Easing into Monday morning

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

Financial markets finished Friday on a civilised note, after what was a very choppy week. US data saw equity markets move modestly back into their cyclical rotation happy place, while currency markets finished with some US Dollar short-covering despite US 30-year yields falling slightly. Precious metals held steady while oil rose on Gulf of Mexico hurricane concerns. In the case of the latter, a glance at the US Hurricane Centre website this morning suggests that will be a storm in a teacup. Commodities remain under some pressure as China continues to make noises about speculative excesses driving up prices. They have raised Dahlian futures margins and fiddled with VAT on imported ores, but in the bigger picture, raw materials remain not far from their recent highs. Given that China is a large net importer of ores, there is a limit to what they will be able to achieve in the medium to long term. However, in the short-term, their rumblings seem to be having the desired effect. President Biden has trimmed 500 billion or so of his infrastructure package to try and make it more palatable for Republicans in the hope of gaining bi-partisan support. The trouble is that Democrats and Republicans seem to have very different ideas about what infrastructure actually is. The Democrats definition includes societal programmes and roads and bridges, while the Republicans are sticking with tarmac. It looks increasingly likely the Democrats will have to try and go it alone on this programme, and if it stalls in Congress, that may end up doing China's commodity price work for them. Who says US/Sino relations were at an all-time low? The circus we know as the virtual currency space continues to snatch headlines. Elon Musk tweeted he remained a believer in cryptos, a handy attitude to have when you are long $1.5 billion of them around these levels, with pesky individuals known as shareholders to answer to. However, China once again showed who was the big fish, signalling a clampdown on crypto-miners. While I am not sure we've seen the end of "Peak-Musk," we did have another roller-coaster weekend of trading, with Bitcoin slumping from $38,000.00 to $31,000.00 before recovering to $35,600.00 as of this morning. Once again, I reiterate, governmental/regulatory risk now represents an existential threat to the virtual currency space. A clean break of $30,000.00 should see another capitulation trade and I can't see that loss of digital wealth not spilling over into other asset classes, at least temporarily. On the subject of equities, the Nasdaq spent last week gyrating each side of its 100-day moving average (DMA). Notably, it tested its rising support line from March 2020 a number of times but failed to reclaim it. It needs to reclaim 13,600.00 for bulls to breath more deeply once again, and preferably break above 14,100.00. The risks are still tilted towards a retest of support around 12,900.00 and then its 200-DMA at 12,600.00. That same Mar 2020 support line draws ever closer to the S&P 500 as well, today around 4080.00. The S&P 500 tested and held rising support twice last week, but failure of 4080.00 will be an ominous development. The Dow Jones, riding high on cyclical rotation, remains well clear of its similar support line. The data calendar is thin in Asia today. Singapore releases its Inflation and Core Inflation Rates for April today, expected to rise to 2.0% and 0.90% respectively YoY. Taiwan should release an impressive data-set of Unemployment, Industrial Production and Retail Sales, which will be flattered by YoY effects. We also receive Thailand Manufacturing, South Korean Consumer Sentiment plus their Manufacturing BSI tomorrow with China Industrial Profits Thursday and Malaysian Trade on Friday. The data should both reinforce the recovery theory and also that prices are rising. However, in the case of Taiwan, Singapore and Malaysia, the street will remain fixated on their escalating Covid-19 situations with Malaysia bringing in national work-from-home restrictions over the weekend as cases continue to spike. That will dampen enthusiasm for ASEAN assets until an improvement is seen. We have three central bank decisions in the region this week. The Reserve Bank of New Zealand and Bank of Indonesia tomorrow. Rates will remain unchanged with Indonesia having no room to move. With USD/IDR stuck above 14,000.00, it would be a huge surprise for BI to push its luck and cut again. Indonesia has dodged the Covid-19 bullets assailing much of Asia at the moment. The return of the country from the Eid holidays could change that balance and will likely also stay BI's hand in case more fuel is needed later. The Bank of Korea will leave its base rate unchanged as well, but I consider it the most likely of the three to start talking about a taper later in the year as domestic demand is recovering now as well. My base case though is they will not want to see the Won shoot higher and will hold steady. Much of Europe is on holiday today, which will mute activity in the Asian afternoon session. German GSP and IFO Business Sentiment tomorrow will be of passing interest, if only to reinforce that Europe's recovery is picking up momentum as those vaccines roll out. US Durable Goods and est. Q2 GDP on Thursday will give markets an insight into the trajectory of the US recovery and inflationary pressures. That story needs some fresh momentum after a series of data prints that haven't reinforced the narrative. On that basis, next weeks Non-Farm Payrolls could well be the most important of the year, coming before a live FOMC meeting in June and after the severe disappointment of the May data. Overall, the week's data calendar doesn't have a lot for financial markets to sink their teeth into. Next week, that will all change. That probably means we have another week of headless chicken financial markets ahead of us. Hang on for the intra-day volatility and sentiment swings. The Biden infrastructure/remake America package is starting to find some headlines again and may well be what drives direction this week. Cryptos may need Elon Musk to jump out of phone boxes in a Superman costume and tweet this week. (A phone box was typically a glass box with a phone that the public could use on-demand. It was powered by coins, not Bitcoins. Dr Who also used the British version to travel around time and space. Oh, never mind.) Asian equities remain bunkered down A quiet weekend of news, and a non-descript New York finish sees Asian markets content to remain hunkered down as the week starts, with much of Europe on holiday as well. On Friday, New York had a mixed finish with markets indulging in a bit of cyclical rotation after some tech gains in previous sessions. The S&P 500 slipped 0.07%, with the Nasdaq falling 0.48%, while the Dow Jones climbed by 0.37%. Futures on the S&P 500 and Nasdaq have advanced by 0.25% in Asia this morning, suggesting that last week's rage-trading will continue this week. Taiwan has risen 0.40%. The Nikkei 225 has risen by 0.40% while the Kospi is flat. The Shanghai Composite and CSI 300 are just 0.10% higher while Hong Kong has fallen 0.45% after more ructions amongst China tech executives over the weekend. ASEAN markets have hitched their cyclical recovery wagons to the Dow outperformance on Friday. Kuala Lumpur leads the region higher, rising 0.80% after oil prices spiked on Friday. Singapore is 0.35% higher with Jakarta edging up by 0.25%. Australian markets are subdued, perhaps with one eye on China's commodity price displeasure. The ASX 200 and All Ordinaries have risen just 0.15%. Asia is definitely in wait-and-see mode today, a wise course of action in my opinion. Activity will ease this afternoon with the United Kingdom the only major market open across the Western Europe area. The US open is a lottery and will depend on headline risk, but they'll probably buy the dip from Friday. The US Dollar holds Friday gains Asian currency markets are quiet today with most of Europe being on holiday today except for the United Kingdom. On Friday, the dollar index rose by 0.30% to 90.02, despite US long-dated yields slipping. Much of the underlying US Dollar strength can likely be attributed to weekend risk hedging after a volatile week across asset classes. I suspect that nerves surrounding the weekend crypto-currency session (well-founded) may also have encouraged markets to load up on US Dollars. That left the majors weaker versus the greenback, but still in consolidative ranges. The majors are almost unchanged in Asia. EUR/USD is at 1.2180, well clear of support at 1.2120. GBP/USD remains close to Friday's close at 1.4150. Only a fall through 1.4000 changes its fundamentally bullish chart pattern. At 108.85, USD/JPY remains in a 108.50 to 109.50 no man's land. The dollar index is unchanged from Friday at 90.02. A break of 88.60 or 89.30 will hint at the next directional move. Notably, the Australian and New Zealand Dollars remain vulnerable, suggesting that risk sentiment remains elevated under the calm surface of the financial markets. Dalian futures prices on iron, steel rebar and rolled steel tanked on the open, falling over 5.0% after China raised futures margins and signalled displeasure at speculative excess pushing up prices. They have since recovered but are still down for the session, possibly weighing on the Australian Dollar. It is trading at 0.7720 today, only slightly lower, but not far from important support at 0.7680. A fall by AUD/USD through 0.7680, and NZD/USD through 0.7110 will signal another down leg and likely, a deterioration in global risk appetite. Asian currencies have a quiet New York session and are almost unchanged today, helped along by a neutral PBOC fixing at 6.4408 this morning. Signals from a PBOC official that the Yuan should be allowed to appreciate, perhaps to offset higher commodity prices, have produced zero reaction in the currency market. The offshore USD/CNH, where one would expect a reaction to immediately show, remains at almost the same price as onshore USD/CNY, at 6.4320. It is likely to be a non-story unless other PBOC officials join the fray. With Europe on holiday today, the Asian FX space has a quiet 24 hours ahead of it. Hurricane fears pushed oil higher Fears that a storm in the Gulf of Mexico might evolve into a hurricane lifted oil princes on Friday. Brent crude shot up by 2.55% to $66.65 a barrel, while WTI by 3.10% to $63.85 a barrel. Oil prices have held those gains in Asia, with both contracts advancing by around 15 cents a barrel. Regarding the hurricane concerns, I have looked at the National Hurricane Centre website this morning and can see nothing developing. Here is the website if readers wish to check for themselves. https://www.nhc.noaa.gov/gtwo.php?basin=atlc&fdays=5 I can't see a thing, so it is interesting that oil prices have held onto their gains, especially with the noise coming from Iran about an agreement with the US remaining positive. It could well be after a torrid week, US markets were looking for an excuse to buy the dip on Friday, and a hurricane is as good a reason as any, tenuous as it was. Fears over returning Iranian production to international markets appear to be dimming as well, perhaps being fully priced in as prices dipped in the back end of last week. If the global recovery narrative across the US, Europe and China remains intact, oil prices should have a natural floor going forward. Brent crude is now near the middle of a wider $64.60 to $70.00 barrel range after last weeks price actions. The $64.60 level is now a triple bottom on the charts, and I believe if that holds, Brent crude should gradually edge higher this week. WTI fell out of its two-month bullish channel last week, the base of which, is just above $64.45 a barrel. That is followed by resistance at $67.00 a barrel. Last weeks lows around $61.60 a barrel are initial support and this needs to hold early this week, else a deeper correction below $60.00 could occur. Gold consolidates at the top of its range Gold shrugged off US strength on Friday, and although it traded in a narrow range, it enjoyed a very positive finish to the week. Gold rose 0.20% to $1881.00 an ounce, climbing another 0.20% to $1885.00 an ounce in Asia today. With the meltdown in the cryptocurrency markets last week, and the weekend price action, it looks like gold is receiving haven flows at their expense. The stubborn refusal of US 10-year yields to meaningfully test the top of their range, and the ensuing Dollar softness is also boosting gold's cause. With gold just below the highs of last week, it looks set to test nearby resistance at $1890.00, sooner, rather than later. That should see gold rise to $1900.00 an ounce, from where I expect option and model-based buyers to drive prices quickly to its next technical level at $1920.00 an ounce. Gold has support at $1871.00 an ounce, but its breakout at $1845.00, and its 200-DMA, remains the crucial pivot point. Only a daily close below $1845.00 suggests the bullish case has run out of steam for now.

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