19 recovery. Predictably, it was equities positive, the Sensex leaping 5.0% yesterday. Stagflationary pressures have eased of late, and the RBI will be cognisant of the Government's impending borrowing requirements. More so if credit agency downgrades mean a more significant amount of domestic borrowing. With the Rupee holding steady near 10-month highs in the face of US Dollar strength, the RBI may resume easing, which should give another boost to Indian equity markets.
The rest of the day's data is strictly second tier across the world. Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) will release results today with both expected to produce record numbers. That should be enough to keep the FOMO hoards engaged with equities, at least for another day.
Asian equities power higher.
The buy the dip hoards returned to the fray on Wall Street overnight, with technology and energy sectors notable outperformers led by Tesla, of course. The S&P 500 rose 1.60% on the Nasdaq's coattails, which leapt to a 2.55% gain. The Dow Jones lagging but still recording a 0.77% gain. There was a clear tech/cyclical divide overnight and repeated in Asia today, which saw similar price action yesterday.
US index futures have rallied by around 0.50% this morning, greenlighting further outperformance by the Northern Asia over cyclical ASEAN. The Nikkei 225 is 0.95% higher, with the Kospi jumping 1.40%, aided by additional domestic stimulus expectations. Mainland China's Shanghai Composite has risen by 0.45%, with the CSI 300 climbing 0.15%. A wall of Chinese retail money has lifted the Hang Seng by 1.62%, the listing home of many Chinese tech giants. Taipei, meanwhile, has rallied an impressive 2.25%.
Singapore has climbed 0.70%, with Kuala Lumpur rising 0.85% with Jakarta up 0.25%, and Manilla rising 1.25% after some torrid sessions. In Australia, higher silver prices and a dovish RBA have listed the All Ordinaries by 1.35%, with the ASX 200 leaping 1.50%.
Equity markets have ignored a much stronger US Dollar overnight, suggesting that for now, the equity correction lower has run its course. Only some serious wobbles in the US fiscal stimulus outlook, or a very poor Non-Farm Payrolls on Friday, is likely to knock equities of track for now, with the dip buyers firmly in control.
The US Dollar rallies.
The US Dollar staged an impressive rally overnight, with major currencies and the cyclical Commonwealth Dollars once again wilting. The dollar index rose 0.44% to 90.98, just below two-month resistance in the 91.00 to 91.20 zone. Profit-taking has seen it edge lower to 90.90 today. A potentially scaled back US fiscal stimulus package seems to have lifted the Dollar on a day that US yields actually fell. It is also reflective of the size of the US Dollar shorts out there that the greenback has performed so well in the past few session. That said, I would prefer to see a daily close above 91.20 before calling for further US Dollar gains to 92.00 initially.
The Euro continues to bear the brunt of Dollar strength, with fears of a double-dip recession caused by its poor vaccine rollouts and ham-fisted policy response to that problem. EUR/USD tested support at 1.2050 overnight on its way to a 0.60% fall and a close at 1.2056. Some profit-taking has lifted the single currency to 1.2075 today, but the risks have increased now of a material correction lower that would target 1.1900 initially.
In the cyclical commodity currencies, a dovish RBA has pushed AUD/USD back towards support at 0.7610, and a deeper correction targeting 0.7400 remains a real possibility. NZD/USD has fallen to 0.7170 this morning with critical support at 0.7110. Meanwhile, USD/CAD has risen to 1.2835, just below its 10-month downtrend, today at 1.2855. Failure targets 1.3000 initially and could extend as far as 1.3400 if the greenback short squeeze finds renewed momentum.
China today, added another CNY 80 billion in liquidity via the 7-day repo, which remained steady at 2.20%—combined with a slighter softer PBOC USD/CNY fix—allowed USD/CNY to hold onto its 0.60% gain overnight, trading at 6.4600 this morning. USD/CNY has a series of clearly denoted highs at 6.5000, stretching back through the whole of January. Asian currencies remain tied to the Yuan's event horizon, thus resilient in the face of US DOllar strength. If USD/CNY rises through 6.5000, both the CNY and regional Asian currencies may enter a phase of catch-up weakness.
Oil rockets higher on US weather.
Oil prices powered higher overnight, lifted in part by the positive sentiment returning to equity markets, but mostly because of frigid weather sweeping the United States, pushing up the demand for heating. That saw Brent crude leap by 2.42% to $56.35 a barrel, and WTI jump 2.60% to 53.50 a barrel. With Asia face much the same weather conditions in the North, oil has moved higher again today, Brent crude and WTI both adding 1.0% to $56.90 and $54.10 a barrel respectively.
OPEC+ begins a serious of monthly technical meetings today although we expect no production changes to be announced, with quarterly targets already agreed. Oil markets will continue to be driven by demand expectations due to cold weather in the US and Northern Asia, especially after US inventories fell last week.
Despite the impressive rally overnight, both contracts remain range-bound, albeit at the top now. Brent crude has resistance at $56.60 and $57.40 a barrel, with support at $54.50 a barrel. Clearance of $57.40 opens the road to $60.00 a barrel. WTI is testing resistance at $54.00 a barrel this morning, followed by $54.45. Support is at $51.60 a barrel. A daily close above $54.45 a barrel signals WTI's next directional move has finally started, potentially targeting $60.00 a barrel as well. US shale hedging via the futures market may make that process slower.
Gold stages unimpressive rally.
With all eyes on the silver rally overnight, gold only managed a modest rally on its sibling's coattails. Gold finished the overnight session just 0.70% higher at $1860.70 an ounce, highlighting the speculative excess occurring in silver markets. The price action still leaves gold stuck in a broader $1830.00 to $1875.00 an ounce range, that has nicely covered the yellow metal for the past two weeks.
Despite the noise from silver, gold is giving no hints yet of its next larger directional move. Nevertheless, the convergence of the 100 and 200 daily moving averages, today at $1850.90 and $1877.80 an ounce respectively, suggests that a breakout is coming.
Gold has resistance at $1875.00 an ounce, followed by the 100-DMA at $1877.80 an ounce. The 200-DMA at $1850.90 an ounce is an intra-day pivot point. That is followed by $1831.50 and the January 18th spike to $1802.50 an ounce.