The US Senate has slapped a fiscal band-aid over the US debt ceiling saga this morning, voting to raise the $0.50 trillion and temporarily extend its cut-off to early December. The can kicking exercise by the Hill was enough to provide temporary relief for US equities and looks like to overshadow the return on Mainland China market from the Golden Week holiday.
Interestingly, US bonds refused to get caught up in the hype in what has been, despite the deafening noise volumes, a sideways week for many asset classes. US Initial jobless Claims dropped unexpectedly to 328,000 overnight and bonds remained firmly on taper watch into this evening’s pivotal US Non-Farm Payrolls data. That is sensible in my opinion as come early December, the Democrats will be forced to use reconciliation to pass a more meaningful debt ceiling legislation, while at the same time likely using the same process to pass their multi-trillion spending packages through the US Senate. Ignore the short-term noise from the FOMO-gnomes of the equity market, this story still has a lot more to give.
Japan has formally pencilled in October 31st for a snap lower house election. Newly installed Japan Prime Minister Kishida has also announced instructions to his cabinet to compile economic stimulus measures for an extra budget to be submitted after the election. Following a positive debt sticking plaster session from Wall Street equities, news that the hoped for fiscal goodie bag has been confirmed has seen the Nikkei 225 soar by over 2.0% this morning. I do note though, that the Nikkei is now as subject to the fast-money whims as US markets these days, and a very high Non-Farm print tonight could evaporate today’s rally on Monday.
China markets have returned from a week-long holiday and inevitably Evergrande, and what to do with it, will resurface once again. Another medium-sized China property company defaulted on an offshore bond this week, and there is no sign of Evergrande or its subsidiaries, US Dollars for offshore holders of debt so far either. That said, the whole mess is likely to be overshadowed today by the Caixin Services PMI, which rebounded sharply in September to 53.4, as Covid restrictions were eased. The Composite PMI rising to 51.4 as a result. With markets this week having an investment horizon as far as their big toes, the short-term positives from the PMIs are lifting Mainland equities higher to start the day.
The other main event to watch today will be the Reserve Bank of India policy decision. The RBI is likely to leave policy rate and repo rate unchanged at 4.0% and 3.35% respectively. Inflation has been stagflation for a long time now in India and it will be interesting to see if the RBI decides now is the time to start unwinding monetary stimulus. As a giant energy importer, the rise in energy rises internationally will worsen that outlook and increase the pressure on the Indian Rupee which has looked very wobbly of late. Easing their foot of the peddle should support the currency in the short term and the timing is probably riper now than previously, as the country emerges from the slump of the last pandemic wave. Expect plenty of volatility after the release at 1230 SGT today.
Germany’s Balance of Trade will attract greater attention this afternoon as well, after August Industrial Production slumped by -4.0% MoM (-0.40% exp), as supply chain bottleneck bit. That weighed heavily on the Euro overnight, falling against the Sterling and remaining unchanged versus the greenback, even as the US Dollar fell against other G-10 currencies. A sub EUR 15 billion print is likely to increase the downward pressure on the Euro, which looks highly vulnerable to further US Dollar strength anyway.
All roads lead to tonight’s US Non-Farm Payrolls data which will decide, in the market’s minds, whether the start of the Fed taper is a done deal for December. The volatile ranges seen this week across asset classes suggest that is so except for energy. I do not believe that markets have priced in the Fed taper and its implications to any large degree yet. Even a weak number tonight probably only delays the inevitable for another month. Still, there is very much a binary outcome to tonight’s data. A number well below 500k equals buy everything sell US Dollars. A number 500k and above equals sell everything, but US Dollars.
Asian equities power higher as China returns.
Wall Street’s rally continued into a third day overnight after the US Senate agreed to temporary extension of the US debt ceiling until early December. The S&P 500 rose by 0.83% while the Nasdaq powered 1.03% higher, and the Dow Jones rallied 1.0% higher. Futures on all three, in keeping with the past few days, have continued their rally in Asia. Futures on all three up by around 0.20%.
That has set Asia up for a positive start to the day with the return on Mainland China markets having no particular event risk. Combined with the announcement of a post-election supplementary budget, the Nikkei 225 has leapt higher by 2.05%, although the Kospi has risen just 0.35% despite impressive Samsung earnings.
Mainland China markets have also rallied strongly on their return, with the Evergrande situation temporarily of the front pages. The Shanghai Composite has jumped2.0% higher while the CSI 300 is up an equally impressive 1.35% in what appears to be a case of no news is good news. Property nerves are weighing on Hong Kong though after Fantasia, who defaulted this week, had trading in tis bonds suspended. The Hang Seng is down 0.20% today.
In regional markets, Singapore has edged 0.25% higher while Taipei, perhaps with one eye on President Xi’s speech on Taiwan this weekend, has fallen slightly, down 0.15%. Kuala Lumpur is 0.25% higher, but Jakarta has jumped by 1.0% Bangkok is 0.65% higher with Manila soaring by 1.65%. In Australia, the All Ordinaries and ASX 200 have climbed by 0.75%.
With the overnight rally continuing into Asia, European markets are set for another positive opening this afternoon, having ignored weak German data yesterday. We are likely to see some position squaring ahead of the US Non-Farm Payrolls data, however, and that will probably limit gains. As I have outlined above, the US data is the pivotal moment of the week for markets and will give a very binary outcome if the data diverges from market forecasts of 500,000 jobs added.
The US Dollar edges lower on Senate debt deal.
The US Dollar gave back some of its recent gains overnight after a short-term US debt ceiling compromise increased investor risk appetite and a rotation out of US dollars. The dollar index finished only slightly lower though, falling just 0.04% to 94.20, thanks in part to weak German data eroding the Euro. In Asia the index has resumed its climb, rising to 94.26. Overall, my expected range of 93.50 to 94.50 has held well though the week.
Currency markets continue to take a less reactionary stance then equities, helped in part, by US yields remaining stubbornly at the high end of the week’s ranges. That suggests that currency markets and bond markets are taking the threat of a Fed taper rather more seriously than the equity space and that tonight US data will be pivotal. A high print should see the dollar index retest 94.50 and rise into next week. Conversely, a disappointing print will delay taper expectations and lead to short-term US Dollar weakness.
Weak German data capped EUR/USD overnight and saw EUR/GBP sold heavily. EUR/USD remains near the bottom of its weekly range, at 1.1500 this morning. The single currency remains vulnerable to more US Dollar strength and robust employment data tonight sets up EUR/USD for another move lower targeting 1.1400 next week. Resistance at 1.1600 and 1.1650 look safe for now. GBP/USD continues to flirt with its breakpoint point, trading at 1.3610 in Asia. The rally by Sterling is mostly due to EUR/GBP selling, driven by weak German data and hawkish comments from UK officials. Rallies toward resistance at 1.3650 have been well contained and strong US data tonight could see Sterling’s sell-off resume. USD/JPY has continued creeping higher to 111.85 today as US yields remain anchored at recent highs, ignoring the short-term exuberance in equity markets over the debt ceiling compromise. A weekly close above 112.00 will signal further losses for the Yen into next week.
AUD/USD and NZD/USD have risen modestly to 0.7310 and 0.6930 as investor caution ebbs after the debt ceiling compromise. Both remain vulnerable to a firm US Non-Farm print tonight if that swings market opinion back to the Fed taper. With Covid-19 cases spreading and rising in New Zealand, which is tempering RBNZ hiking expectations, the Kiwi looks the more vulnerable of the two. Strong US data could see NZD/USD retest 0.6800 next week.
The return of Mainland China markets has passed with a whimper, with the PBOC adding just CNY 10 bio of liquidity and setting a neutral USD/CNY fixing at 6.4604. Onshore CNY is trading on the firmer side of the fix at 6.4500 today, lending some support to regional Asian currencies which have suffered at the hands of a stronger US Dollar this week. One notable exception is USD/INR, which has continued firming overnight and this morning ahead of the RBI policy decision shortly. Forex markets look poised to sell INR once again if the RBI remains fully on hold, and a test of 75.000 looms into the end of the week. Once again, Asian currencies face a very binary outcome one US employment data is released. On hold today ahead of the data, a high Non-Farm print will resume the downward pressure on Asia FX, while a weak number will provide some short-term relief.
Oil prices rebound.
As expected, oil’s sell-off proved very temporary and oil prices rebounded sharply overnight. Brent crude rose by 2.0% to $82.45, and WTI leapt 2.50% higher to $78.85 a barrel, with no indications from government that any reserves from the SPR would be released onto the market. The return of China Mainland markets today has seen the rally continue, with both contracts 0.50% higher to $82.85 and $79.20 a barrel.
The Russian inspired sell-off in natural gas prices has quickly come to a halt with prices steady overnight, as the markets digest the reality of the high in rhetoric, but low in specifics nature of the announcements. With China in the market “at all costs” for energy supplies and no instant magical panacea for Europe and the UK’s energy woes, the Russian announcements were never likely to have more than a transitory effect. By default, that will continue to support oil prices. Similarly, China’s announcement allowing Inner Mongolia coal mines to ramp up production has had zero impact, emphasising that higher prices are the path of least resistance.
With the relative strength indexes (RSIs) on both contracts moving lower into neutral territory, oil prices now have plenty of room to continue rising from a technical analysis perspective. Brent crude has initial support at $79.50 but only a fall through $76.00 a barrel would alter the bullish outlook. Resistance is nearby at $83.50 a barrel, and a test of $88.00 a barrel cannot be ruled out next week. Likewise, only a fall through $73.00 would alter the bullish outlook for WTI. A rise through resistance at $80.00 a barrel opens the door for further gains targeting $84.00 a barrel initially.
I continue to expect any oil price sell-off to be short-lived given the physical demand out there on spot markets for energy. Likewise, I expect the US Non-Farm Payroll data to only have a short-term impact on prices, not a structural one.
Gold trades in narrow range ahead of US data.
Gold prices held steady at $1755.00 overnight, rising slightly to $1758.50 an ounce in Asia this morning. The usual pre-weekend, pre-data risk hedging by Asian investors accounting for the modest price rise. Overall, though, gold remains confined within a narrow $1750.00 to $1770.00 an ounce range as it awaits the US Non-Farm Payroll data this evening.
Like other asset classes, the US data presents a very binary outcome for gold prices. Weak data should see gold rise back towards $1800.00 as tapering expectations are reigned in. Conversely, a strong number puts the Fed taper front and centre. US yields and the US Dollar are likely to rise, and gold’s medium-term descent should resume.
Gold has initial resistance at $1770.00 an ounce, followed by $1790.00 and then the formidable $1800.00 to $1810.00 zone, containing the 100 and 200-day moving averages. Support lies at $1750.00 initially and strong US data should see gold retest support at $1720.00 an ounce. A weekly close below $1680.00 signals a much deeper correction is in place extending below $1600.00 an ounce.
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