By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
The $2.8 billion antitrust fine levelled upon Alibaba by Chinese authorities this weekend has set the tone for the Asian equity market this morning, which are a sea of red. Perversely, Alibaba’s stock has rallied as the fine wasn’t as bad as it could have been. (roughly 4.0% of sales) However, it is the thought that counts, and investors seem concerned that Alibaba will not be the last China tech giant in the fine firing line.
Federal Reserve Chairman Jerome Powell has added some peripheral nerves stating the US economy is at an “inflection point” during an interview on 60 minutes. The US recovery is balanced out by the downside risks of surging Covid-19 cases globally.
Another likely source of tension is US bond yields which rose on Friday after US PPI data printed much higher than expected. Although US equity markets shrugged it off, US index futures have retreated this morning, adding another negative for Asian markets, which were notable for their caution last week. The US has three, ten and thirty-year bond auctions this week, and bid-to-cover nerves have risen.
Japan PPI printed above expectations this morning at 0.80% MoM, with the YoY data also outperforming. Inflation nerves won’t be assuaged anytime soon, with the global calendar bookended by US CPI for March tomorrow evening, and China Q1 GDP, Industrial Production and Retail Sales on Friday. India also releases March CPI this afternoon. With the Indian Rupee slumping after the Reserve Bank of India quantitative easing announcement last week, a print above 5.50%, as it grapples with another wave of Covid-19, could renew pressure on the currency and local equity markets.
Asia has three central bank announcements this week, starting with the Reserve Bank of New Zealand and Singapore on Wednesday, followed by the Bank of Korea on Thursday. All three will remain unchanged, but it will be the policy statements that hold the most interest as ever—notably, their outlooks for growth and inflation.
Australia sees the release of Employment data on Thursday, which should retreat from last months blowout of 89,000 jobs added but still come in around 40,000, although it is a volatile series. The lucky country may run into a few headwinds this week, though, as the government basically threw their vaccination schedule for 2021 into the rubbish bin this morning due to AstraZeneca production and import issues, as well as age-related restrictions for its use.
Covid-19 complacency by financial markets may continue to be tested this week. Australia’s issues are being replicated thanks to AstraZeneca safety concerns globally, and export bans by Europe, India and even the US, which is sitting on 20 million doses. Johnson & Johnson’s one-shot vaccine is also under a blood-clotting spotlight, and an Israeli report this weekend suggested the South African variant could bypass the Pfizer BioNTech shot. None of this is good news for the reopening of borders and travel bubbles, and one thing markets have not priced, is Covid-19 lingering for longer; perhaps they should.
Geopolitics doesn’t respect viruses, and the heatmap has hotspots continuing to rise in intensity. The US warned China over Taiwan today, with China continuing to play games with fleets of ships over the Spratly Islands. Meanwhile, tensions continue to escalate on Ukraine’s Eastern border as the Russians and their vassals’ build up military forces. Iran’s most important nuclear facility has suffered an unspecified “incident” this weekend as well, immediately blamed on the Israelis. Iran’s response, Russia’s “peacekeeping”, the list goes on, and any one of these hotspots could throw an unexpected banana skin under global markets. Despite President Biden’s election last year, the world still has plenty of countries run by chest-thumping alpha males.
Looking at the above in totality, it is not surprising that Asian markets look a little hesitant today. Of the above, I would say that the US CPI and Core CPI and its 10-year and 30-year auctions have the potential to impact markets most. Although US equity markets with the return of the FOMO gnomes to power have shrugged off the inflation story, other asset classes in the US and across the globe have shown a high correlation to the US 10-year recently. I have suspected that the US yield story had not gone away. This week’s data calendar will give plenty of ammunition to prove me right or wrong.
Asian equities under pressure
Asian equity markets are under pressure on several fronts today, sending the region’s bourses lower across the board. Lower US index futures, China’s big-tech clampdown, inflation, Covid-19 and vaccination delays regionally, geopolitics; investors can choose their poison.
On Friday, US stocks shrugged off the US PPI data, with the S&P 500 rose 0.77%, the Nasdaq climbing was 0.51%, and the Dow Jones leaping by 0.89%. In Asia today, though, the futures on all three have fallen by 0.30%, tempering even Wall Street’s eternal optimism.
The Nikkei 225 has fallen 0.55%, with the Kospi today’s outperformer, rising a miserly 0.10%. In China, the Shanghai Composite has declined 0.80%. Further clampdowns on China technology companies have sent the CSI 300 tumbling by 1.85%, with the Hang Seng falling 1.15%. If the sell-off accelerates this afternoon, it will be interesting to see if China’s “national team” emerges to “stabilise’ markets.
Elsewhere, Singapore, Kuala Lumpur and Taipei are 0.45%, while Jakarta and Manilla are unchanged. Bangkok has fallen 1.30% as Covid-19 cases materially increase in Thailand, and the Nifty 50 futures are 1.70% lower, pointing to a torrid start for India’s markets this afternoon.
European and UK markets are likely to open lower, not being immune to the negativity sweeping Asian markets and US index futures.
The US Dollar edges higher in Asia
With risk concerns aplenty this morning, the US dollar index has risen 0.10% today to 92.26, after rising 0.12% on Friday, in a day marked by large ranges amongst DM currencies and very choppy trading. Although ignored by US stock markets, the rise in US treasury yields stopped the US Dollar sell-off in its tracks, and abruptly reversed its course.
EUR/USD is almost unchanged at 1.1890 today, and although it may face some pressures from a stronger greenback this week, the breakout of its falling wedge formation is still very much in play. EUR/USD would need to fall through 1.1700 to invalidate its bullish technical outlook. Sterling’s outlook is somewhat cloudier, with vaccination fears and EUR/GBP buying continuing to pressure the cross. GBP/USD is at 1.3688 today, just above support at 1.3675, a triple bottom and its 100-day moving average. (DMA)
USD/JPY remains in consolidation mode at 109.60, but both the Australian and New Zealand Dollars appear to have run out of upside momentum, suggesting that peripheral risk concerns in currency markets have increased. AUD/USD hit a brick wall ahead of 0.7700 last week, and a loss of 0.7600 implies a retest of 0.7500. NZD /USD failed multiple times at 0.7070, and failure of 0.7000 risks a retest of the low 6900’s.
In Asia, those risk concerns are also making themselves felt. Although USD/CNY is steady at 6.5550 today, USD/KRW and USD/INR have spiked 0.45% higher, while USD/IDR has risen 0.35% to 14,625.00, through the central bank’s line in the sand at 16,500.00. The Thai Baht has also fallen, with USD/THB increasing 0.30% to 31.563. Covid-19 will be driving the Won, Rupee and Baht weakness, while the rise in US yields has had an immediate impact on the Rupiah. I expect the central banks of all four countries to be in “smoothing” today.
The moves in the Australasians and Asian markets highlight the increased risk sensitivity over rising Covid-19 cases and the potential for higher US yields again this week. Investors ignore those warning signs at their peril, with complacency reaching record levels last week from the author’s point of view.
Oil markets unchanged in Asia
Oil markets edged lower in New York on Friday, as the US Dollar strengthened modestly. Overall, the trading was directionless as both Brent crude and WTI continue consolidating in the middle of their one-month ranges, awaiting new directional inputs. It is a similar story in Asia, with Brent crude unchanged at $63.00 a barrel, and WTI unchanged at $59.30 a barrel.
In the bigger picture, Brent crude continues to trade noisily between $60.00 and $65.00 a barrel, and WTI’s between $57.50 and $62.50 a barrel. Intraday sentiment and flows continue to dominate proceedings. A breakout of those wider ranges will signal oil’s next directional move.
Gold retreats on higher US yields
Gold’s correlation to the US 10-year bond continues, with higher yields on Friday pushing gold lower by 0.67% to $1744.00 an ounce. Gold has edged another 0.30% lower to $1738.50 an ounce in quiet Asian trading.
Gold tested and failed at the 50.0% Fibonacci retracement level at $1760.00 an ounce on Friday, for the second day in a row. That suggests that US yields will have to move markedly lower this week, or gold rediscovers its haven mojo, for that level to break, opening up further gains.
For now, gold looks set to trade quietly in a $1730.00 to $1760.00 range, with Bitcoin seemingly the safe-haven asset of choice at the moment. In the meantime, gold remains at the mercy of the US 10-year Treasury yield.