One eye on FOMC Minutes

(Craig Erlam – MarketPulse)

The week is off to a relatively slow start, with Asia trading mostly in the red and Europe and the US poised to do the same.

We don’t get many quiet weeks these days but this may turn out to be one of the few, with the US Thanksgiving bank holiday cutting the week short for many traders and the Fed minutes on Wednesday potentially weighing on activity beforehand.

The recovery rally has stalled over the last week or so as Fed commentary has remained more hawkish than investors wanted. The rebound was also much stronger than is arguably warranted, with the Dow up almost 20% from its October lows.

Policymakers appear keen to stress that one inflation number doesn’t make a trend and further evidence will be needed to justify a slower pace of tightening. While they will probably be quietly satisfied that inflation has turned a corner, there may also be a determination not to accept that publicly at the risk of undermining its tightening efforts until now. Another good report next month and the tone will almost certainly notably change.

China stocks tumble as COVID-19 cases rise

The recent news has been less good from China, where surging Covid cases have wobbled markets just as we were seeing an improvement in sentiment. A slight relaxation of Covid restrictions and the prospect of more early next year, alongside a 16-point plan to boost the property market, had triggered a strong rebound in stocks in China and Hong Kong but that has been undermined by the recent surge and restrictions.

Not only would fresh lockdowns in major cities take a sledgehammer to growth into year-end, but it could also complicate any plans that are being put in place to soften the zero-Covid policy next year. We’re back into uncertain territory which could slow the recovery in stock markets.

Oil slips further amid China woes

The prospect of more restrictions and therefore lower demand in China has weighed on crude prices recently. Brent slipped back below $90 last week and could register the fourth day of declines if it remains in the red. We’re seeing bleak economic prospects all around the globe which continues to weigh on oil prices and if interest rates keep rising as they are, expectations will likely deteriorate further.

That will make the next OPEC+ meeting in a couple of weeks all the more interesting. The group came under fire early last month for its decision to cut output targets by two million barrels per day, even as many countries fight inflation and recession in part as a result of higher oil prices. The question now is whether the group be so bold as to cut output again in light of recent price moves and economic developments.

Paring gains but still encouraging

Gold prices are slipping at the start of the week in risk-averse trade that is supporting the US dollar. The yellow metal has performed extremely well in recent weeks as investors have been buoyed by slightly less hawkish rhetoric from the Fed and some much more positive inflation prints.

It’s stalled around $1,780 which was previously a very significant area of support and given some back in recent days but it continues to trade well off the lows which are encouraging. The next test of support could be $1,730 where it met strong resistance on the way down in September and October.

Are darker days ahead for crypto?

The landscape is not getting any better for cryptos as we continue to learn more about the fallout from the FTX collapse. Bitcoin is off around 4% this morning, trading below $16,000 and looking very vulnerable. Another sharp drop looks very possible as sentiment in the space has been shredded. It could take some time for that to be repaired and the uncertainty that the FTX scandal has created is an enormous headwind for cryptos in the near term. At this point, I wouldn’t be surprised to see $10,000 tested again in the not-too-distant future.

US Dollar Index outlook: The Dollar regains traction on fresh safe-haven buying

(Slobodan Drvenica – Windsor Brokers)

US Dollar Index

The dollar index extends acceleration from last Friday and hits a one-week high in early Monday, lifted by renewed risk aversion.

Traders move into safety on the fresh rise in new Covid cases in China, which prompted tighter restrictions, with the capital Beijing’s most populous districts being hit the most.

China’s zero-Covid tolerance policy drives the volatility higher in such a situation, as tough restrictions impact economic activity and markets await signals whether the government will start easing its policy soon.

Fresh safe-haven buying lifted the dollar index, signaling fresh direction after the price was in sideways mode last week, consolidating its recent strong fall.

Initial reversal signals are developing on the daily chart as fresh gains cracked the first pivot at 107.41 (Fibo 23.6% of 114.72/105.15 fall, reinforced by 10DMA), with a sustained break here to firm near-term structure and expose next important barriers at 108.81/109.05 (Fibo 38.2% / 100DMA).

North-heading daily indicators support the action, though momentum is still deeply in the negative territory, the weekly bear-trap under Fibo 61.8% of 101.29/114.72) underpins the action.

Recovery needs lift through the 109 zones and violation of the base of thick daily cloud (109.61) to confirm the reversal signal and open the way for further recovery.
Otherwise, recovery will remain fragile and at risk of a stall that would signal better opportunities to re-enter a larger downtrend off the Sep 29 peak (114.72).

Res: 108.30; 108.81; 109.05; 109.61.
Sup: 107.90; 106.68; 105.70; 105.15.