Asian Open: Copper breaks out in style following US CPI

Wednesday US cash market close:

• The Dow Jones Industrial rose 38.3 points (0.11%) to close at 36,290.32
• The S&P 500 index rose 13.28 points (0.29%) to close at 4,726.35
• The Nasdaq 100 index rose 60.973 points (0.38%) to close at 15,905.10

Asian futures:

• Australia's ASX 200 futures are down 0 points (-0.01%), the cash market is currently estimated to open at 7,438.90
• Japan's Nikkei 225 futures are down -90 points (-0.31%), the cash market is currently estimated to open at 28,675.66
• Hong Kong's Hang Seng futures are up 173 points (0.71%), the cash market is currently estimated to open at 24,575.17
• China's A50 Index futures are up 145 points (0.94%), the cash market is currently estimated to open at 15,656.14

Equity markets weathered the well telegraphed inflation print of 7%, although that may not have been the case had Jerome Powell not soothed inflationary concerns at his confirmation hearing the day prior. The S&P 500 rose 0.2% by the close although (like DJI and Nasdaq) printed small Doji’s. But given the levels of inflation and hawkishness of the Fed that could be taken as a positive sign overall.

The ASX 200 is holding above its 50-day eMA and trend support from the December low, yet 7470 resistance continues to cap. But, even if we are to see a break above here, we’d want to see a break above 7500 before switching to a bullish bias. Until then, we remain neutral.

ASX 200: 7438.9 (0.66%), 12 January 2022

• Energy (3.02%) was the strongest sector and Consumer Staples (-0.59%) was the weakest
• 8 out of the 11 sectors closed higher
• 3 out of the 11 sectors closed lower
• 5 out of the 11 sectors outperformed the index
• 133 (66.50%) stocks advanced, 51 (25.50%) stocks declined

Outperformers:

• +1.87% - CSL Ltd (CSL.AX)
• +4.75% - Afterpay Ltd (APT.AX)
• +1.64% - Macquarie Group Ltd (MQG.AX)

Underperformers:

• -4.19% - Domino's Pizza Enterprises Ltd (DMP.AX)
• -3.52% - Reece Ltd (REH.AX)
• -2.34% - Metcash Ltd (MTS.AX)

US inflation hits its high consensus, dollar gets whacked

Inflation rose 7% y/y as expected in December, which is its highest rate in 39 years. Core CPI, which excluded food and energy rose 5.5% y/y, it’s highest level since Feb 1991. As Joe Biden and his low approval rating know full well, these inflation numbers are not to be taken lightly. But form a trader’s perspective they did come in as expected which removes the element of surprise. And with Jerome Powell effectively confirming a March hike, markets pricing in an 80% chance of said hike and many expecting 3 more this year, traders were keen to book profits after the release.

The US dollar was the weakest currency and fell broadly against all of its major peers, which saw USD/CHF fall over 1% and USD/JPY break firmly below 115. The US dollar index finally broke out of its 2-month range, below 95.50 support and has challenged the June trend support. Naturally, this allowed the euro to hit a 2-month high and close firmly above 1.14. The Australian dollar was the strongest major currency, with the Swiss franc and New Zealand dollar close behind and all rising over 1% against the US dollar.

Commodities embraced the weaker dollar with metals (mostly) leading the way

With a weaker dollar and strong (even if a bit too hot) economy, commodities were quick to rally. The Thomson Reuters core commodity index rose another 1.5% after hitting a 7-year high yesterday. Natural gas is up nearly 40% over the past 8 days alone and was the strongest commodity of the session, with oil rising around 1.5%. Excluding palladium, metals were also broadly higher with gold reaching a 1-week high of 1227, silver rose 1.8% and closed firmly above $23. Yet it was arguable copper which stole the metal show.

Copper breaks out with a vengeance

We noted copper’s potential to breakout ahead of yesterday’s European open, and it did not disappoint. Rising over 4% by its daily high on more than double it’s daily average volume, it’s a classic breakout from a flag pattern on the daily chart. The flag projects a target near the October high around $4.83 and easily cleared $4.50 resistance on a closing bases. Given it has been slowly building a base since the $4.00 low and higher lows have increased in magnitude, it is possible we may see it return to its loner-term trend. But for now, we’re happy to target the highs around $4.75 whilst prices hold above the $4.30 low. But if this is flag breakout then prices should not retreat back beneath the flag itself.

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