By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
Financial markets dodged a few bullets overnight. US Core Inflation came in a smidge lower than expected at 1.30% YoY, and the headline printed at 1.70% YoY as expected. That was enough to offset a weaker bid-to-cover ratio at the US 10-year Note auction, with US yields easing slightly, lifting equity markets and allowing the US Dollar to retrace some recent gains.
The Biden stimulus package passed the House of Representatives and will likely be signed off by the President tomorrow. The $1.9 trillion will make an immediate impact and should show up in the March data post-haste. Those inflation fears that markets are so myopically focused on aren’t going anywhere in a hurry. Wall Street has one more inflation bullet to didge this evening in the shape of the US 30-year bond auction where bid-to-cover rations will once again be in focus. If US Initial Jobless Claims show a rapid improvement, we could be back to square one on inflation concerns if the auction is weak.
Asian markets appear to be focusing, though, on the announcement that senior official will meet next week in Anchorage, Alaska. Regional markets have seized on hopes that Sino-US relations could be about to improve, which will be bullish for trade and, by default, positive for Asia. Those hopes may be premature, but that hasn’t stopped animal spirits from being released across Mainland China equity markets, and their equally FOMO neighbours in Hong Kong, Taiwan and South Korea.
The European Central Bank releases its latest monetary policy decision this evening. Headline rates will remain unchanged, but given ECB officials pushback on higher European yields, the chance remains that the ECB may choose to frontload its QE programme to cap recent rises. That would be negative for the Euro in the short-term, unwinding some of its recent gains, having flirted uncomfortably with critical support in the 1.1800/50 earlier in the week.
The data calendar is quiet in Asia today, with Japan PPI coming in slightly lower. Simultaneously, Australian Consumer Inflation Expectations printed marginally higher, giving us a nil-all draw on inflation insights for Asia today. That leaves Asia to bask in China-US hopes while markets await further developments in the US this evening.
Asian equities higher on US-China hopes
The passing of the Biden stimulus through the House saw more cyclical rotation flows on Wall Street overnight. The Dow Jones rose 1.46% to a new record high, while the S&P 500 climbed 0.60%. The tech-heavy Nasdaq failed to find any tailwinds, though, despite US inflation data being slightly softer, it finished 0.05% lower. Overall, the Nasdaq performance suggests that inflation fears persist on Wall Street, amplified by the Biden stimulus and noise increasing about the President’s proposed follow-on infrastructure package. The Nasdaq remains deep in corrective territory from a technical perspective.
However, northern Asian markets are outperforming this morning after a meeting between US and China officials was announced for next week. Hopes that trade relations may improve between the two superpowers has drowned out inflation nerves today, with US index futures also performing strongly.
Although the Nikkei 225 has climbed just 0.42% this morning, Mainland China’s Shanghai Composite and CSI 300 have leapt by 2.30%, and the Kospi has jumped by 2.10%. Fellow high trade beta markets Hong Kong and Taiwan have rallied 1.60% higher.
Singapore has risen 0.85%, with Jakarta climbing 1.05% with Bangkok up 0.20%. Having outperformed this week, Kuala Lumpur has retreated by 0.65% as investors book profits. Financials and travel sectors have led Australian markets lower this morning, with the Federal Government tourism support package meeting an underwhelming reception. The ASX 200 and All Ordinaries have eased 0.15% lower.
The picture is mostly a positive one in Asia, led by the 2020-darling markets of North Asia, that have been under the pump this week. The more cyclical ASEAN markets show a lesser degree of exuberance today, signalling that European markets will rise cautiously, but not with Greater China and South Korea’s same explosiveness. Although US-Sino talks are a positive development, the inflation genie has not gone away, and sentiment could easily change direction once again if the US 30-year auction is received poorly tonight.
The US Dollar edges lower
The easing of inflation fears on Wall Street overnight saw the US Dollar continue to give up some of its recent gains, the dollar index falling by just 0.15% to 91.95. The primary winner overnight was the Euro, with EUR/USD climbing out of its danger zone, rising 0.25% to 1.1925. USD/JPY continued to consolidate gains, ranging each side of 108.50.
The commodity currencies all recorded modest gains overnight, but the Australian and New Zealand Dollars remain in corrective territory and vulnerable to US inflation developments. The Canadian Dollar climbed after the Bank of Canada held steady overnight, but USD/CAD still remains within shouting distance of long-term resistance.
In Asia today, the US Dollar has weakened slightly after the US-China announcement. However, actively amongst the major and Asian regional currencies is muted, with trading ranges remaining tight. That suggests that forex markets are refusing to buy into headline hype for now and are more tightly focused on tonight’s US Jobless Claims data and the US 30-year bond auction.
Over the past two sessions, the US Dollar’s gentle retreat has looked corrective and directly correlated to the slight fall in US yields. In the bigger picture, the US Dollar short-squeeze still looks like it has plenty to go. The Biden stimulus plan will impact US data almost immediately, raising the inflation spectre again. The US Dollar will continue to remain a buy on dips over the next few weeks.
Oil markets continue to consolidate
Having retraced nearly 50% of last week’s rally, oil markets rose modestly overnight, as both Brent and WTI consolidate recent gains. The official US crude inventory data show massive swings in inventories, gasoline and distillate volumes, but clearly impacted by the Texas deep freeze, gave no clear directional signal to the markets.
Brent crude rose 1.50% to $68.20 a barrel overnight, with WTI rising by 1.40% to $64.60 a barrel. Hopes for improvements in US-Sino relations have lifted prices again in Asia, both contracts increasing 0.50% to $68.50 and $65.00 a barrel, respectively.
Brent crude has support at $66.50 a barrel, with resistance at $69.30 a barrel. WTI has support at $63.20 a barrel and resistance at $65.95 a barrel. I expect both contracts to continue consolidating around these levels over the next 24 hours, as markets await directional moves elsewhere. Overall, oil will find plenty of willing buyers on material dips, particularly as the Biden stimulus passage is now assured.
Gold continues to show fight
Gold rose once again overnight, bizarrely as US inflation fears ebbed, leading to slightly lower yields and a US Dollar. Gold climbed by 0.65% to $1726.00 an ounce, and has risen another 0.30% to $1732.00 an ounce in Asian trading.
Gold’s price action has shown impressive fortitude, which I admit has caught me by surprise, rebounding further and faster than I expected. Nevertheless, the US inflation genie has not been slain, particularly as the Biden stimulus will be signed into law tomorrow. If gold has been consistent in one thing in 2021, it is disappointing bullish investors. The price action typically being a climb up the stairs, followed by a jump out of the window.
Until gold can recapture the $1689.00 50% Fibonacci breakout on a weekly basis, I shall remain unconvinced. Gold has interim resistance at $1740.00 an ounce. Support is at $1708.00, followed by $1689.00 and $1676.00 an ounce, Monday’s low.