By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA
The noise continues in financial markets, which are wasting a lot of energy vacillating between global recovery hopes and asset bubble fears this week. The US bond tantrum has introduced some long overdue two-way price action into the nearly one-year unidirectional buy-everything rally. That state of affairs is likely to continue as markets learn to live with the prospect of higher interest rates and steeper yield curves, driven by the higher input price side of the global recovery equation.
Central banks generally remain “on message,” releasing as many doves as possible, rightly concentrating on the fragility of employment due to the pandemic. Across the world, employment remains very much on fiscal policy life support, for those countries that can afford it, and some who can’t. In Asia, including China, domestic demand remains cautious, even as the manufacturing/export sectors boom. There will be limits as to how far that can recover while international borders remain closed.
One notable exception is China’s top banking regulator, Guo Shuqing. Mr Guo’s comments yesterday about bubble concerns in China property and the US and European equity markets were enough for nervous equity markets to reverse part of Monday’s impressive gains.
Such is the nature of the financial markets at the moment, though, that those comments have been quickly forgotten today. Asian equities and US index futures are rallying strongly today after an impressive Australian GDP print stoked the recovery fires again. Helping along in the background was the progress of the US stimulus bill to the Senate, and President Biden announcing the US will have enough Covid-19 jabs to vaccinate all American adults by the end of May. Thanks in part to a tactical shot of Federal money allowing J&J’s arch-rival Merck, to start manufacturing J&J’s one-shot Covid-19 vaccine simultaneously.
Inflation fears have ebbed temporarily after Eurozone Flash Inflation eased in February. For February, China’s Caixin Services PMI came in lower at 51.50, although that will be due to Lunar New Year distortions. Japan’s Jibun Bank Services PMI remained steady at 41.20. The markets are also pricing in the certainty that OPEC+ will ease production cuts this week, keeping pressure on oil prices, a significant source of the input price rises in recent months.
So, for now, the inflation genie has popped back into its bottle, allowing Asia to get back to buying equities. I doubt the little fellow will stay in there for long, though, especially with US ADP Employment, the ISM survey and Non-Farm Payrolls to come this week. All are likely to surprise to the upside. Let’s not forget the capacity of OPEC+ to surprise as well.
But that will be tomorrows story, just as the global recovery was Monday’s story, and bubbles everywhere were yesterdays. Today, the inflation demon has been slain, and it’s buy-everything business as usual. March may leave us all a bit deaf.
Asia equities rally on vaccines and Australian GDP
Equity markets are experiencing a wax on, wax off week, tail-chasing short-term momentum of whichever story carries the most weight on the day. Yesterday it was bubbles, which saw equity markets unwind part of the impressive rallies seen on Monday. The S&P 500 fell 0.81%, the Nasdaq plunged 1.60%, and the Dow Jones eased by 0.46%.
US vaccine manufacturing progress and an impressive Australian GDP print has lifted animal spirits today, though. US index futures have recovered in Asian trading, with the S&P and Dow futures rising 0.35%, and the Nasdaq futures rising 0.55%.
That has greenlighted Asia to follow suit, and regional equity markets are performing strongly. The Nikkei 225 has risen 0.25%, a muted performance ahead of a government decision on extending Covid-19 restrictions. The Kospi, though, has risen 0.70%, and China’s markets are also rallying strongly. The Shanghai Composite has jumped 1.50%, the CSO 300 by 1.25%, and the Hang Seng has rallied 1.50% higher.
Regionally, Singapore is 0.55% higher, along with Taiwan. Kuala Lumpur and Jakarta are around 0.30% higher, and Australia’s ASX 200 and All Ordinaries are 0.75% and 0.65% higher, respectively.
Assuming no headline surprises, notably bubble ones from important people, hit the wires again today, Europe should follow Asia higher. Wall Street will be a harder one to call. US ADP Employment and ISM data should outperform tonight. Depending on Wall Street’s mood, it will be received as a recovery boost, so buy everything. Or, it will be inflationary; we are all doomed, so sell everything. I shall decline to predict Wall Street’s mindset; it has the same inherent dangers as assuming what Mrs Halley is thinking about, or so I have been told regularly. Either way. I end up scolded.
Currencies mark time in Asia
Currency markets are drifting in Asia after a non-descript session overnight. The US Dollar gave back some of its recent gains overnight, with the dollar index retreating 0.28% to 90.78. It is barely changed in Asia, rising two points to 90.80 as trading among the major currencies remains moribund this morning.
It would be premature to say that the US short-squeeze has run its course with the US data set to impress this week, which may see US yields firm once again. The technical picture still points to more downside pressure on EUR/USD and GBP/USD, and more upside pressure on the USD/JPY. Support for EUR/USD remains its 100-day moving average at 1.2025, followed by 1.1950. GBP/USD has support at 1.3860, followed by the rising wedge at 1.3785. USD/JPY pullbacks should be limited to the 106.50 area.
Both the Australian and New Zealand Dollars tested multi-week support yesterday before recovering. Their rallies overnight remain modest, though, and any bubble jitters are likely to see them retest those channels. Support for AUD/USD is at 0.7740 today, and for NZD/USD at 0.7200. Failure opens up 200-point drops for both in the coming week.
Asian currencies are quiet, with the PBOC fixing USD/CNY lower at 6.4565, comfortably in the middle of the 6.4000/6.5000 PBOC comfort zone. The Thai Baht, Philippine Peso and Indonesian Rupiah have eased slightly today, reflecting investor nerves on US bond yields. Elsewhere though, the Singapore Dollar and Malaysian Ringgit have gained somewhat.
Overall, the picture of currency markets is one of wait-and-see, with the US Dollar upside being the path of least resistance still.
Oil’s rises in Asia
Oil markets finished the New York session lower once again overnight, as the market positions for an expected reduction in production cuts by OPEC+ tomorrow. The fall was helped along by an unexpectedly significant rise in US API crude inventories. Brent crude fell by 1.25% to $62.40 a barrel, and WTI fell by 1.25% to $59.45 a barrel.
The more positive sentiment sweeping Asian financial markets today has lifted oil prices as well—both contracts gaining 0.80% to $92.95 and $59.90 a barrel, respectively. Gains are likely to be limited ahead of the OPEC+ decision tomorrow and official crude inventories from the US this evening.
The six per cent fall by Brent crude in the past week is unlikely to cause too many concerns by OPEC+, but if Brent retreats much further in the next 24 hours, OPEC+ may spring a nasty no reduction surprise. At this stage, I suspect a Brent crude price of around $65.00 a barrel is their ideal comfort zone.
Brent crude has support around $62.50 and then $62.00 a barrel, with resistance at $64.50 and $67.50 a barrel. A failure of $62.00 could extend losses to $60.00 a barrel. WTI has support at $58.75 and $57.50 a barrel, with resistance at $60.00, $61.00 and $63.80 a barrel.
Gold clings on to a modest recovery
Gold prices climbed by 0.80% to $1738.50 an ounce overnight, but its recovery was tenuous, and its technical outlook remains gruesome. Gold’s fate remains entirely in the hands of movements in other asset classes, notably US bonds. Another rise in the US yields this week, almost certainly signalling a retreat below $1700.00 an ounce. Notably, gold lacks upward momentum, having tested and failed to recapture the critical $1760.00 price level on Monday.
Sentiment has ebbed in Asia, with regional investors more focused on local equity markets. Gold has eased by 0.20% to $1735.00 an ounce this morning in quiet trading.
Gold has resistance at $1740.00 and $1760.00 an ounce, its 50% Fibonacci and breakout point. Its next support is at $1680.00 an ounce, the 61.80% Fibonacci retracement. Failure clears the way for a much deeper fall to the $1600.00 an ounce region.