Markets indulged in a choppy but ultimately range-trading day overnight. Equities and bonds moved sideways, while base metals had a mixed day as did energy, where oil remained steady but natural gas gave back some of its recent gains. The exception was currency markets where the US dollar rallied aggressively versus both developed and emerging market currencies.
There was no obvious driver behind the move. The overnight central banker forum stayed in Team Transitory, although that mantra appears to be falling on more and more deaf ears. Much talk was made of the reality of the Fed taper, something that has been telegraph ad nauseum by the author in recent times. However, before jumping on the “team taper” bandwagon with regards to the overnight US dollar rally, I would note that currency markets may also be being distorted by end of quarter and end of month rebalancing flows. I’d like to see the US dollar hold on to all its gains and possibly advance further before jumping in with both feet on that. Although US yields have risen, equity markets are still trading sideways in the big picture. The scale of those moves is not yet consistent with a full-on taper repricing.
Certainly, Asia-Pacific equity markets are not in taper-tantrum mode, with price moves heading in polar opposites across the region. That may be due to the various data inputs we have seen in Asia today after what was a sideways session for most asset classes in New York overnight.
South Korean Industrial production outperformed year-on-year, but underperformed month-on-month for August, falling by -0.70%. MoM retail sales also lagged falling by -0.80%, although once again, the YoY data outperformed. While the South Korean data was unspectacular, the Japan data was disappointing. MoM industrial production fell by a whopping -3.20% for August and retail sales MoM slumped by -0.40%. Covid restrictions will be dampening retail demand and should improve as restrictions are lifted this week. But industrial production is challenging with car manufacturing and electronic devices leading the charge lower. The new Japanese Prime Minister said as much, blaming supply-chain woes and semiconductor shortages. Mr Kishida has promised to open the fiscal pumps again and looking at the data, it comes none too soon.
China’s PMI data was a mixed bag. The official NBS Manufacturing PMI for September fell into contractionary territory at 49.60, while the Caixin PMI rose slightly to 50.0. Official Non-Manufacturing PMI rebounded from last month's sharp drop as Covid restrictions eased, jumping back to 53.2. The data itself won’t be filling the street with confidence though against the developing background of China’s energy shortages, the relentless “shared prosperity” crackdown, and the Evergrande situation. Yesterday it was the turn of banking trading floors with government officials arriving to put a clamp on excessive speculative trading and ordering trading spreads to be tightened. With China on holiday for a week from tomorrow, the manufacturing PMIs are unlikely to rebound anyway for October.
In contrast, Australian data was relatively healthy. Building permits leapt higher by 6.80% MoM for August, and MoM private sector credit expanded at a healthy clip, rising by 0.60%. With a lower Australian dollar overnight, natural gas prices holding up, iron ore rallying ahead of the China holiday and an earlier easing of restrictions being dangled by the NSW Premier, it's perhaps not surprising that Australian equities are rallying today.
Sentiment in Asia appears to be receiving a modest lift from news that a deal to extend funding of the government until December this year seems to have been agreed upon among Senate leaders. Markets love kicking the can down the road almost as much as outright certainty. It is unlikely to be enough to lift the gloom across most Asian markets entirely though.
Except for German inflation this afternoon, the rest of the day's data calendar is second tier. US Q2 GDP Prices and Growth and Q2 PCE Prices will be old news. US markets are likely to be much more engaged with happenings on Capitol Hill today, with Thursday a pseudo deadline for the debt extension and infrastructure/spending votes across both houses.
Tomorrow's Japan Tankan survey, Eurozone Inflation and US Personal Spending and Income (a Fed fav) and ISM Manufacturing PMI will be of far greater interest. Asian liquidity tomorrow will be sapped by a China and Hong Kong holiday and markets tonight, will be left to the tender devices of month-end and quarter-end flows.
A mixed day for Asia
US equities traded sideways overnight with the S&P 500 edging 0.16% higher, the Nasdaq falling -0.24% and the Dow Jones rising 0.27% today. Early Asian markets were under pressure, but a rebound of sorts has happened after a deal to avert a US government shutdown was announced, and China’s PMIs showed stability after last month's poor showing. US index futures have rallied strongly as a result, taking the edge of Asian concerns. The S&P futures have jumped 0.50% with Nasdaq futures rallying 0.60% and Dow futures climbing 0.40%.
The Nikkei 225 and Kospi have reversed early losses, but the Nikkei 225 is still down 0.40% even as the Kospi climbs into the green by 0.10% with both countries releasing soft economic data this morning.
In China, news that Evergrande had sold a banking stake yesterday and had resumed work on some housing projects has also given markets some respite. The PBOC also added a small liquidity injection. Evergrande and China’s energy crunch still hang over equity markets, but mainland markets seem intent on going into the week-long holiday on a positive note. The Shanghai Composite has risen by 0.40%., while the CSI 300 is 0.50% higher. Hong Kong is faring worse though, with the Hang Seng falling by 1.10% so far.
Regional Asia has also reversed its early cautious sentiment after the US government funding announcement, helped along by lower currencies. Singapore has risen by 0.45%, while Taipei is 0.35% higher. Kuala Lumpur has edged 0.25% lower with Bangkok 0.10% lower, even as Manila climbs 0.70% higher and Jakarta rises by 0.85%. The US announcement, a lower currency, decent data and higher iron prices have sparked a broad rally in the ever-optimistic Australian markets today. The ASX and All Ordinaries have leapt higher by 1.30%.
With European currencies and the pound being slammed overnight by the US dollar juggernaut, pleasing for exporters, and with Asian markets recovering on the US government funding news, European markets should open higher this afternoon. With the quarter-end and month-end upon us, I expect rebalancing flows to cause choppy sessions in both Europe and the US on a quiet data day.
The US dollar steamrolls everything
The US dollar leapt higher versus DM and EM currencies overnight although it is hard to attribute the sudden acceleration to any one input. Month and quarter-end flows could be distorting markets. Equally a pricing in of a Fed taper and higher US yields, or hopes that a debt ceiling deal will be reached could equally be to blame. The US dollar may also be receiving inflows related to its bond market or from haven buyers nervous about negative developments around the world. You could take your pick from any or all of that smorgasbord as a reason to buy USD, but when looked at in totality, you would struggle to find a reason to sell the greenback and perhaps that is part of the answer. For this pilot fish of the world’s capital markets, I am content to mumble “I love it when a plan comes together.”
The dollar index powered 0.68% higher to 94.36 overnight, a huge move. Although easing slightly in a dull Asian session to 94.27, there appears to be no sign of the rally losing steam. The index reached 11-month highs overnight and technical indicators suggest it may be overbought in the near term. That could see some consolidation today, but I anticipate a test of 94.75 by early next week.
EUR/USD has fallen by 0.75% and is flirting with major support at 1.1600 this morning. Rallies should be limited to 1.1670, but a daily close under 1.1600 signals a much deeper decline is in play, potentially reaching 1.1200. GBP/USD fell 1.20% to 1.3435 overnight before recovering to 1.3455 in Asia. Britain faces its own energy and supply chain winter of discontent and has already tumbled through 1.3610 this week. Nearly 200 points lower now, the charts still indicate further losses targeting 1.3200 in the days ahead. USD/JPY has risen 0.40% to 111.85 and as a US/Japan yield differential play, could extend gains to 114.00.
Always vulnerable to a heightened fear environment in financial markets, the Australian and New Zealand dollars were stretchered off the field overnight, falling by 0.80% and 1.30% respectively. Fears over a Kurt Russell moment and a potential Covid-19, Escape From Auckland are weighing on the Kiwi heavily in the background. Both currencies have rallied today on the US funding news and the rallies in commodity prices, notably iron ore. AUD/USD has risen 0.40% to 0.7205, and NZD/USD had risen 0.25% to 0.6885. With the US dollar resplendent though, and plenty of reasons around the world to be nervous generally, both remain acutely vulnerable to heightened fear sentiment returning. Only moves above 0.7250 and 0.69050 would alleviate that.
The PBOC set a slightly weaker fixing for the CNY today at 6.4854, although in open market trading the CNY continues to trade firmer at 6.4640 with officialdom, perhaps with one eye on imported energy costs, keen to ensure the CNY goes into the week-long holiday on a firm note. Regional currencies though are under pressure and if indeed the US dollar move overnight was a Fed taper response, will continue to do so. As I have stated repeatedly, a disconnect between Asian and US monetary policy has negative implications for most countries in the region unless they want to start burning through foreign currency reserves.
Some of that may be occurring today with USD/KRW topping out at 1188.00 once again suggesting that the Bank of Korea doesn’t want 1190.00 to break for now. Similarly, the Philippine peso, logically one of the more vulnerable currencies, with stagflationary monetary policy and plenty of overseas borrowings, is finding it hard to breach 51.00. The BSP could be on top here for now. The Indonesian rupiah is in much the same boat and USD/IDR is starting to rise today, climbing to 14,300.00. USD/INR, also with reference rates well below inflation like the Philippines, has risen steadily this month and accelerated in the last few days. INR may have been temporarily boosted by investor inflows that left China and India’s hot IPO market. If that has abated, a stronger US dollar and higher US yields will weigh heavily on the INR. USD/INR rose to nearly 74.400 overnight and if the US dollar stays strong, could revisit 75.000 sooner rather than later.
The Thai baht is in a similar boat and along with PHP, IDR and INR remains highly sensitive to higher US yields and a Fed taper. USD/THB has risen to 33.914 and unless the BOT is on the offer at 34.000, looks set to book more losses in the week ahead. USD/MYR will also have a serious monetary policy disconnect, although high oil prices and an economic reopening seem to be shielding the ringgit from the worst of the US dollar rally. Nevertheless, USD/MYR has risen to 4.1880 as of today, and a close above 4.1900 tomorrow signals a move higher to 4.2200 initially.
Oil prices finished almost unchanged overnight, with Brent crude closing at 78.45 and WTI at $74.70 a barrel. In a moribund pre-China holiday session, prices are unchanged in Asia.
Despite the narrow ranges, I note two important occurrences that suggest oil prices remain very well supported at these levels. Firstly, the mighty US dollar rally overnight did not dent oil prices by one iota. Secondly, US official Crude Inventories followed the API data and posted a surprise 4.50 million-plus gain in crude stocks. Once again oil prices did not move, as opposed to the drop the day before the API data caused. That suggests that the speculative long-covering that pushed Brent crude of its highs above $80.00 a barrel may have run its course for now and that pol’s price action is far more constructive than the headline changes suggest.
The Northern hemisphere energy crisis isn’t going to disappear over the weekend, another underlying supportive factor. I also believe that OPEC+ will not be spurred into increasing their production targets next week at the JMMC meeting. The grouping has shown before that they are not reactive to short-term moves in spot markets. A China holiday from tomorrow for a week may take the heat out of the oil rally, but there are few reasons to suggest it is anything but a buy on dips.
Only a fall by Brent crude through $76.00 a barrel temporarily delays the bullish outlook while resistance lies at $79.50 and $80.70 a barrel. Similarly, WTI would need to fall through $73.00 a barrel to change the bullish outlook, while resistance lies at $75.70 and $76.70 a barrel.
Gold’s retreat continues
Gold continued its journey south overnight and given the strength of the US dollar on currency markets, I am surprised that gold only fell modestly. Gold finished the night 0.443% lower at $1726.50 after testing support at $1720.00 an ounce intra-day. In Asia, gold has risen 0.30% to $1732.00 an ounce as investors lock in some risk insurance ahead of the week-long China holiday.
Risk hedging, and if we are honest, there are plenty of reasons to want to have some at the moment, may well be playing a major part in taking the edge of the gold sell-off. However, gold still looks very vulnerable, and rallies have quickly dissipated.
Another bout of US dollar strength in US markets tonight could see gold test support at $1720.00 an ounce. After that $1700.00 offers only psychological support ahead of the critical longer-term support zone between $1675.00 and $1680.00 an ounce. Failure of the latter could well set off another wave of investor liquidation and push gold, rather quickly, as low as $1600.00 an ounce. Above, gold still faces challenging resistance at $1640.00, $1660.00, and $1680.00 an ounce.
Bitcoin gets a friend from the SEC (Who’d have thought)
Bitcoin has shrugged of US dollar strength and staged an impressive 4.85% rally to $43.500.00 today. I initially thought Elon Musk must have said something and perhaps he did. But I believe that the head of the US SEC ‘s support for Bitcoin futures may be behind the rally seen today.
The terms "SEC", "Bitcoin" and "good news" in one sentence seem terribly contradictory to me. I’m surmising that the SEC feels that regulated Bitcoin futures will afford more protection to crypto investors. Good luck with that. Call me a Defi-muppet, but I thought the whole point of cryptos, as espoused by the crypto-evangelists, was to be decentralised and not regulated? Well, my years in the market have taught me to never let common sense and stating the obvious about the emperor’s new clothes get in the way of greed, I mean short-term momentum and the facts. I look forward to seeing Gene Simmons and Kim Kardashian and this Drake chap ringing the bell one day to start trading.
A look at the technical picture, because Bitcoin is a tradeable but not investable “asset,” reveals that once again, the 100-day moving average (DMA), continues to contain Bitcoin sell-offs very nicely. The 100-DMA is at $41,350.00 today followed by a nice series of daily lows around $40.600.00. Along with the 21 September low at $39575.00, that forms quite a layer of technical support. A retest of $50,000.00 requires a daily close above $45,000.00 as a signal, or for Elon Musk to say something.
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