By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
The rumours sweeping Asia that the giant container ship blocking the Suez Canal turned out to be just that, rumours, with the Ever Given unmoving. With experts forecasting unsticking it could take weeks; Egypt formally closed the canal, meaning Asia to Europe seaborne freight face a much longer and more expensive trip via South Africa and the Atlantic. An extended closure could find its way into inflation data as freight rates must also surely rise.
Oil gave up most of its gains as the US Dollar continued rising, primarily because of Covid-19 fears as European lockdowns and its vaccination programme lurch from one train wreck to another. India, the world’s third-largest oil importer, joined Europe to effectively ban Covid-19 exports yesterday as it seeks to get in control of its escalating new wave of infections. Taken together, it becomes harder to construct a bullish case for energy in the near-term, and OPEC+’s April 1st meeting will almost certainly make no changes to the production cut schedule.
Elsewhere, the news was better. US Initial Jobless Claims slipped below 700.000 for the week, hinting yet again that the US economy is recovering quickly. President Biden doubled his jabs in arms target to 200 million in his first 100 days overnight and said that he would run again in 2024. That tempered by a weak US 7-year note auction which took some of the froth off equity markets that recovered after the positive jobless claims data.
That saw the US Dollar power higher once again, and I expect trading in currency, bond and equity markets to be very choppy and noisy over the coming days as the end of the quarter approaches. President Biden may yet play a part in next week’s fun and games as he is likely to release preliminary details of the follow-on $3 trillion remaking America package.
Although taxes will rise to pay for part of it, more debt issuance is on the way, which could be enough to lift US bond yields once again. We can expect more US Dollar strength as a result, and tech-heavy equity markets in the US and Northern Asia will once again be in the firing line. Cyclicals such as the Dow and ASEAN markets should once again outperform. That will be assisted by the news that the Federal Reserve will allow banks to resume full dividend payouts and buybacks from June. Steeper yields curves and higher dividends will support financials and increase the likelihood of repetition elsewhere, notably in Singapore.
A rise by the US Dollar next week may finally start weighing on Asian EM. Running dirty pegs to the Dollar was easy last year when everyone was selling it, and the US cut rates. That allowed Asia to cut rates to the bone mostly as well while preserving the currency value. Things get more complicated if yields rise in the US and the Dollar rallies, with domestic demand still seriously muted across Asia, even if the export machine is firing on all cylinders. Asia has no room to raise rates at the moment, so in a dirty peg world, you either start selling foreign reserves or allow currency depreciation. The joys of outsourcing monetary policy.
The Asian data calendar is once again bare, leaving the region to continue its Wall Street follow the leader pattern of the past week. Next week the calendar intensifies with China Industrial Profits released on Sunday, leading to official and Caixin PMI’s on Wednesday and Thursday. The pan-Asia Markit PMI data also hits the wires on Thursday, April 1st. Malaysian Trade and South Korean Manufacturing bookend it at the start of the week, and Thailand Manufacturing and South Korean Exports also on Thursday. With OPEC+ also meeting later on Thursday the 1st, April Fool’s Day is shaping up as the highlight of Asia’s week next week.
Asian equities indulge in Friday FOMO
Asian equities are performing strongly today after US stocks rallied overnight, with the futures moving higher today. The S&P 500 rose 0.52% overnight, with the Nasdaq climbing 0.12% and the Dow Jones rallying 0.62%. The jobless claims report boosted stocks, and cyclical rotation was evident after the Fed signalled a resumption of full bank dividends. In Asia, the futures on all three indexes have powered higher, rising between 0.30% and 0.45%, with the Nasdaq futures outperforming.
That has unleashed the Friday FOMO animal spirits in Northern Asia, with the Nikkei 225 leaping 1.75%, with the Kospi climbing 0.80%. The “national team” intervention yesterday has made boosted retail sentiment in China. The Shanghai Composite has risen 1.45%, with the CSI 300 climbing 1.10%. The Hang Seng is now 1.0% higher for the day. Taiwan has also rallied 1.35%.
Further South, Singapore has risen 0.40% while Kuala Lumpur is flat, Jakarta and Bangkok are up 0.20%. Australian markets are also higher, with bullish spirits tempered by a new Covid-19 community case in Queensland and ongoing massive floods. The ASX 200 and All Ordinaries have risen 0.55%.
With Nasdaq futures outperforming this morning, rotation into the more tech-heavy Northern Asia markets has occurred at the cyclical ASEAN ones’ expense. The performance in Asia today should be enough to lift European and UK markets, although the vaccine spat, and Europe’s lockdown will temper gains. US PCE data this evening has the potential to send yields higher if it outperforms, and that could temper the animal spirits into the week’s end.
The US Dollar continues its march higher
The US Dollar shrugged ignored the equity rally overnight, with the US Dollar index rising another 0.35% to 92.85, carving through its 200-day moving average at 92.56. That is the first close above the 200-DMA since May 2020 and points to more gains targeting 93.00 initially and then 94.30. Currency markets appear much more focused on the US yield curve for now, with the weak over note auction spurring more Dollar strength.
Asia has seen a modest US Dollar reversal, most likely driven by profit-taking and the impressive equity rallies this morning. However, EUR/USD had fallen through 1.1800, trading at 1.1780 in Asia. That failure implies deeper losses now, targeting 1.1600. Sterling rose overnight on hopes of European vaccine rapprochement and has climbed to 1.3760 in Asia. It remains some distance from the bottom of its upward channel at 1.3810, and it is too soon to say it is out of the woods.
The Australian and New Zealand Dollar went nowhere overnight, although both have climbed higher in Asia. Both Commonwealths remain in deep trouble, though, and any rise in risk-aversion sentiment or US bond yields should see their downtrends resume quickly.
Asian currencies have mostly traded sideways overnight and are generally unmoved after a slightly weaker Yuan fix by the PBOC today. Regional markets have taken solace from the equity rally in Asia today and seem content to mark time awaiting the plethora of data and further political developments next week.
With the end of the quarter rapidly approaching, currency trading is likely to get very noisy and choppy as institutional quarter-end flows and rebalancing’s dominate markets.
Oil markets consolidate, very noisily
The Ever Given refloating rumours that swept Asia yesterday were quickly quashed but could not stop oil giving back much of the previous day’s recovery. The Covid-19 situation in Europe and potentially India, along with a dearth of Asian buyers, saw Brent crude tumble 3.65% to $61.80 a barrel. Meanwhile, WTI fell 3.85% to $58.50 a barrel.
Reuters reported yesterday that Asian importers had been content to take oil out of storage rather than purchase shipments overseas, coinciding with refinery maintenance season, notably in China. The dip overnight, though, appears to have flushed some interest out, with Brent crude and WTI both rising by over 1.0% in Asian trade. Compared with the falls overnight, the retracement is modest, merely moving oil into the middle of the week’s trading range.
Despite the impressive volatility and trading ranges, oil markets have moved into consolidation mode ahead of the OPEC+ meeting on April 1st next week. It is highly unlikely that OPEC+ will change their production targets with prices looking so vulnerable, especially as the futures curves’ backwardation has disappeared. That will weigh more heavily on OPEC+ thoughts than anything.
Oil prices appear to be capped by the Europe Covid-19 situation while supported by the Suez Canal blockage and bargain hunters on the dips. The net result is a very wide and choppy range, but a range it is. Markets do look more nervous about the downside, though, and if the Ever Given suddenly floats, oil prices most likely will not. A deeper correction lower ahead of OPEC+ next week cannot be ruled out.
Brent crude has support at $60.30 and $60.00 a barrel. Failure signals further losses to $57.50 a barrel. Resistance is at $65.00 a barrel. WTI has a triple bottom at $57.35, and failure sets the scene for deeper losses to $55.00 a barrel. Resistance is at $62.00 a barrel.
Gold weathers the Dollar storm
In its quiet corner of the market, gold continues to consolidate as it attempts to form a longer-term bottom in prices, which should signal a direction rally in the month ahead. Despite a stronger US Dollar, gold fell only 0.45% to $1727.00 overnight, holding above support at $1720.00 an ounce. It has eased to $1724.00 an ounce in Asia.
Gold’s overall price action remains construction, though, and the yellow metal is attempting to form a longer-term base, between its 61.80% and 50.0% Fibonacci retracements, setting the scene for a move back above $1800.00 an ounce if all goes to plan.
Gold has support at $1720.00 and $1700.00 an ounce, followed by the
61.80%retracement in the $1685.00 area. It has initial resistance at $1755.00 an ounce, followed by the 50.0% retracement at $1760.00 an ounce.