2021 has been another strange year, so you wouldn’t completely dismiss a phone call like this from Beijing to Canberra. Australia probably has ready stocks available after China’s import ban last year. Still, President Xi is more likely to tell his citizens to put on extra layers of clothing this winter than make that phone call.
It’s not just China, however, with energy issues, the entire Northern hemisphere is now sweating (or is that chilling), on whether the forthcoming winter is mild or cold, because only a win for Team Mild is likely to bring relief from higher energy prices. Brent crude traded above $80.00 a barrel overnight, before sharply retreating as speculators booked profits, helped along by a surprise rise in US API Crude Inventories of 4.127 million barrels. Like MacArthur, it shall return.
Apart from energy, there were plenty of other doom and gloom scenarios giving equity markets are reason to pummel stocks overnight. The US debt ceiling will need to be passed line by line by the Democrats alone through the Senate. The $3.5 trillion spending bill is in trouble as well, not just from Republicans, but also by the progressive wing of the Democrats. They clearly haven’t heard of the terms mid-term elections and unemployment. President Biden has though, and he is cancelling a trip to knock heads.
We had hawkish comments from Fed President Bullard last night and even Fed Chairman Powell, in congressional testimony, was less dovish than previously, suggesting that the conditions for a Fed taper were locked and loaded. Elizabeth Warren said she would vote against his reappointment as well, calling him dangerous. US data was mixed with confidence indicators and the Richmond Fed Manufacturing index retreating, while the Case-Shiller house price index continued climbing at a race that would make Space-X envious.
That was all enough to send equities tumbling overnight and US 10-year yields higher to 1.55%. Although stagflation is now being mentioned ad nauseum, a concern mentioned many times by this newsletter in the past, but nobody listened, I believe we are facing a stagflation-lite and not stagflation-heavy. Growth remains expansionary, but if energy markets carry on the way they are going, growth momentum will slow even as input costs rise. There is not much monetary policy can do about that, the only cure for high prices is high prices and more winter woollies.
Markets to finally seem to be coming around to the author’s premise that some sort of taper tantrum is going to occur in Q4 as the reality of the Fed tapering finally pokes the most one-eyed equity bull. Rice tech prices, built on stratospheric growth forecasts in a rampant bull market, will come under stress is 10-year yields approach 2.0%. Which likely explains their bronze medal last night. The knock-on effects will be felt far and wide though. ASEAN currencies will suffer as the regions monetary policy settings move out of sync with the US. You can pop Japan and Europe into that equation as well, possibly China if the energy crisis deepens. Gold will face a lot more downside pressure and it will be interesting to see how appealing cryptos become in a higher US interest rate US Dollar bull market. Let’s hear it for the hedge against risk, currency debasement mantra Bueller. Bueller? Ferris Bueller? Elon Musk’s Twitter account may need to be super busy in Q4 to keep that party going.
To be clear though, I am not expecting a big-bang taper tantrum, more of a creeping reality bites one. We may have to get used to a lot more two-way volatility in equity markets as a result, which will be no bad thing. Even after a Fed taper, interest rates are going nowhere, anywhere in the world. And you can be sure if things get ugly, the world’s central banks will be there to backstop the whole mess once again. Even if equity markets fell 10 to 15%, we would still be in a bull market, so let’s keep it real.
Today Japan’s LDP selects a new prime minister. Timing is everything, and the doom and gloom noise in international markets will drown out any response locally to whomever wins. USD/JPY is, and continues to be, a US/Japan yield differential play, so any fallout on the currency will be non-existent. Only if the new Prime Minister says there is no reason to open the fiscal stimulus taps again will Japanese markets react negatively, as much of the recent Japanese equity rally is based on just that premise.
China has apparently asked state-backed firms to start picking up Evergrande assets. That is probably the first hint of the China solution. A state-backed asset stripping leaving a faint core, looking like a dwarf star post super-nova. Evergrande is due to make another US Dollar coupon payment today of around $47 million. I fully expect that not to happen, as with last weeks, with the company making full use of its 30-day grace period. It will add another cloud to a bleak landscape today.
The data calendar is quiet in Asia today with just the Bank of Thailand policy decision due later. Rates will be held at record lows of 0.50% although the Finance Minister has already been on the wires exhorting the bank to be “accommodative.” They already are, and Thailand isn’t Turkey. Nevertheless, with my comments above in mind, there is precisely zero reasons to be long the Baht right now. You can probably add the Rupiah, Dong, Won and Peso into that group as well.
The situation in the United Kingdom appears to be going from bad to worse as well. The British Pound collapsed overnight as petrol shortages persist at service stations, thanks to the panic-inducing bank-run qualities of the British press last weekend. Britain has plenty of fuel, just no truck drivers to deliver it. A problem now affecting vast swathes of the UK economy in a post-Brexit no-visa world. Stagflation could be a real problem here in the months ahead, and if the winter is cold, a winter of discontent beckons, and unfortunately Boris isn’t Churchill. “Sell sterling your majesty?” “Yes Mortimer, sell.”
Looking ahead over the next 24 hours, two data points leap out to me. Firstly, official US Crude Inventories this evening. Energy markets really need a chunky rise in inventories to take the heat out of energy markets temporarily. Secondly, China’s official Manufacturing and Non-Manufacturing PMIs and the Caixin Manufacturing PMI. If they are soft once again Asia is in for a torrid end to the week, something that will probably spill into Europe and the US this time. If you think things couldn’t get murkier, China then goes on holiday for a week from Friday with Evergrande unresolved. Add in shenanigans surrounding the US debt ceiling and spending bills on Capitol Hill and there are not many reasons to suggest the investing world will be a safer place by the end of the week.
It will be interesting to see if the Tina, fomo-gnome, dip-buying army look at this as an opportunity to do what they do best.
Asian equity markets sink of Wall Street woes.
Asian equity markets are showing a distinctive North/South split today. The Northern Asia heavyweights, with the highest beta to the US tech rally and China, and will the highest percentage of speculative zeal, have plummeted. ASEAN markets, with less technology darlings and a high percentage of old school banks and property heavyweights are down, but much less so.
The sharp rise in US yields overnight, broke the already fragile spirit of Wall Street, helped along by testimony from Chairman Powell that wasn’t as dovish as hoped, and rising fears over the US debt ceiling. The S&P 500 slumped by 2.04%, while the Nasdaq plummeted by 2.83% and the Dow Jones fell by 1.62%. As Wall Street reluctantly assimilates Fed tapering implications, it is not yet clear whether the buy-the-dip army has finally been halted. Index futures on all three indexes have rallied by over 0.50% in Asia, suggesting a Napoleonic retreat from the gates of Moscow is not yet a done deal. We have also been led to water quite a few times by rising yields in the US, only for it be found wanting.
Japan markets, the centre of much speculative fervour of late have tumbled, the Nikkei 225 is down 2.83%. The Kospi is also suffering, falling by 2.0%. In China the Shanghai Composite has fallen by 1.80% followed by the CSI 300, down 1.55%. Hong Kong is calm comparatively, perhaps with one eye on the US futures. The Hang Seng is only 0.65% lower.
Singapore is a bastion of calm, the STI climbing 0.05% today. Kuala Lumpur is down 0.40% with Jakarta also modestly in the green, up 0.15%. Taiwan though, has plummeted by 1.80% in keeping with its Northern Asian neighbours with its heavy weighting towards tech. Bangkok and Manilla are both down 0.40%. Australian markets are also lower with the ASX 200 and All Ordinaries falling by 1.0%.
The stabilising of base metal prices and the rally by US index futures appears to have limited the fallout in ASEAN markets today, along with a lower beta to technology in favour of cyclical sectors. That is likely to be of cold comfort to Europe though, which will head south this afternoon, although like ASEAN, I suspect the losses will be more limited. Much will depend, I believe, on whether the rally in US index futures in Asia is sustained or turns out to be a false dawn.
The US Dollar rises on higher US yields.
The US Dollar marched higher overnight, benefiting from a rise in US yields after a less-dovish Powell, and small amount of risk aversion buyers. The implications of a Fed taper have been making their way through currency markets for a while now, even as equity markets stayed in their own dreamland space. The dollar index climber 0.35% overnight to 93.74, before easing slightly in Asia to 93.70 as US equity futures rally. The index is now locked and loaded for a further rally above 94.00.
EUR/USD was side-lined overnight, easing to 1.1685 this morning. !.650 to 1.1750 continues to contain nicely. The British Pound suffered, GBP/USD tumbling by 1.20% to 1.3540 as petroleum shortages persist and winter of discontent fears rise. GBP/USD crashed through major support at 1.3610 overnight and this sets up a much larger move lower targeting 1.3300 initially. The spike higher in US yields lifted USD/JPY 0.45% higher to 111.50 overnight. It will ignore the politics of a new Japanese PM today, and a daily close above 111.70 will signal the start of a directional move higher targeting 114.00. Much will depend on the direction of US yields, however.
AUD/USD and NZD/USD tumbled by around 0.70% overnight on rising fear gauges, with AUD/USD catching an energy price tailwind today, rising 0.20% to 0.7250. NZD/USD has continued falling by 0.15% to 0.6950 today after Covid-19 cases spiked in Auckland. If the delta variant jumps the fence around Auckland, NZD/USD has a lot more downside having broken support at 0.6980 overnight.
Asian currencies retreated overnight, led by the Won and the Baht. If we are indeed on the cusp of a taper repricing in markets, the Thai Baht, Korean Won, Indonesian Rupiah and Philippine Peso will be the most vulnerable with monetary policies completely out of Fed-sync. High energy prices and a reopening economy appear to be sparing the Malaysian Ringgit from the fallout for now. China’s PBOC continues to set neutral USD/CNY fixes signalling which will provide some stability to the Asian FX space.
US API Crude Inventories and speculators sink oil.
Brent crude rose over $80.50 a barrel overnight before speculative longs rushed into book profits after the US API Crude Inventory data showed a surprise 4 million-plus rise in stocks. Brent crude ended the day down 1.50% at $78.20 an ounce. WTI failed ahead of $77.00 before falling 1.30% to $74.40 a barrel by sessions end.
With the relative strength indexes (RSIs) on both contracts in overbought territory yesterday, the odds of a speculator-driven pullback were high. It is likely to be only a stay of execution though, with natural gas and coal prices high and China’s energy deficit hogging the headlines. The RSIs have moved back to neutral now as well meaning oil from here is likely to be a buy on dips.
Prices are almost unchanged in Asia today, with nearby support in Brent crude at $78.00 a barrel. Only a fall through $76.00 a barrel will temporarily change the bullish outlook. WTI has support at $74.00 a barrel with key near-term support at $73.00 a barrel.
Gold sinks on stronger US Dollar/yields.
Gold fell by 0.90% to $1734.00 an ounce overnight before recovering slightly to $1738.00 in Asia today. A spike in long-dated US yields and the US Dollar as Fed tapering implications started to be priced by markets, pushed gold lower and it is now extremely vulnerable to more US Dollar strength. The fallout in gold has been softened slightly by risk-hedging buying, but it appears that if things stay the same, that will only slow gold’s descent.
Gold has now broken through support at $1740.00 an ounce which becomes resistance. That is followed by $1760.00 and $1780.00 an ounce. The overnight low at $1728.00 and then $1720.00 are initial support. That is followed by $1700.00 and then critical long-term support around $1680.00 an ounce. Gold looks set to test $1700.00 an ounce this week if tapering repricing continues.
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