By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA
The slow, but steady increase in Covid-19 cases across Asia, ex-India, is weighing on sentiment in early Asian trading. India’s situation dominated the weekend press, but across Japan, South Korea and Thailand and others in between, Covid-19 is undermining confidence in cyclical recovery that many, including the author, has priced into their H2 2021 outlooks.
In all honesty, it is much too soon to draw conclusions on this scenario, although we will have a much better picture, I believe, in a few weeks as the situation evolves. One thing is for sure, markets have priced in the pandemic as a sprint and not a marathon. That premise could come under stress in the weeks to come, although I sorely hope I am completely wrong on this front.
Pandemic nerves are likely to be drowned out this week as it progresses as the pace of the data calendar picks up. This week’s calendar is heavy with tier-1 releases, notably China’s Industrial Profits on Tuesday and Manufacturing and Non-Manufacturing PMIs on Friday in Asia. Today, the US releases Durable Goods, House Prices tomorrow, an FOMC decision plus GDP late on Wednesday, and finishes the week with Initial Jobless Claims and Personal Income/Expenditure. The US Bond auction calendar is relatively quiet, with only 5-year and 7-year note auctions.
In Europe, Germany releases its IFO survey today and flash GDP for Q1 on Friday, which also sees pan-Europe inflation data announced. Today’s CDU Congress in Germany may also provide some fireworks.
Australia releases Inflation and RBA Trimmed Mean CPI on Wednesday, and ex-China, Asia’s calendar is busy as well. Singapore releases Industrial Production this afternoon, with South Korean Advance GDP for Q1 early tomorrow morning. Tomorrow also sees the latest Bank of Japan rate decision. Japan releases Retail Sales on Wednesday, followed by Malaysia’s Balance of Trade and Thailand Industrial Production. Friday has South Korean and Japan Industrial Production before the pan-Asia Markit PMIs released the following Monday.
Tucked in amongst that line-up is US earnings. Notably, the MAAFS report this week. Microsoft, Alphabet, Amazon, Facebook and Spotify. They should all have continued printing money; of more interest will be their outlook going forward and whether they are mollifying it, either by regulatory threats or the easing of the Zoom boom.
It was notable that US markets put the Biden capital gains tax increase quickly behind it on Friday, after much hand-wringing by markets on Thursday. Wall Street finished the week strongly as it convinced itself the measure would inevitably be watered down. Similarly, with a data calendar as juicy as this week, Monday morning Covid-19 nerves are likely to be quickly forgotten.
Two entities who will not forget, though, are the Bank of Japan and the FOMC. Having tinkered with their QE programme last month, the BOJ will be unchanged this week, although they will note the binary risks of the pandemic. Especially so as parts of Japan have entered Covid-19 restrictions.
The situation in India and elsewhere has played into the FOMC’s hands as well, with the world’s central bank’s having consistently hedged their easy money inflationary bets by pointing out the pandemic risks. Those expecting hints of a Fed taper will be sorely disappointed with the FOMC likely to be in “we told you so” mode. Net-net, the Bank of Japan and FOMC should be positive for the buy-everything trade.
Another area of complacency is the US bond market. Bond yields continue to ease, but if the US economy performs the way it is predicted over the coming months, it is hard to see the US 10-year staying around 1.50%; that number should probably start with a two. With the avalanche of data to come over the next two weeks, we should have a better idea on this front come Friday week after the Non-Farm Payrolls. Equities are at record highs, and a steepening of the US yield curve would pressure them globally, particularly in the pimped-up valuation universe of Wall Street. Gold, Bitcoin, and selected EM Asian currencies would also feel the heat in this scenario.
Another warning sign is the rush of international companies to SPAC themselves on Wall Street. The simple reason, despite the corporate PR rhetoric, is that American’s will assign US valuations to anything remotely tech no matter where in the world they are based. Grab would not be worth $40.0 billion anywhere else in the world except Wall Street. Nor would anywhere else accept a CEO holding 2.0% of the equity having 60% of the voting rights. The early investors will likely not care as SPAC-ing in the US will allow them liquidity to book profits and pass that issue on to US SPAC-holders. After ten years, Grab doesn’t even make money.
In a sense, I suspect Grab will represent “peak SPAC.” If something is too good to be true in the financial markets anywhere, my experience is that it always turns out to be the case. Only a front page of The Economist proclaiming “SPAC Forever” would be a more prominent warning sign that equity markets are overdue a correction. Add in the potential of the US bond yields to move higher, and the scene is set for an equity correction in the next couple of months.
Before my email box is bombarded, though, I do note that the world’s central banks with the decade-long free money pumps will have investors backs. Equity markets may endure a torrid correction, but I have little doubt that they will still finish the year higher than today.
Finally, my favourite “mainstream institutional the future is now” asset class, Bitcoin, remains under pressure after weekend trading. In all honesty, I have no idea why and I shall not look for “facts” to fit the narrative. I will leave the “healthy correction” to the “institutional” experts. My feeling is that the market is long and wrong above $60,000 of fiat currency, backed by tax-payer revenue, US Dollars. As mentioned last week, Bitcoin broke out of a rising wedge at $56,000.00 on the 20th of April. My target remains $42,000.00 because that’s what the knucklebones of my chart say. Having been pummelled over the weekend, Bitcoin is up around 6.0% today; maybe Elon tweeted, I know not.
Equities recover early losses
The Covid-19 nerves appear to be disappearing in the back mirror faster than expected, with Asia-Pacific markets flat to slightly higher now in morning trading. That has been helped along by US index futures moving slightly into the green in the past hour after falling at the open early today.
On Friday, Wall Street shrugged off the capital gains tax fears of the day before to close out the week on a solid note after strong US factory data. The S&P 500 rose 1.09%, with the Nasdaq rallying 1.44%, led by big-tech. Meanwhile, the Dow Jones rose by 0.66%, and despite the tail-chasing noise of last week, all three major indices finished not far from where they started for the week.
In Asia today, the Nikkei 225 has recovered its poise to rise 0.26%, while the Kospi has risen 0.60%, with the Taiex climbing 0.90% on the inevitable semi-conductor tailwind. Mainland China’s Shanghai Composite is up 0.50%, with the CSI climbing 0.80% and the Hang Seng lagging, rising just 0.30%.
Regional Asia sees Singapore gain 0.20%, with Kuala Lumpur climbing 0.45% and Jakarta easing by 0.25%. Covid-19 restrictions have pushed Bangkok 0.40% lower, while in Australia, the All Ordinaries and ASX 200 are almost unchanged.
Tech-heavy markets are modestly outperforming cyclical ones in Asia today, reflecting the price movements of Wall Street on Friday. That implies that Europe and the UK should expect a modestly positive start. Overall, markets seem content to mark time in anticipation of an accelerating data calendar starting tomorrow, and ahead of US tech-heavyweight earnings this week.
The US weighed down by yields
The US Dollar eased on Friday after the rise in US yields post-data quickly ran out of steam, with the US 10-year finishing near unchanged around 1.55%. That left the dollar index 0.49% lower at 90.83, easing further in Asia to 90.70. Most of the fall can be attributed to the Euro, which rallied powerfully by 0.68% to 1.2095 after robust PMI data alleviated slow-down fears. EUR/USD closed above its 100-day moving average (DMA) for the week, a bullish technical development. On a slow news day, EUR/USD looks set to rest at 1.2150 in the European session.
The reappraisal of the previously dismal European outlook has capped any Sterling gains versus the greenback. EUR/GBP buying has capped GBP/USD at 1.3910 even as EUR/GBP has rallied to 0.8715, just shy of resistance at 0.8720. Sterling will struggle against both as the market unwinds weeks of negative European positioning.
Both the Australian and New Zealand Dollars have added nearly one per cent over the past two trading sessions. As risk barometers, both are clearly signaling market sentiment at the moment and look set to test resistance at 0.7800 and 0.7230, respectively, shortly.
The Indian Rupee has found some respite over the past few sessions, with USD/INR falling back below 75.00. The market appears to be pricing India will move past the present Covid-19 situation, and the Rupee is benefiting from a general risk-positive attitude to Asian currencies in general. USD/INR is set to fall again today after preliminary data suggests that Mumbai and New Delhi cases could be peaking, even if the situation remains dire elsewhere.
Across Asia in general, regional currencies have rallied, with the CNY, KRW, MYR and NTD at one-month highs. Only the Thai Baht and Indonesian Rupiah are lagging. Thailand, because of its Covid-19 outbreak. The Rupiah, as markets remain concerned that the Bank Of Indonesia’s last cut may have been one too far, leaving it vulnerable to rising US yields.
Ahead of an acceleration in the global data calendar and heavyweight US earnings releases this week, the US Dollar will remain on the back foot throughout today as US yields remain benignly becalmed, allowing risk sentiment to flourish.
Oil remains in range-trading mode
A weaker US Dollar on Friday, following robust US PMI data, allowed the global recovery trade to move into the ascendant. That lifted oil prices as well, with Brent crude rising 0.44% to $66.00 a barrel and WTI climbing 0.75% to $62.10 a barrel.
Both contracts have eased by 15 cents a barrel in muted Asian trading, and in the bigger picture, the end of week price action left both contracts smack bang in the middle of their two-week ranges. The monthly OPEC+ meeting this week should be a non-event, with the Russians telegraphing as much last week. Production rises commence from next week, and that will probably serve to mute gains until markets see what effect, if any, they immediately have. Covid-19 issues worldwide, notably India, are also tempering the animal spirits of global recovery bulls.
Brent crude is trading in a broad $64.00 to $68.00 a barrel range, and WTI between $60.00 and $64.00 a barrel. A break of either side of those ranges will dictate oil’s next directional move. In the meantime, I expect both contracts to bounce around noisily between those broader support/resistance levels.
Gold suffers Palladium blues
Despite US yields and the US Dollar remaining subdued on Friday, gold struggled to hold on to its recent gains. By the end of the session, gold had retreated by 0.40% to $1777.00 an ounce, although it has crept back above $1780.00 in Asian trading today.
Notably, gold once again attempted an assault on the $1795.00 an ounce region, which was repulsed. Gold has now traced out a triple top between $1796.00 and $1798.00 an ounce.
I suspect that gold’s lunch may have been eaten by the platinum group metals, which recorded huge gains last week and finished Friday on an equally strong note. Platinum, particularly, rose by 2.0% to $1231.00 an ounce, and Palladium was rising to just shy of $3000.00 an ounce. Both metals are 0.50% higher again in Asia, lifting gold slightly by association, as supply constraint concerns continue to squeeze prices.
With so much one-directional volatility amongst the Platinum group last week, one side effect may have been to divert the fast money that would typically play in gold and silver markets for more fruitful hunting grounds. That lack of participation may have sapped the bullish momentum of gold even as US yields and the greenback give plenty of reasons to be long it.
Gold has initial support at $1769.00 and $1763.00 an ounce, followed by the 50% Fibonacci at $1760.00 an ounce. The triple top between $1796.00 and $1798.00 an ounce, $1800.00, and then the 100-DMA at $1802.50 an ounce now forms a formable layer of resistance to gold’s advance. Realistically, gold needs to close above the 100-DMA in the next couple of days, or the danger will increase that a washout of speculative longs will occur.