The choppy week continues as markets continue to chase their tails in a light data week ahead of Friday’s US Non-Farm Payrolls main event. Overnight, firmer services PMI data across Europe and from the US was enough to flush out the buy-the-dippers in equity markets, which ignored a torrid Asian session and posted strong gains. Unsurprisingly, US technology behemoths outperformed, having been singled out for treatment the day before.
The disconnect continued elsewhere, where US yields firm, notably at the long end. It wasn’t enough to distract the FOMO gnomes of the equity market, but the US Dollar did lift itself higher over the session. Energy prices continued to surge, led by natural gas which climbed nearly 10.0% overnight. We’ll have to name it Bit-gas at this rate. On that note, Bitcoin and cryptos also continue on a burn higher, for reasons I know not. Elon Musk hasn’t said anything, but I note that the Head of the US SEC in testimony on the Hill, said that the US wouldn’t ban cryptos.
The equity rally is already fading in Asia today, with US index futures deep in the red. That suggests that despite the best hopes of the perpetual mega-bulls, the path of least resistance is lower at the moment. I am expecting the markets to continue tying themselves in knots over the next few sessions until we, hopefully, get a decisive Non-Farm Payrolls print. Higher or lower than 500,000 will do, as it will allow some clarity on the Federal Reserve taper path and positioning appropriately.
Today’s Asian data calendar is another blank canvas with retail sales data released across Europe, while the US releases official crude inventory, petroleum, and distillates data. The latter will attract more attention than usual given the ongoing spike in energy process. China remains on holiday until Friday and Evergrande stock remains suspended and has been relegated in the headlines, I doubt it will stay that way though.
South Korean September inflation eased slightly to 0.50% MoM this morning. Given the movement in global prices, that may become more challenging as time goes by but is unlikely to push the Bank of Korea into moving rates. The other main event has been the Reserve Bank of New Zealand policy decision, with the RBNZ going ahead with it previously postponed 0.25% rate hike to 0.50%. That is likely to be the first of several hikes if New Zealand’s recovery continues. The New Zealand Dollar has fallen after the announcement suggesting it was fully priced in by markets. Also adding to concern, and rightly so, are the rise in delta-variant cases in Auckland and in locations outside the Auckland fence. Experience internationally suggests that once delta is loose from a contained area, life gets more challenging very quickly and that will leave the New Zealand Dollar vulnerable to more downside.
Asian equities fade
Equity markets rebounded sharply overnight after strong services PMI data across Europe and the US lifted battered spirits. The veritable buffet of risks outlined yesterday, not least the US debt ceiling and spending packages, are all still there, but in a quiet data week, the buy-the-dip crowd couldn’t resist temptation. The S&P 500 rose by 1.05%, tech rebounded as the Nasdaq rallied by 1.25%, and the Dow Jones finished 0.93% higher.
That rally has quickly faded in Asia, with US index futures falling deep into the red, despite a lack of headline drivers. Nasdaq futures are 0.50% lower after news that Facebook could once again be having “technical issues,” but S&P 500 futures are also down by 0.45% and Dow futures have sunk by 0.35%. That momentum has waned so quickly could also be a function of higher US bond yields, but it does hint that US stocks will struggle to maintain gains ahead of Friday’s payroll data.
Japan, once again, has led Asia south today, the Nikkei 225 falling by 0.95%. the Nikkei seems to be suffering from a buy the rumour, sell the fact scenario, having bought stocks up before new PM Kishida’s appointment on the hopes that more fiscal stimulus is on the way. It is indeed on the way, but so it appears, is a proposal to hike income tax rates for higher earners and on investment income. PM Kishida also wants a fairer distribution on national income aka China’s “shared prosperity.” The fallout from that on China equities is there for all to see, and it is not a large jump to say that higher taxes and rejigged income distribution in Japan could have a similar effect.
Mainland China remains on holiday today, but Hong Kong has also fallen by 0.95%, while South Korea’s Kospi is 1.0% lower. Taipei is down 0.35% while Singapore has struggled into the green, rising 0.20% after the government signalled yesterday it was considering various international travel corridors. Kuala Lumpur is the region's standout, catching a strong commodity and energy price tailwind, the KLCI rising by 1.0% as bargain hunters circle Malaysia’s stock market. Jakarta is seeing a similar boost as well, the Jakarta Composite Index rising by 1.05%. Notably, Thailand and Manila have also rallied today as well.
Australian markets, though, are not receiving the same commodity tailwind. Banks and travel have led Australian equities lower today after the government said borders would not open to tourism until next year. APRA, the Australian prudential regulator, today tightened lending requirements for mortgage providers, which has weighed on the heavyweight banking sector. The ASX 200 and All Ordinaries have fallen by around 0.50%.
Australia aside, there appears to be a notable rotation in Asia today into the ASEAN value markets from the more tech-centric North Asian heavyweights. The latter are also heavy net energy and commodity importers, as opposed to ASEAN, which may be raising the perception that ASEAN is a more defensive play in Asia at the moment. I am cautious on that trade though, because a firm US Non-Farm Payroll number on Friday will have the Fed taper in play, and ASEAN is much more sensitive to potentially higher US interest rates.
The US dollar advances
The bull market correction of the US Dollar may have come to an end as the greenback resumed its rally overnight, boosted by firm longer-end US yields. US debt ceiling fears ebbed, and the dollar index finished 0.20% higher at 93.98, climbing to 94.05 in Asia. The index has clear support at 93.65, although resistance at 94.50 remains some distance away. That range will likely contain until the US data on Friday.
EUR/USD continues trading in a narrow range each side of 1.1600. Its rally was capped after ECB’s Lagarde said a rate hike would have no effect in this commodity price-driven environment. For once, I couldn’t agree more. The British Pound continues to surprise though after strong Services PMI data yesterday. It rose to 1.3620 overnight before easing to 1.3615 in Asia. It is flirting with its downside breakout line at these levels, and another close above 1.3620 this evening raises the possibility of a short-squeeze to 1.3750. With US yields firming overnight, USD/JPY, mechanically rose to 111.45 overnight, climbing to 111.60 today. It remains a yield differential play and this rally could easily reverse course. Only a weekly close above 112.00 might change that narrative in my eyes.
AUD/USD and NZD/USD both traded sideways overnight, but as the sentiment mood has darkened in Asia, both have been quickly sold heavily. AUD/USD has fallen 0.37% to 0.7265, and NZD/USD has fallen 0.43% to 0.6930, with the 0.25% RBNZ rate hike clearly completely priced in. Both will continue to be flung around on the waves of flip-flopping risk sentiment for the rest of the week until the US Non-Farms, hopefully resolves the picture. Of the two, NZD/USD remains the most vulnerable. With the delta-variant outside the Auckland boundaries now, a key supportive factor for NZD over the last 18 months is quickly eroding and could cause an RBNZ pause going forward.
The previous US Dollar weakness has had a minimal impact on Asian currencies this week, reflecting their sensitivity to the very real possibility, that a Fed taper will be locked and loaded after Friday’s US data. USD/THB and USD/PHP has run into mysterious walls on the upside, hinting that their respective central banks are selling US Dollars. But otherwise, Asian currencies are continuing to trade softer versus the greenback. With energy prices continuing to skyrocket, most of which is priced and transacted in US Dollars, Asia’s price taking orientation means regional Asian currencies will remain under pressure, with perhaps the Malaysian Ringgit and Indonesian Rupiah as exceptions. USD/INR and USD/KRW remain near recent highs at 74.547 and 1189.70 today. 75.000 and 1192.00 look like their respective central bank lines in the sand for now, but I don’ discount both testing those points this week. A combination of a stronger US Dollar driven by higher US yields and risk sentiment, and higher energy prices, will continue to be a toxic cocktail for regional currencies.
Oil coattails natural gas higher
An unchanged OPEC+ continued to reverberate through oil markets overnight, lifting prices, as did the near 10% overnight rally in natural gas prices. Brent crude finished 1.55% higher at $82.55, and WTI rallied 1.85% to $70.05 a barrel. Both remain around those levels in Asia as local markets digest another overnight jump in prices.
The overnight US API Crude Inventory data showed only a modest increase in crude in storage. The official Crude Inventory data tonight will assume greater importance. A tiny fall of 400,000 barrels is expected, but if crude stocks drop substantially, oil is likely to have another excuse to rally aggressively once again.
Brent crude will find plenty of support on dips to $79.00 and $76.00 a barrel. After rising through $82.00 overnight has no meaningful resistance ahead of the 2018 highs around $87.00 a barrel in its sights. WTI will be well supported on dips to$76.00 and $75.00 a barrel. Having cleared $78.50 overnight, the charts suggest that a rally to $84.00 a barrel is not out of the question.
The only caveat on further immediate rallies is that the relative strength indexes (RSIs) on both contracts are now in very overbought territory. That may signal some daily pullbacks this week but does not change the underlying bullish case for oil. Any sudden dips in prices to cull speculative longs are likely to be met with just as quick price rebounds.
Business as usual for gold
The old inverse correlation between gold and the US Dollar returned overnight. As firmer US yields and a resumption of the US Dollar uptrend pushed gold 0.55% lower to $1760.00 an ounce. In Asia, with the US Dollar continuing to rise, gold has fallen by 0.30% to $1755.00 an ounce.
It looks as though some risk-hedging is still around however, and I continue to expect gold to find some support at $1750.00 and $1740.00 an ounce with resistance at $1785.00 capping gains into Friday’s US data. More important support lies at $1720.00 an ounce, with the $1800.00 to $1810.00 an ounce zone, containing the 100 and 200-day moving averages, forming a formidable zone of resistance.
A firm US Non-Farm Payroll number on Friday will put the Fed taper back in play with no ambiguity. That will see the gold downtrend resume with renewed momentum.
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