By Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Precious metals built upon recent gains yesterday, while the JPY firmed further after Friday’s ‘rate checks’, as sentiment on the whole remained relatively positive. Today, US consumer confidence and a busy earnings docket await.
WHERE WE STAND – After a year or so were equities were the main narrative in town, it is perhaps nice that we can focus our attention elsewhere for a while.
Though yesterday marked the start of a new trading week, the narratives dominating the discourse among market participants remained the same – namely, yet more record highs across the precious metals complex, plus the JPY extending on the gains seen last Friday.
Let’s start with metals, if for no other reason than the moves we’ve seen this year being, frankly, staggering – gold up 20% YTD, silver up over 50% YTD, and January isn’t even over yet! By this stage, every man and his dog is familiar with the fundamental bull case (reserve demand, retail demand, hedging geopolitical risk, & the ‘sell America’ trade), but that certainly doesn’t mean that it no longer holds water. On the contrary, in fact, said bull case remains very robust indeed, with momentum also favouring further upside, as metals continue to prove the old adage that one record high tends to beget several more.
That said, the recent moves that we’ve seen in the complex are little short of parabolic, especially in the case of silver, with the market having come a very long way, in a very short space of time. This does go a long way to tilting the balance of risk out of the favour of fresh longs entering the fray, and towards those who’ve been long for some time taking some profit. Shorts, though, would be wise to bide their time for a while – selling an asset simply because ‘it’s gone up a lot’ is never an especially wise idea, especially in this instance where bullish momentum is so robust, and the fundamental case for further upside so strong. For now, the ‘path of least resistance’ continues to lead higher, in my mind.
As for the JPY, it was also a case of last week’s momentum continuing, with the ‘rate checks’ seen on Friday having spooked market participants rather significantly, and dramatically reduced the attraction of short JPY positions, given that these checks typically serve as a ‘last warning’ before actual intervention takes place. Incidentally, we do now have confirmation that those chunky JPY gains on Friday did NOT come as a result of actual intervention, with the BoJ’s daily account data giving no sign that the MoF had entered the fray.
That said, while participants are understandably a little jittery about adopting bearish JPY views, I do wonder whether, the longer we go without an MoF intervention, the greater the likelihood that markets seek to ‘test the mettle’ of the MoF – in other words, selling the JPY once more, in order to discover where policymakers’ pain threshold lies. Naturally, you’d say that Friday’s 159.25 high in USD/JPY is a key ‘line in the sand’, though that ‘rule of thumb’ might not be as reliable as usual, considering the Takaichi Admin’s apparent heightened sensitivity to adverse JPY moves than those who preceded them.
That said, it does feel as if any actual intervention would likely prove more of a ‘speed bump’, re-setting spot JPY to a firmer level, but not interrupting the longer-run bearish trend, unless it were to be carried out in conjunction with, for instance, US authorities – which remains a prospect we much watch closely.
As for markets elsewhere, it must be said that there wasn’t exactly much by way of fresh fundamental drivers for participants to get their teeth into. That said, we did see a decent bounce on Wall St, with the S&P rebounding after notching back-to-back weekly losses for the first time since June. At risk of repetition, the bull case here remains a solid one, though the assumption of continued robust earnings growth will naturally come under the microscope a bit this week, with around 20% of S&P 500 constituents set to report.
While it was a case of ‘Buy America’ for equity traders, FX participants are still very much in ‘Bye America’ mode. Clearly, the ‘TACO trade’ continues to work well for stocks, though the policy volatility associated with the ‘escalate to de-escalate’ negotiating strategy trumps that as an FX driver, is doing nothing to help the greenback.
Evidencing this, the DXY dipped under the 97 figure yesterday, printing fresh lows since last September in the process. While the stateside growth outlook remains favourable, participants are unable to focus on it, and are also considering their US exposures more broadly, amid the seemingly never-ending tariff threats which continue to emanate from a certain someone’s ’Truth Social’ account. Until the noise dies down on that front, and we get some clarity as to whether/not the Treasury are actually seeking to engineer a weaker USD (I lean towards not), then the balance of risks tilts towards a softer greenback for the time being.
LOOK AHEAD – A few items of note on today’s docket, as the FOMC begin their first 2-day policy meeting of the year.
On the data front, today brings the monthly manufacturing survey from the Richmond Fed, as well as the Conference Board’s consumer confidence report. The former will help to shape expectations for next week’s ISM report, while the latter should reinforce the relatively optimistic message from last week’s UMich data, though neither is likely to be especially market-moving on its own.
Besides that, the US sells 5-year notes this evening, with that supply likely being taken down relatively well, while a jam-packed earnings slate awaits too, including household names such as UnitedHealth (UNH), Boeing (BA), American Airlines (AAL), and Texas Instruments (TXN).