By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
US Inflation duly rose by 0.50% MoM for March overnight, roughly an eight-year high. However, the print was only just above expectations, and with markets ignoring the collapse of the China trade surplus earlier in the day, it was no surprise that Wall Street said: “nothing to see here, move along.”
It would have taken a much higher CPI print to shake market confidence, and the momentum of the US recovery, with the worst is over/buy everything momentum seemingly achieving escape velocity. Calls to suspend the Johnson & Johnson one-shot Covid-19 vaccine over the same blood-clotting issues dogging the AstraZeneca one was swept aside, admittedly because the US has ample stocks of Pfizer Biotech and Moderna to replace them.
Perhaps most importantly, the overnight US 30-year bond auction passed without incident with a healthy bid-to-cover ratio. With 3-year, 10-year and 30-year auctions all successfully concluding this week, the flame of a steeper yield curve has lessened markedly.
US yields retreated across the curve, and the impact on other assets was as predictable as it was mechanical. Equity markets rallied, notably technology, the US Dollar fell, and precious metals and cryptos rallied. Oil markets also moved higher, helped along by OPEC, which raised its consumption outlook for 2021.
With markets ignoring higher inflation in the US, which is set to rise more in the months ahead, the street’s next inflexion point is likely to be China’s Friday data dump. China releases Q1 GDP, Industrial Production and Retail Sales, but it would probably take a significant deviation to upset the applecart with the sentiment trumping data. In the meantime, the go-to strategy seems to be to ignore everything and buy everything.
The Monetary Authority of Singapore (MAS) held policy in neutral this morning as expected. It also left its GDP forecast between 4.0% and 6.0% unchanged as YoY Q1 GDP crawled back into positive territory at 0.20%. Electronic and specialised machinery exports are powering the rebound, as is an easing of social restrictions in the City-state.
Likewise, the Reserve Bank of New Zealand also their policy unchanged later this morning. As ever, the accompanying statement held the most interest for markets. It contained no surprises, highlighting the balanced risk profile even as the domestic recovery continues. Recent housing control measures, and vaccination programmes being thrown into disarray worldwide with the AstraZeneca hangover mean the RBNZ is under no pressure to hint at higher future rates. With risk appetite internationally running the show, any fallout on the New Zealand Dollar should be non-existent.
India’s WPI Inflation YoY for March is released later today and may tough 6.0%. The Indian Rupee remained under severe pressure and received only a modest US Dollar weakness reprieve overnight. The RBI QE programme and India’s dire Covid-19 situation are subsuming any other factors. A 6.0% print will raise the stagflation nerves once again and is likely to be another headwind to the suffering currency, which may well test 76.00 versus the US Dollar sooner rather than later.
The data calendar across Europe and the US is second-tier for the rest of the day. Still, we do have Federal Reserve Chairman Jerome Powell and at least four other Fed Governors speaking late this evening Asia time. Any one of them could provide some short-term volatility if they deviate from the Federal Reserve playbook, especially given the buy everything recovery hype that is sweeping markets like its 2020 this week.
Finally, I will be away from this afternoon for a short break on one of Indonesia’s sunny islands. Please don’t hate me too much; I endured a swab up both nostrils this morning to make it through the airport later. Part of the benefit of living in an enormous country like Indonesia is you can move around inside it with precautions. I shall return next Wednesday.
Equity markets start on a mixed note
Equity markets are off to a mixed start in Asia, after a robust Wall Street session overnight led by big tech. Overnight, the Wall Street session was notable for investors piling back into the 2020 darlings of the S&P and Nasdaq after ignoring the higher US CPI print. With the Dow Jones lagging, ASEAN’s cyclical markets are also underperforming today, while North Asian markets are mostly higher.
Overnight, the S&P 500 rose by 0.33%, with the Nasdaq leaping 1.05% higher, as the Dow Jones edged 0.20% lower. US index futures have all edged lower today in Asia, mollifying the bullish euphoria seen in other time zones.
In Asia, the Nikkei 225 has fallen 0.40% after disappointing Machinery Tools Orders data. The Kospi has climbed 0.10%, with Mainland China’s Shanghai Composite rising 0.50%, with the CSI 300 jumping 0.80% higher. Hong Kong has leapt by 1.15%, while Taiwan has eased 0.20% lower.
Singapore has fallen by 0.15% and Kuala Lumpur by 0.10%, while Jakarta has risen by 0.80, with Manilla unchanged. Australia, meanwhile, sees the ASX 200 0.40% higher and the All Ordinaries increasing by 0.55%.
Asia is once again proving more cautious except for Hong Kong, home to many of China’s tech heavyweights. Asia appears to be taking inflation fears globally, and the ever-present threat of more China tightening more seriously than the wild exuberance of Wall Street at the moment. Covid-19 disruptions to vaccination programmes and rising cases, are much closer to home for Asia as well. Asia may underperform America and Europe this week, but that may be no bad thing in the long run.
US Treasuries send the Dollar lower
All roads lead to the US 10-year yield now, it seems, and currency markets are no exception. A firm 30-year auction and a post-inflation data fall in US yields saw the US Dollar head South. The dollar index fell by 0.30% to 91.82, with the index having now spent the last five days below its 200-day moving average. (DMA)
Developed market currencies rallied with EUR/USD climbing 0.30% to 1.1950, having broken out of its descending wedge formation last week. The single currency should test 1.2000 this week, with the wedge formation targeting further gains to 1.2200. USD/JPY has fallen to 108.90 as of this morning, and failure of critical support at 108.40 would be another confirmation that the US Dollar rally has run its course for now.
Key risk appetite barometers, the Australian and New Zealand Dollars notably, had modest rallies overnight, rising to the top of their recent weekly ranges. NZD/USD has rallied through resistance at 0.7060 to 0.7090 today after the RBNZ remained unchanged, just below its 0.7100 pivot. The fact that both Australasians have failed to join the US Dollar retreat wholeheartedly is one of the few notes of caution I have about recent price action at the moment.
Asian currencies rallied modestly overnight on US Dollar weakness and lowered US yields. Again, except for the Indian Rupee, cautious optimism rather than exuberance is typifying regional currency trading right now. With all roads leading to the US 10-year yields, I can’t blame them, and investors should keep monitoring this benchmark for the US Dollars next move.
Oil lifted on OPEC projections
Oil markets rose overnight and this morning after the US Dollar weakened, and OPEC lifted its consumption projections higher for the rest of 2021. Brent crude rallied 1.30% to $63.90 a barrel overnight, rising to $64.10 this morning. WTI jumped by 1.40% to $60.45 a barrel overnight, rising to $60.65 today.
Despite the noise, both contracts remain solidly in range-trading mode, with Brent crude trapped in a broad $60.00 to $65.50 a barrel range and WTI between $57.50 and $62.50 a barrel. I note, however, that Brent crude has traced out a series of higher daily lows over the past week. That suggests that oil is quietly gathering momentum for a retest of the upside boundaries of its recent ranges. Given the bullish mania sweeping other asset classes, that is really of no surprise.
Gold surges higher overnight
Gold’s mechanical linkage to the US 10-year Treasury yield remains as strong as ever. With yields retreating overnight after markets ignored the US inflation data, gold rose by 0.70% to $1745.50 an ounce. As has been its want of late in Asia, gold is almost unchanged at $1744.00 an ounce, with Asian investors attention more focused on the crypto-verse.
Gold’s most important resistance remains tantalisingly close at $1760.00 an ounce, its 50.0% Fibonacci retracement. Gold needs a series of daily closes above that level to confidently say that it has traced out a longer-term bottom in prices between the 50.0% Fibonacci and the 61.80% Fibonacci around $1680.00 an ounce.
Gold has support at $1720.00 an ounce, with interim resistance at $1750.00 an ounce. As I stated yesterday, gold seems destined to range between these two levels, and that outlook has not changed.