Blancmange versus Pavlova

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,

The data prints have been coming thick and fast since US GDP last night for Asia, with several notable releases across the region this morning with more to come. The overall picture is more of a messy blancmange than a clear thematic picture so beloved by financial markets. I will attempt to work through it all systematically to create a beautiful Kiwi made and invented pavlova instead. (step away from the pav Australians) Overnight US Advanced GDP for Q1 rose by 6.40%, an impressive result, but not quite the 7.0% that many, including the author, had expected. Digging through the sub-indices, the headline number was dragged down by a fall in inventories, suggesting that logistical constraints and chip shortages impacted the numbers. That is a theme that reappears later. US markets had sold bonds ahead of the numbers in anticipation of a blow-out increase, with yields retreating slightly afterwards, leaving US 10-year and 30-year yields only marginally higher. Given that President Biden announced yesterday that he wants to add another $1.8 trillion of government spending to his ever-growing pile, that wasn't a bad result for bonds. One gets the feeling, though, that bond vigilantes have an increasingly itchy trigger finger. The neutral result on bonds fed through to an equally neutral result for currency markets, with the dollar index barely changed. In Asia, this morning, official China Manufacturing and Non-Manufacturing PMIs for April printed at 51.1 and 54.9, respectively, expansionary but well below expectations. The NBS explained that chip shortages and logistical constraints had impacted the headline numbers, very much the theme we are seeing from around the world at the moment. Conversely, the China Caixin Manufacturing PMI rose above expectations to 51.1. The Caixin index is more narrowly concentrated, encompassing a population of SME's weighted towards the Eastern seaboard, than the broader official PMIs. Divergence isn't unusual, and the Caixin number should limit the damage from the fall in the official index, although it may play catchup next month. China's five-day Labour Day holiday, which starts tomorrow, may also have played its part, with factories winding down ahead of it. Japan is also on holiday from Monday to Wednesday next week, and there are a plethora of Labour Day holidays scattered across the world, including Asia. Today will likely mark a nadir of activity in Asia until next Thursday, famous last words. Another headwind for China equities today is the ongoing clampdown on China big-tech. Along with fines for Tencent, Bloomberg reports that the government regulator is imposing restrictions on the financial arms of 13 major Mainland tech firms, including JD.com and Didi Chuxing. With the clampdown on data harvesting and monopolistic practices expanding, China equities faced headwinds today despite the PMI data, and that will inevitably spill over to those listed in Hong Kong as well. South Korean Industrial and Manufacturing Production YoY rose in March, although the MoM data fell. The latter is somewhat odd given the Lunar New Year effects on February output. I will concentrate on the YoY component and assume the MoM will correct in future releases. Retail Sales also outperformed, rising by 10.90%. The overall picture suggests the uneven Asian recovery is on track, with South Korea, being at the centre of the semi-conductor vortex, set to outperform. Japan's Jibun Bank Manufacturing PMI rose to 53.6, outperforming for the 3rd month in a row. Tokyo CPI, though, fell on a YoY basis by -0.60%, worse than expected. Where goes Tokyo, goes the rest of Japan, and as such, we can expect the Bank of Japan to keep the pedal to the metal for the foreseeable future. Notably, though, Japan unemployment also fell to 2.60%, but the deflationary environment is clearly capping wage-price pressures, even as underlyingly, Japan Inc seems to be doing ok. Australian Prive Sector Credit rose by 0.40% MoM in March but eased on a YoY basis to 1.0%. The most significant gains were in the mortgage and business credit areas, suggesting that Australia's recovery remains on track despite the divergence in the data. Commodity prices have hit record highs overnight, another tailwind for the lucky country. Singapore Bank Lending for March rose to SGD 691.0 bio, slightly higher than February. DBS Bank has announced record quarterly results and suggests that Singapore's recovery is making steady progress. It will, however, have its limits until borders reopen with the City-state. The re-emergence of community Covid-19 infections will limit gains today on the STI much as they have done in Australia and New Zealand in the past, countries with almost identical Covid-19 exclusion policies. Picking the bones out of all of that, I would reach some tentative conclusions. The recovery in Asia remains on track, as it does in the US, but is uneven. Covid-19 remains a threat in Asia. Logistical bottlenecks, and semi-conductor shortages, are now a global issue, making their presence felt everywhere. That may mollify the pace of global recovery in developed countries but will not derail it. The unintended side effect will be a rise in prices and thus inflation. Investors remain worryingly complacent to the threat of a spike in US yields because of inflation. It may not end up being as transitory as I thought when one adds in the Biden spending agenda. May should provide more clarity on which way the wind is blowing. On a final note, if one were to ponder what could derail the US technology hegemon and possibly the cryptocurrency space, I suggest you look to China's technology companies and their relationship with their regulators. Big government is back, and not just in China. I'm off to have some pavlova, happy Friday. China PMIs and regulators weigh on Asian equities China's lower than expected official PMI's and its escalating regulation of its technology giants weigh on Asian equities today. Position adjustments ahead of the three day holidays in China and Japan next week may also be in play, and I note that US index futures are retreating in Asia, although I can see no single driver for that. Overnight, US GDP, another fall in Initial Jobless Claims, and strong US earnings propelled Wall Street higher. The S&P 500 rose 0.68%, while the Nasdaq finished 0.22% higher and the Dow Jones leapt 0.72% after impressive Caterpillar results. Asia has seen the futures on all three in full retreat, with the Nasdaq down 0.50% and the S&P e-minis and Dow Jones futures lower by 0.30%. Japan's Nikkei 225 and South Korea's Kospi are 0.45% lower, with China's Shanghai Composite and CSI 300 falling by 0.55%. Hong Kong has plummeted by 1.60%, led by Hong Kong-listed China tech heavyweights. Regionally, Singapore has climbed 0.25% on record DBA results, while Taipei is flat. Kuala Lumpur is 0.35% lower, with Jakarta easing by 0.15%. Australian markets are following China and the US futures lower, with the ASX 200 retreating 0.85% and the All Ordinaries falling by 0.70%. The somber mood in Asia is expected to flow through to a softer European open, with the China PMI data, in particular, likely to send some shivers through German markets. EU GDP is unlikely to shift the narrative, although US Personal Income and Spending this evening could lift the clouds if it outperforms, although the US bond market may have different ideas. The US Dollar gains in Asian trading The US Dollar rose in early New York trading as US bond yields climbed. But post the on expectations US GDP data, both the greenback and US yields pulled back, leaving the dollar index barely changed at 90.64. In Asia, the index has edged higher to 90.66, but overall, the US Dollar remains in a holding pattern versus the EUR, GBP and JPY heavyweights. Although activity is muted in the DM space, the negative US Dollar chart patterns remain in play, despite the sideways price action. EUR/USD is at 1.2115 today and targets further gains to 1.2250 in the days ahead. GBP/USD is at 1.3940, and still appears to be gathering momentum for a serious test of resistance at 1.4000. USD/JPY has recovered from its lows at 107.50 to 108.85 this morning, with a break of 108.00 or 109.30, signalling its next directional move. AUD/USD and NZD/USD retreated overnight, but their bullish falling wedge chart patterns remain intact for now. A rise by AUD/USD through 0.7820 targets 0.8000 next week. Similarly, if NZD/USD climbs past 0.7300, it should target 0.7400 next week, although a failure of 0.7200 now delays that outcome. Asian currencies rallied after the US GDP numbers overnight, notably the previously unloved Thai Baht and Indonesian Rupiah and Indian Rupee. Meanwhile, USD/CNY hovers near weekly lows at 6.4635. Although the fall in Northern Asia equities has seen the US Dollar trace modest gains today, the overall picture suggests that the global recovery trade remains ascendant. Activity will be muted in Asia next week due to the Labour Day holidays. Still, if currency markets negotiate the Personal Income and Expenditure data from the US this evening, the Asian FX rally should resume next week. Only a spike in the US yields this evening would derail that premise. Oil prices power higher One asset class that did like the US GDP numbers was oil, with Brent crude and WTI exploding higher overnight. With the start of the Northern Hemisphere summer and the US recovery continuing to power ahead, and with India and OPEC+ seemingly priced in, oil's rally resumed in earnest. Brent crude rose through significant resistance at $68.00 to $68.50 a barrel. WTI took out $64.50 a barrel, as it powered 1.85% higher to $64.85 a barrel. Both contracts have given back some gains from overnight in Asia, after softer China PMI numbers and profit-taking set in. Brent crude and WTI easing 0.40% to $$68.25 and $64.60 a barrel, respectively. Despite the lull in Asia - something we can expect to continue into next week due to long China and Japan holidays - the technical breaks higher overnight signal that oil's longer-term rally has resumed. A weekly close at or these levels this evening will be a powerful bullish signal in its own right. Brent crude should now target $70.00 and $72.00 a barrel in the weeks ahead, with support nearby at $68.00 followed by $66.00 a barrel. WTI should now target $66.00, followed by $68.00 a barrel, with $64.50 forming an intra-day pivot point. Only a fall though $62.00 invalidates the bullish technical picture. Although I expect oil to trade sideways into the US Personal Income data and Michigan surveys, only a resulting spike in US yields will be enough to derail a bullish weekly finish. Given that situation would be due to an improving US outlook, any sell-off tonight is likely to be temporary. Gold retreats on US data Gold was the major loser from the positive US GDP data series overnight. Gold traded in a volatile $25 range but finished the session 0.55% lower at $1772.00 an ounce. Notably, once again, gold attempted to rise above $1790.00 an ounce in early New York trading, but was repulsed. Bulls can take some heart that the $1760.00 an ounce Fibonacci support was also tested, but also held. In Asia, gold is trading on the soft side, falling 0.30% to $1755.80 an ounce, with no sign that Chinese or Japanese investors are hedging portfolio risk into the holiday breaks by buying gold. That suggests that despite US bond yields being only slightly higher, the softer side of the market is down. Gold has resistance at $1790.00 an ounce, followed by a double top and the 100-day moving average in the $1800.00 an ounce area. Support is nearby between $1755.00 and $1760.00 an ounce. Resistance is now formidable ahead of $1800.00 an ounce, while downside momentum remains modest, suggesting that $1755.00 to $1790.00 an ounce contains today. However, a rise by the greenback and/or US long-dated yields this evening will spell trouble for gold. A clean break of $1755.00 an ounce sets gold up for a potentially rapid and disorderly fall to $1725.00 an ounce as long positioning rushes for the exit door.

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