“At All Costs”

“At All Costs”

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

Bloomberg is running a very interesting top story this morning stating that China’s Vice Premier Han Zheng has ordered the country’s top state-owned energy firms to secure energy supplies, meaning anything that comes out the ground and can be combusted, “at all costs.” It is probably a strong signal about how concerned China is regarding keeping the industry going, and more importantly, the winter that is just around the corner. I’m fairly sure it still isn’t enough for “that” phone call to be made from Beijing to Canberra. And if Chinese steel and aluminium smelters are going to be shutting down for extended periods, you can be sure that will reverberate through global supply chains. Don’t expect global PPI data to show “peak stagflation” anytime soon.

None of that is going to be good news for Europe either, who will now be in a gloves-off bidding war with Asia for spot energy supplies. Russia, whom Europe have foolishly tied their energy security to, have hinted that Gazprom might be able to pump more gas if only Nord Stream 2 approval could be hurried up a little. Subtle. Vladimir Putin and Scott Morrison make strange bedfellows. But as they cast their glances towards Europe and China, I am sure they are rubbing their hands with glee and going to bed with smiles on their faces.

Asia spot natural gas prices are now trading at near the equivalent of $180.00 a barrel of Brent crude, meaning that oil’s appeal as a gas substitute for power generation is almost irresistible. Damn the torpedoes on emissions targets as well, get me coal. OPEC+ may not offer much solace either. No details have emerged from the JTTC meeting ahead of the OPEC+ Ministers meeting on Monday. Reuters is reporting that OPEC+ is only considering a one-month hike of 800,000 bpd in November, with no increase in December to offset that. So basically, a one-month NPV of the planned rises. The last time I saw compliance data from OPEC+, it was at 116%. That suggests that OPEC+ is struggling to pump enough to meet its present targets, let alone ramping up production. It then needs to be pumped, loaded on tankers, and transported. After a torrid 18 months for OPEC+ producers, (does anyone remember the negative price WTI futures debacle?) the opportunity to refill government coffers may be irresistible. Whichever way you cut it; shorting oil is only for the brave with very deep pockets. I am expecting Riyad’s hotlines to start ringing a lot more.

Over in the United States, a deal funding the US Government until December 3rd was passed. Kicking the can down the road didn’t save Wall Street, where equities slumped into the quarter’s end. An infrastructure bill vote happens in the House this morning Asian time. But the $3.5 trillion build-back better package looks to be in trouble, both from within the Democrats themselves where the “progressive wing” looks intent on progressively marching to defeat in next year’s mid-terms, and without from the Republicans. Both bills and a new debt ceiling face a Republican brick wall in the Senate. If it all looks like a mess, it is, and markets are reacting appropriately as nerves fray.

One group I hope to hold their nerve, are those central banks moving towards tapering quantitative easing, most especially the Federal Reserve. Introducing some two-way volatility into equity markets and cutting out the cancer of never-ending asset price appreciation is long overdue. About eight years overdue in fact. The cost of capital in corporate finance parlance is not zero, and the worlds’ central banks need to stop stealing the wealth creation of our children and grandchildren to keep the lights on today. If that means a taper-tantrum or two and other creative destruction, then so be it. Sadly, I know too well where the Fed, BOE and ECB’s - insert central bank here - happy place is if things start looking really wobbly, and so does the market. Don’t get too bearish on equities, property and yes, cryptos just yet.

Hong Kong is on holiday today, as is Mainland China, which won’t return to the office until next Friday. That will mute liquidity in Asia and possibly explains why oil prices are not reacting to the Bloomberg story, although industrial metals are easing this morning. Asia released its first of the month dump of Jibun Bank and Markit PMIs along with Japan’s Q3 Tankan Surveys. Starting with Japan’s Tankan, the Large-Manufacturer Index beat at 18, but the Large Non-Manufacturing survey was an underwhelming 2. Ostensibly good news for manufacturing, looking under the hood, it shows that input and output prices are rising rapidly. And non-manufacturing is clearly taking a Covid-19 hit. This Tankan may be a high-water mark as those underlying pressures hollow out Q4’s outlook. Net net, market impact is minimal with Japan’s markets more focused on events overseas and what fiscal goodies the new Prime Minister will wheel out.

The Markit Manufacturing PMIs across Asia Pacific were a mixed bag. Australia showed remarkable resilience given the scale of its lockdowns, rising to 56.80. Taiwan and Japan eased, but remained expansionary, while South Korea rose. ASEAN was a mixed bag, with the region showing some signs of recovery, especially Indonesia where Covid-19 cases have slumped. Nevertheless, Indonesia aside, ASEAN remained in contractionary territory below 50.0 and the Asia North/South divide remains as stark as ever.

We get more PMIs from across Europe today, but the street is going to be more focused on the circus on the Hill in Washington DC, and US Personal Income and Expenditure, as well as ISM Manufacturing PMIs. Sentiment is fragile after last nights weekly Initial Jobless Claims rose unexpectedly, raising the spectre more of recovery slowdown fears. My understanding is the number was distorted by California moving jobless claimants of the expired Federal package and onto a State one. Nevertheless, it is clear that markets are in a dark mood and the US data needs to put in a good show tonight to avoid an ugly end to a torrid week for equities. A jump in personal expenditure and income may not assist anyway, as it will put tapering nerves back on edge.

A quick look into next week makes me think it will be just as frisky as this one despite China being on holiday. Apart from all the ebbs and flows of everything else I have outlined above, none of which is going away next week, it is also a US Non-Farm Payroll week. Additionally, we have three central bank policy decisions in the Asia-Pacific. India and Australia will remain on hold with their rate outlook of most interest. We also have New Zealand where the RBNZ postponed a planned rate hike due to the Covid-19 outbreak. Auckland still remains fenced in but it will be interesting to see if the RBNZ thinks the country’s containment measures have achieved enough success for it to follow Norway and hike.

Asian equities slump

Wall Street endured a torrid end to the quarter, posting another punchy down day although the forces of rotation were evident between growth and value in the main indexes. The S&P 500 fell by 1.16%, with the Nasdaq retreating by just 0.44%, while the Dow Jones slumped by 1.62%. We have seen rotation flows within the big three at work all of last week, which suggest to me that the market is quite indecisive about which way to point at the moment. Notably, no short-covering has occurred in Asia today, and futures on all three have fallen again by around 0.45%.

Hong Kong and Mainland China are closed for holidays, but the negative forces from energy concerns, Covid, US debt ceilings, US Congressional standoffs, global growth concerns, stagflation etc, take your pick, are as evident in Asian markets as they were in US markets overnight. The Nikkei 225 has slumped by 2.0% with the Kospi tumbling by 1.40% and Taipei slumping 1.65%.

In regional markets, Singapore is 1.25% lower, while Kuala Lumpur has fallen by 0.50% and Jakarta by 0.70% after the Finance Minister signalled income tax rises on the high earners and raised sales tax. Bangkok is 0.20% lower while Manila has bucked the trend, rising by 0.35%.

An announcement by the Australian Prime Minister that Australia’s borders would reopen in November, to vaccinated Australians, has had zero impact on markets down under. The ASX 200 and All Ordinaries have tumbled by 2.10% and 2.0% respectively, with Singapore iron ore futures falling by 3.70% and copper falling by 0.80%.

The dark mood sweeping markets is unlikely to reverse course by this afternoon, meaning that European equities are likely to open lower. Weak PMIs this afternoon could further dampen that mood before we see whether the buy-the-dip mafia on Wall Street chose to remain on the sidelines.

A mixed session for currencies

A slight easing of US yields overnight, and some profit-taking, pushed the dollar index slightly lower, falling 0.13% to 94.24, before recovering to 93.40 in Asia. As long as risk-aversion sentiment and the repricing of the Fed taper remain foremost though, the index remains on course to test 94.75 by next week.

The headline moves disguised quite a lot of jostling amongst the major currencies. USD/JPY has fallen 0.62% to 111.20, tracing out a double top at 112.05. A slight fall in US yields helped the Yen but most of the fall in USD/JPY can probably be attributed to exporter selling and haven buying of Yen by nervous Japanese investors. Only a fall through 110.50 delays the USD/JPY rally.

EUR/USD continued to edge further under the 1.1600 pivot level and is trading at 1.1575 today. Unless it recaptures 1.1650 in the next few sessions, technicals will continue pointing to a much larger move lower to 1.1200. Some EUR/GBP selling and GBP short-covering lifted GBP/USD to 0.35% to 1.3475 overnight, although GBP/USD has retreated in Asia to 1.3455. With the recovery rally running out of steam so quickly, the signs still point to deeper losses to the 1.3200 region. Only a rise through 1.3600 changes the bearish outlook. USD/CHF has fallen 0.30% to 0.9310 and it would appear haven-buying is helping to cap USD/CHF’s advance. It remains in a well-defined uptrend though targeting 0.9480.

The sharp drop by AUD/USD and NZD/USD this week probably flushed out exporter buyers overnight as they rose by 0.70% and 0.50% respectively to 0.7230 and 0.6900. A slight weakening of the US Dollar assisting. Both have edged slightly lower today and will continue to be buffeted by swings in risk sentiment. AUD/USD would have to rise above 0.7350, and NZD/USD above 0.7000 to change what is a very bearish outlook in the currency environment. NZD/USD may get help from the RBNZ next week if it finally hikes rates to 0.50%. However, that is likely to be reflected in AUD/NZD weakness with bigger forces driving the US Dollar at the moment.

Asian currencies will not have stable PBOC USD.CNY fixes to lean on for support of the next week with China on holiday. Asia FX continues to trade to the weaker side versus the US Dollar as markets reprice the reality of the Fed taper and higher energy prices weigh on the region. A soft Non-Farm Payrolls next Friday is likely needed to reduce the pressure on Asian currencies, as that would mollify Fed tapering concerns temporarily. Asian currencies are falling again today and it is notable that two of the worst performers are the Thai Baht and Indonesian Rupiah, which are amongst the most vulnerable to a Fed taper. USD/THB and USD/IDR have risen by 0.40% today to 74.254 and 14,315.00. Interestingly, USD/PHP continues to find resistance ahead of 51.00 while THB and IDR retreat, suggesting that the BSP remains on the offer for now.

Oil markets are remarkably calm in Asia

Oil prices had a volatile session overnight, trading in a large range. Ultimately, though, both Brent crude and WTI finished almost unchanged, up 0.30% at $78.35 and $75.05 a barrel. In Asia, the absence of China has had an immediate impact on volumes with both contracts almost unchanged at $79.50 and $75.00 a barrel.

If China’s state-owned energy companies have indeed been instructed to “do whatever it takes” to secure winter energy supplies, it is unlikely that oil prices can fall very far, even if most China buying occurs in the natural gas and coal markets. Similarly, the Reuter’s reporting around Monday’s OPEC+ ministerial meeting leaves me with the impression that the grouping is only prepared to, or can only apply a band-aid to the energy supply crunch.

Therefore, although speculative oil futures markets could see some sharp intraday moves lower, as occurred yesterday on OPEC+ hopes, they are likely to rebound just as quickly, inevitably meeting a wall of buyers on the dips. The scramble for pre-winter energy supplies from the Northern hemisphere heavyweights is not something that can be magically alleviated by physical markets in the short term.

Brent crude’s overnight low at $76.70 is initial support, but only a daily close under $76.00 temporarily changes the bullish outlook. It has resistance just above $79.00 followed by $81.00 a barrel. WTI has support at $73.00 a barrel, which held overnight, with resistance at $76.00 and $76.60 a barrel.

The potential for disappointment from the OPEC+ meeting on Monday is high. A one-month increase of 800,000 bpd in November just won’t cut it for markets scrambling for energy supplies. Nor, it appears, is OPEC+ overly concerned right now either, with a chance to replenish state coffers seemingly irresistible right now. Don’t expect much hope from the world’s swing producer, Saudi Arabia either. A unilateral weekend announcement opening the pumps, for example, would undermine its leadership and the cohesion of OPEC+.

Gold optimists return

It seems that you just can’t keep the gold bugs down for long, even if the light at the end of the tunnel is the train coming the other way. Gold staged an impressive rally overnight, rising by 1.76% to $1757.00 an ounce, a $30 move. There was no clear singular reason for gold’s powerful rally, US yields and the US Dollar edged only slightly lower, and nothing materially changed in the world, with US jobless claims only slightly higher than expected. In Asia, gold has hardly moved, easing slightly to $1753.00 an ounce today.

I would certainly agree that the uncertainty sweeping the world has prompted risk-hedging buying and rightly so. Still, despite seeing those flows all week, gold had still sunk until yesterday when it unwound the whole week’s losses. Some loading up ahead of the one-week China holiday may have seen greater than usual haven flows, but the whole move smacks of hope and false optimism and speculative zeal over reality.

This looks like a sucker's rally to me as none of the fundamentally bearish factors for gold, the Fed taper, higher US yields and a stronger US Dollar, has changed. Join in the fun at your peril. Gold has resistance at $1763.00, the overnight high, followed by $1780.00 and $1800.00 an ounce. Support is distant at the $1622.00 double bottom followed by $1720.00, $1700.00 and long-term support in the $1680.00 an ounce region.


Jeffrey Halley
Jeffrey Halley Senior Market Analyst, Asia Pacific, OANDA

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