By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
The inflation genie I mentioned on Friday found life rather uncomfortable in its bottle, it appears, as US yields shot higher on Friday. Notably, the long end of the curve steepened markedly, and for all the noise surrounding the rise in 10-year yields, the 30-years was where the real action was.
That was enough to unwind the intra-day rallies on Wall Street, with the rotation into cyclicals at the expense of technology very much in evidence again. That left the Dow Jones higher, the Nasdaq stretchered of injured once again, and the S&P 500 left somewhere in the middle.
The US Dollar duly reversed its intraday sell-off, finishing the session on a strong note. Most interestingly, from my point of view, was gold. For the first time in what seems forever, gold did not wilt in the face of Friday’s impressive leap in US yields. Gold managed to record a small gain for the session, which should be taken as a massive win given its performance this year.
Gold’s performance, and the resilience of non-tech stocks, hints that maybe markets are starting to get more comfortable with the prospects of higher inflation, and some degree of resulting adjustment in the costs of capital.
Equity markets in the Asia Pacific, ex-Mainland China, are vacillating each side of unchanged this morning after US index futures started today positively. Some very dovish comments from US Treasury Secretary Yellen over the weekend, no doubt helping the process along.
China data produced a mixed bag today, giving the market no real directional nudge. Industrial Production and Retail Sales outperformed YoY, but Jan-Feb Fixed Asset Investment and Unemployment both disappointed. China’s equity markets are lower today as the government’s relentless crackdown on technology and tightening financial conditions sap investor confidence. Like the Nasdaq, the Shanghai Composite’s chart shows a market well in correction territory, and the CSI 300 continues to threaten longer-term support.
It is a heavyweight week for central banks this week. The FOMC announces its latest monetary policy decision on Wednesday. Although no Fed Funds or QE programme changes are expected, all eyes will be on the governor’s “dot plots” of future rate expectations. If those are shifted forward, something I doubt given the nervousness in markets, we could be in for another bout of inflation nerves.
In Asia, Indonesia and Taiwan announce their latest policy decisions on Thursday, with both expected to stand pat. Indonesia has probably the more interesting, having cut rates last month, just before the latest bond yield spikes and US Dollar strength. The Rupiah is amongst the more vulnerable regional currencies to higher US yields and dollar strength. Expect central bank intervention to sell US Dollar to ramp up if the Rupiah weakens this week.
The Bank of Japan announces its latest decision on Friday. We expect the very dovish tone to continue with no moves on rates. More interest will be whether the BoJ will allow JGB’s to fluctuate in a wider band given the moves in yields internationally. That may alleviate upward pressure on USD/JPY, although I suspect that will be a temporary fix.
The Bank of England also announces on Thursday. Again, rate will be left unchanged. The post-meeting statement will be of more interest as inflationary pressures rise, and the impressive speed of Covid-19 vaccinations and gradual reopening’s brings the UK recovery forward. If the MPC notes these factors as worthy of consideration going forward, gilt yields could push higher, dragging Sterling along with them, especially versus the Euro.
With markets back on inflation watch, India’s WPI Inflation for February and its trade balance will e monitored closely. Data released late Friday showed India’s inflation rising above 5.0% yet again, while industrial production and manufacturing softened unexpectedly. Combined with rapidly rising oil prices pressuring the current account, India’s nascent recovery appears to be faltering, and it is in danger of slipping back into the stagflationary box canyon. Neither outcome will be positive for Indian bonds, or the Rupee, with equities also likely to struggle.
One bright spot is the impressive rise in foreign exchange reserves to $580 billion, now the 4th largest in the world. That will soften the blow on the current account due to energy prices. Still, if WPI Inflation and the WPI sub-indexes disappointed, the gloomy outlook for Indian assets may darken.
On the subject of inflation genies, despite Ms. Yellen releasing the doves over the weekend and steadying nerves in Asia this morning, I do note that sentiment of late turns on a dime in the US right now. Last Friday’s price action highlighting this risk. Although all eyes will be on the FOMC meeting midweek, do not discount US Retail Sales’ potential fallout tomorrow night. Retail Sales are expected to fall by -0.60% MoM for February. A number above zero per cent could frazzle nerves again. US Foreign Bond Investment, and Net Long-Term Tic Flows, released in the early hours of tomorrow morning Asian time, could provoke a similar reaction.
Asia equities are mixed
Cyclical rotation flows dominated Wall Street on Friday, as US bond yields suddenly spiked higher. Technology bore the brunt of the assault, the Nasdaq falling 0.59%, while the S&P 500 roses just 0.10%, while the Dow Jones climbed by 0.90%. Dovish comments by Treasury Secretary Yellen over the weekend see the futures on all three indexes up by 0.20% this morning, lending a sense of calm to Asian equities.
The Nikkei 225 is 0.30% higher today, while the Kospi is now unchanged. Mainland China’s Shanghai Composite has recovered some earlier losses but is still down by 0.40%, with the CSI 300 has fallen by 0.95%. Today’s China data was mixed, and retail sentiment remains fragile. This week, it will be interesting to see if China’s “national team” steps in once again if markets move sharply lower.
Hong Kong has climbed 0.45% as the Hang Seng rebalancing starts on a modest scale today, notably with Ali Baba Health being added. Singapore has risen 0.30%, Taiwan has fallen 0.10%, while Kuala Lumpur is 0.40% higher. Australian markets are quiet, with the ASX 200 and All Ordinaries just 0.20% higher.
Some degree of cyclical rotation is evident in Asia today, much like Wall Street on Friday night. After Friday’s bond rout, the grit of equity markets today will give confidence to European stocks at their open. Overall, it appears that the rotation from tech to cyclical recovery stocks is the preferred option to any rise in bond yields for the early part of the week. Markets are likely to range for the remainder of the session in Asia.
The US Dollar continues to play bond market ping-pong
The direct correlation between moved in US bond yields and the US Dollar saw the greenback spike higher after a surprise leap in US long-end bond yields on Friday. The dollar index is climbing 0.20% to 91.68 on Friday. The index fell this morning after US 10-year futures climbed (yields fell) but has moved back to unchanged as the bond futures moved into negative territory.
The US Dollar’s advance versus the major and commodity currencies on Friday has left the majors drifting in the middle of their weekly ranges. The Australian and New Zealand Dollars remain just below their multi-month support lines, while the Canadian Dollar has moved out of danger, for now, USD/CAD falling to 1.2480 on Friday. Overall, the G-10 group is almost unchanged in moribund Asian trading.
Asian currencies retreated in New York on Friday and have edged lower again in Asia, as USD/CNY topped 6.5000 once again. It is now in the middle of its one-week 6.4500 to 6.5500 range, and that pattern is repeated across other Asian currencies. In Asia, the Indonesian Rupiah, and the Malaysian Ringgit, somewhat surprisingly, look the most vulnerable to further US Dollar strength. Otherwise, regional markets look to be settling in for a few unspectacular sessions ahead of the FOMC, assuming US bond markets remain calm.
Oil reverses New York losses
The US Dollar strength seen on Friday in New York was enough of an excuse for traders to lock in some profits on long oil positions. Both contracts easing slightly on Wall Street. Brent crude fell 0.55% to $69.10 a barrel, and WTI retreated by 0.50% to $65.60 a barrel in what was a quiet session by recent standards.
Asian markets have been in buy-the-dip mode, though, with both contracts rising today, unwinding Friday’s losses. Both have advanced 1.05% to $69.90 and $66.25 a barrel, respectively.
Brent crude remains on target to retest $71.50 a barrel and WTI $68.00 a barrel, possibly this week. Futures spreads remain in backwardation, and dips in prices remain shallow and short-lived. Brent crude has support at $68.00 a barrel, and WTI has support at $63.00 a barrel. Both will find a procession of willing buyers if those regions are visited.
Is gold finally bottoming?
Gold spiked at low as $1700.00 an ounce on Friday after US bond yields exploded higher. Intriguingly, it rallied back just as hard, despite US yields remaining firm, and actually recorded a modest gain of 0.25%, or $1727.00 an ounce, for the day.
This is the first time in recent memory that I can recall gold not wilting in the face of such moves and behaving like the inflation hedge that so many of us expect it to be. Gold is unchanged in dull Asian trading, and if it is yet early days, but gold’s price action from here deserves to be closely monitored and could be hinting that a material bottom has formed.
Gold has support at Friday’s low of $1700.00 an ounce, with resistance at $1740.00 an ounce, followed by the $1760.00 an ounce Fibonacci break-out. Gold’s relative strength index is comfortably in neutral territory, giving the yellow metal plenty of room to manoeuvre as well. If US yields push higher this week and gold at least holds at these levels, the case for a material rally will become compelling.