By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
Financial markets in Asia are off to a subdued start today. The weather has delayed the opening of Hong Kong markets while the PBOC USD/CNY fixing was nondescript, and Covid-19 concerns are weighing on a number of regional markets. The data calendar is exceptionally light today as well. However, the pace on the front accelerates impressively as the week moves on, culminating in the one ring to rule them all, the US Non-Farm Payrolls on Friday.
Wall Street finished the week on a positive note, with equity markets boosted by President Biden’s retreat on linking the bi-partisan infrastructure package to his social spending programmes. Bond yields firmed on that news which boosted banking stocks, which were already moving higher after passing the Federal Reserve stress tests with flying colours. That has lifted expectations of a bumper series of buybacks.
The weekend news was relatively sedate, with China Industrial Profits (YTD) YoY released yesterday. Industrial Profits rose 83.40%, a retreat from last month’s 106.10%. Price increases and the ongoing chip shortage were notable headwinds and YoY base effects are starting to ease.
Malaysia’s Balance of Trade and Thailand Industrial Production are the only Asian data of note today and there also, base effects from last year are starting to ebb, as they will be for much of the region going forward. Both sets of data will show healthy increases, but Covid-19 is most definitely on the mind of Asian investors this morning, and will subsume any upside surprises.
Across the region Covid-19 restrictions are eroding sentiment. Malaysia has extended is MCO national lockdown once again. Thailand has tightened restrictions in Bangkok. Jakarta, where I am based, is in a dark place, with cases surging, with that pattern being repeated across Java. In Australia, the Greater Sydney area lockdown was widened, and Darwin also entered a snap lockdown with the trans-Tasman air bubble suspended until the end of tomorrow. Milder restrictions in the Wellington area of New Zealand were all extended.
Although much has been made about the vaccine progress in the US, the UK, and Europe, Covid-19 and its new delta variant remain a severe problem for much of the world. Nowhere more so than Asia, with Japan and Taiwan also dealing with persistent virus cases and Singapore subject to still-severe, domestic restrictions. I have stated before that resurgent Covid-19 posed the largest threat to the post-pandemic economic bounce across Asia. We are not there yet, but if we are at this point this time next month, many economic forecasts will need to be revisited for surgery.
Circling back to China, I am not expecting too many downside surprises this week. The week will be dominated by China’s official Manufacturing and Services PMIs, released Wednesday, and the broader Caixin Manufacturing PMI, released Thursday. Services should remain robust around 55.0, but manufacturing could be vulnerable to downside surprises, as price input increases and chip shortages bite. That said, China’s communist party spends the week celebrating its 100th birthday, so to some extent, the week will be scripted. The PBOC added CNY 20 billion in liquidity to the financial system today visa the repos, and I am expecting Mainland China equities to be remarkably resilient this week.
Europe releases National Consumer Confidence data tomorrow which should show an improving trend. Wednesday sees the US releases ADP Employment, which will see a rejig of Non-Farm Payroll forecasts, although it has been a very poor indicator of late, ahead of Thursday’s Initial Jobless Claims.
Thursday, being the ist of the month is huge. Asia, Europe and the US all releases official and Markit Manufacturing PMIs. That will give the world a much clearer idea of the direction of travel for the global economy. Most notably, weather rising material prices, labour shortages, and chip shortages are slowing the pace of the recovery. You can cut the cake both ways on this front. Rising prices equals rising inflation equals sell everything and but Dollars. Or rising prices equals slowing demand equals lower bond yields, so buy everything and sell US Dollars. Given the US 10-years have crept back above 1.50% and the US Dollar has held of its gains against Asia FX and most of them versus Developed Market (DM) FX, I am inclined to go with the former.
US Non-Farm Payrolls finish the week, and the market reaction to a higher or lower than expected print should follow the playbook outlined in the previous paragraph. The one million-plus forecasts nirvana of the earlier in the year has been replaced with a less exuberant recovery, as it becomes clear that millions of Americans, for a variety of reasons, aren’t rushing back into the workforce. The street is around 600,000 jobs added at the moment, although if form follows function, that median will be adjusted as the week moves on.
OPEC+ meets this week as well, with oil prices continuing to grind higher. I suspect much of that relentless increase is due to the American’s, and not OPEC+. US shale is returning at a snail’s pace with bit the financing and production sides of the equation being badly burnt in the Covid-19 meltdown last year. Financing shale is probably a poisoned chalice for the newly woke; I mean ESG-sensitive banking community. However, the sector as a whole, will undoubtedly continue to produce large amounts of hot air. All good news for OPEC+, and I expect them to ease production cuts further, but not by too much. I believe Brent crude in a $70.00 to $80.00 range is the groupings’ happy place. Filling their coffers, but not upsetting the American’s too much.
Asian equities have a cautious start
Although Wall Street finished the week on a positive note, Asian equity markets are mostly slightly negative to start the week. Regional markets appear content to wait for a flood of tier-1 data late this week, with Covid-19 restrictions across the region also weighing heavily.
On Friday, growth trumped value after progress with the US infrastructure plans, and US banks passing the Federal Reserve stress tests leading to an outperformance by the Dow Jones and S&P 500. The S&P 500 rose 0.33% while the Nasdaq finished almost unchanged, lower by just 0.06%. In contrast, the Down Jones raced 0.71% higher. In Asia, futures on all three indexes have edged 0.10% higher.
Asian markets are mostly slightly lower. The Nikkei 225 and Kospi are down 0.10%. In Mainland China, the Shanghai Composite is 0.05% lower, while the CSI 300 has edged 0.10% higher. With the Communist Party 100th birthday this week, I expect China’s “national team” to be on the bid “smoothing” is equity market sentiment heads south. Bad weather has cancelled the morning session in Hong Kong, although it will reopen this afternoon.
Regional markets are mixed to negative. Singapore has climbed 0.13% on M&A and trade agreement talk with the UK, while Taipei has climbed 0.30%. Kuala Lumpur has tumbled by 1.10% as the national Covid-19 lockdown was extended one again. The escalating virus situation is weighing heavily on Jakarta and Bangkok as well, down 0.80% and 0.25% respectively. In Australia, escalating restrictions in New South Wales and the Northern Territories sees the ASX 200 down 0.15%, while the All Ordinaries is unchanged.
The subdued start to the Asian week is likely to continue until the middle of the week when the data calendar accelerates. The evolving virus situation across APAC will start to weigh on any gains if it deteriorates increasingly. Europe is in a different place on the virus and is likely to shrug on Asia’s woes and post a modestly positive start to the week.
Currency markets continue sitting on their hands
Currency markets appear to be on strike at the moment, with tight ranges amongst the major currencies, and seemingly determined to wait for clearer signals later in the week. The US Dollar has held much of its post-FOMC gains still, suggesting that forex markets are more nervous of another move higher in US yields than equity markets.
On Friday, the dollar index finished unchanged at 91,81, having probed the downside before a move back above 1.50% by the US 10-year yield saw it regain its poise. Yields have firmed again slightly in Asia which has seen the dollar index edge 0.05% higher to 91.85 in moribund trading. That has left the majors almost unchanged from Friday. EUR/USD is trading at 1.1925, GBP/USD at 1.3890 and USD//JPY at 110.65. Even AUD/USD and NZD/USD are showing no virus nerves, holding steady at 0.7585 and 0.7070, respectively.
The PBOC set a neutral USD/CNY fix today but added liquidity via the repo market. That has seen USD/CNY rise 0.10% to 6.4620 this morning, although it is hard to see 6.4500 giving way until the data prints later this week.
The Thai Baht, Malaysian Ringgit and Indonesian Rupiah remain under pressure though and will likely do so throughout the week. The deteriorating Covid-19 situations in each currency is weighing on sentiment. USD/MYR is trading at 4.1500 today and could retest 4.1650 this week. USD/THB is at 31.892, not far from last week’s highs around 32.000. Meanwhile, the virus situation in Indonesia is arguably, the most potentially problematic of all, and USD/IDR is testing resistance near 14,500.00 today. A move towards 14,600.00 will almost certainly provoke a response from Bank Indonesia.
I expect currency markets to remain steady for the first part of the week as we await the torrent of data in the second half. Regional Asian currencies look most vulnerable, either by a spike higher in US yields or the threat to growth due to their respective virus situations.
Oil grinds higher ahead of OPEC+
Oil is almost unchanged in Asia today, albeit firmly anchored at the highs of last week as prices once again ground higher on Friday. Brent crude rose 0.77% to $76.10 a barrel, and WTI rose 0.93% to $73.95 a barrel, where both remain today.
The US infrastructure package progress gave oil another leg-up last week, and the Baker Hughes Total Rig Count came in unchanged at 470 rigs on Friday evening. That suggests that a sudden resurgence by US shale remains as distant as ever, and this is underpinning oil prices as OPEC+ discipline remains high. With Iranian talks moving to the backburner, the focus will be on OPEC+ this week. With US shale side-lined, OPEC+ will likely see an opportunity to raise production once again, with any fallout on prices likely to be limited.
That may cap oils advances this week, though, especially as both Brent crude and WTI’s relative strength indexes (RSIs) remain in very overbought territory. I doubt we will see Brent crude traded at $78.00, WTI at $76.00 a barrel this week in that context, with both vulnerable to a sharp correction lower as the week moves on.
Any washout of speculative long positions should be short in duration, as oils physical fundamentals remain very supportive. Thus, Brent crude could correct to near $73.00, and WTI to $70.00 a barrel. Unless OPEC+ massively opens the taps next week, however, any selloff will be short-lived.
Gold remains rangebound
Gold once again probed the topside of its range on Friday, only to fade ahead of its 100-day moving average (DMA). Still, it did manage to finish 0.40% higher at $1781.50 an ounce, supported by weekend risk-hedging. It appears those risk-hedges have been unwound this morning, with gold falling briefly to $1770.00 before rebounding to be almost unchanged at $1781.00 an ounce.
Gold remains locked in a $1760.00 to $1800.00 an ounce range, with the 100-DMA today at $1793.50 an ounce, capping gains. As ever, golds fate will be decided by other markets, notably the US Dollar’s direction. The RSI has moved back into neutral territory, removing one source of support. Its failure ahead of the 100-DMA on Friday suggests this week; gold will be more vulnerable to downside risk than last.
In the bigger picture, gold needs to complete a daily close above $1800.00 an ounce or below $1760.00 an ounce to signal its next directional move. Otherwise, patience is required in a range trader’s market.