By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,
The weekend was dominated by China’s announcements of a crackdown on Tencent Music, and more importantly, its intention to all but end China’s multi-billion-dollar student tuition industry as we know it. Although early Asian markets followed Wall Street higher, once Mainland exchanges opened and stocks there entered a free-fall, regional markets have mostly followed suit.
Reuters is also reporting a China Securities Times story that suggests the central government is stepping up restrictions on local government financing vehicles. Given that the China tech crackdown has already frayed investors nerves along with credit concerns, particularly in the property development sector, the last moves by the central government in the education sector, which threaten to wipe out billions of dollars by overseas investors, is another ratchet higher in the regulatory risk landscape in China.
Perversely, one beneficially of China’s trampling of domestic and international investors across a broad battlefront could be US equities markets. Although investors have been prepared to sell their souls for rock and roll to get a piece of China action, the risk/reward skew now means that the path of least resistance could be Wall Street, where the FOMO gnomes ignored mixed PMI data on Friday to send the major indexes to record closes.
Although fellow North Asia heavyweights, Japan, South Korea, and Taiwan are likely to suffer less, with their high beta to the global recovery as a whole, ASEAN markets are also expected to underperform by association. Regional markets will be further weighed down by the remorseless rise of the delta-variant virus in the troubled trio of Indonesia, Thailand and Malaysia. Don’t be fooled by the falling cases in Indonesia over the weekend; testing also fell hugely with President Jokowi extending PPKM restrictions.
There was no bipartisan agreement on a US infrastructure package over the weekend, with voting scheduled to commence tomorrow in the Senate meaningfully. It, along with the looming federal debt ceiling, is being almost entirely ignored by US markets which, this week, will be myopically focused on US big-tech earnings releases, a veritable FAANGSta’s paradise, and the Federal Reserve FOMC meeting.
Big tech earnings are likely to have a more significant impact in that so much good news is baked into prices that earnings that undershoot or come in just on target will likely see some harsh short-term punishment to stocks prices. What the FOMO gnomes of Wall Street giveth, the FOMO gnomes can take away. Any dips should be temporary, assuming no surprises from the FOMC and that the monetary taps remain fully open.
Turning to this week’s FOMC, it should theoretically be a non-event, with the Augusts Jackson Hole Symposium and September’s FOMC meeting more “live.” Making assumptions hasn’t treated me well of late, though, and last month’s FOMC dot-plot caught me by surprise. Six million fewer American’s are still in work than pre-pandemic, and I suspect this needle will have to move a lot more to taper the Fed, especially given Mr Powell’s vehement defence that inflation is transitory.
Although I suspect much of the rally is being driven by Europeans looking for the least ugly horse in the glue factory, the US bond market certainly agrees. Their own central bank is condemning them to Japanification, so 1.25% on a 10-year Treasury looks better than paying Germany, Italy or Greece to own their debt. The Fed’s $120 billion per month of buying is undoubtedly playing its part as well.
Still, if the FOMC “tweaks” the language to imply that they’re now really starting to begin to really seriously think about starting to talk about tapering, that could shake the bond market from its malaise and push yields and the US Dollar higher. I wouldn’t bet on it, though. Still, if big-tech earnings only meet expectations, and the FOMC changes the statement wording, US equities could be in for a beating at the end of the week.
China and the US FOMC are likely to drown out any impact from the data calendar in Asia this week. China Industrial Profits tomorrow can add to the dark clouds over local equities if it underperforms. But South Korean Q2 GDP, Malaysia’s June Trade Balance, Australian Q2 CPI and South Korean June Industrial Output are all old news. The trajectory of the delta-variant virus across Indonesia, Thailand, Malaysia, and Australia, the fragile four, will have a more immediate impact.
As galling as readers know, it is for me to say this, one beneficiary of today’s China turmoil looks to be Bitcoin and Ethereum. Bitcoin is 8.35% higher at $38,400 of fiat US currency this morning, and it appears that some defensive rotation, probably from Mainland investors, is occurring. CNBC is also running a story from Friday that Amazon may be preparing to accept digital coins as payment. Goldman Sachs is apparently clearing some institutional client’s trades in Bitcoin. The Vampire Squids and Bitcoin is always worth a few per cent gains, but all in all, the combination of stories is all meat and three vegs to the “bitcoin as a mainstream asset” army.
The price action has led to some very interesting developments of the Bitcoin technical picture. Bitcoin has broken out of its three-month descending triangle at $34,300.00 and suggests we could have another $17,000 of gains, taking us to $51,000.00, or thereabouts. It must overcome resistance at the 100 and 200-day moving averages, at $40,800.00 and $44,700.00 first, though. I guess I will have to put up with the “institutional experts” re-emerging as well to say Bitcoin is a hedge against inflation and deflations, that Goldman’s means it is becoming a mainstream asset, and that it is a hedge against equity market and China volatility. Someone will probably say it can cure Covid-19 as well, but for me, the technical break in isolation is huge, and should be respected. I still believe the entire sector and un-stable coins are complete nonsense that will lose small investors billions, but the people have spoken, and the digital Dutch tulips look ripe for a large rally in the short term.
China equities get crushed
The plunge in China equities dominated Asian markets after the government further tightened its crackdown on Tencent and completely torpedoed the multi-billion student tuition sector over the weekend. Although Wall Street closed at record highs on Friday, lifting early trading in Asia, regional markets turned south after China opened.
Only the Nikkei 225 has risen today, climbing 1.05% and seemingly piggybacking the robust New York close, with the uneventful start to the Olympics lifting sentiment. The Kospi, meanwhile, has fallen by 0.50%, with Taipei dropping by 0.65%.
China markets are under siege, with the Shanghai Composite plunging 2.20% and the CSI 300 2.30%. Hong Kong, replete with China tech listings, has plunged by 2.90%, with talk of tightening local government financing adding to the credit concerns in Hong Kong-listed property developers as well. With China’s government seemingly ambivalent to stock market ructions, something that surprise precisely nobody, Mainland China and Hong Kong markets are set to suffer a repricing by investors globally of their risk premia this week.
Across Asia, Singapore has fallen 0.55%, with Kuala Lumpur down 0.30% and Manilla down 1.10%. Jakarta has bucked the trend to be up 0.30%, while Bangkok markets are closed today. Australian markets are treading water between China concerns and a resplendent Wall Street. The ASX 200 and All Ordinaries are unchanged for the day.
US index futures are also lower this morning, notably the Dow Jones, with its higher beta to world growth. China nerves have sent it 0.40% lower, while the S&P and Nasdaq futures are 0.20% lower. European stocks are likely to open cautiously this afternoon, notably countries such as Germany, with high exposure to the China growth story. However, US markets are set to remain insulated, with US tech earnings and the FOMC the main points of influence on Wall Street this week.
The US Dollar remains firm
The US Dollar remains near 5-month highs versus the majors, with the dollar index closing 92.90 on Friday, not far from its 93.20 high last Monday on the “delta-dip.” The persistent strength of the US Dollar, even as US bond yields continue to ease, likely reflect flows into the bond market and a continual haven bid from emerging markets that are battling the delta-variant globally, notably in Asia.
Markets are vulnerable to move US Dollar upside surprises this week, given that the overall environment, when looking at US yields, should not support US Dollar strength. Especially with no infrastructure agreement in the Senate and a looming US debt ceiling. If the FOMC surprises with a change of language this week, we can expect another surge in the US Dollar, particularly versus the low low forever Euro, and emerging market currencies.
EUR/USD is trading sideways at 1.1775 today and appears to be slowing, forming decent support at 1.1750. However, its rallies have been shallow, and 1.1800 has mostly been contained. EUR/USD needs to close above 1.1800 a couple of times this week to change the bearish narrative; otherwise, the risk remains of a deeper selloff to sub-1.1600.
GBP/USD looks more constructive, helped along by “freedom week”, passing mostly without incident by British standards. GBP/USD closed the week above the 200-DMA at 1.3710, and a rally above 1.3800 would signal further gains targeting 1.4000. A stabilisation of the US 10-year yield has seen bids creeping back into USD/JPY, which has risen to 110.35. A rally through 110.70 targets a retest of the 111.60 May highs, although we may have to wait for the FOMC outcome first.
USD/CNY has shied away from resistance at 6.4900 since the start of June. A daily close above 6.4900 likely signals that authorities are happy with another bout of Yuan weakness, having put a floor under the appreciation trend in early June. The turmoil in the China stock market and the ongoing clampdowns by the government across multiple sectors means USD/CNY is unlikely to fall very far this week.
The Australian and New Zealand Dollars are trying to trace bottoming formations at the moment, but the rallies are shallow. With their high correlation to risk sentiment in Asia, sustained rallies will be hard to come by, especially with the Indonesian Rupiah, Malaysian Ringgit, Thai Baht and other ASEAN currencies suffering deep delta-discounts. On that note, regional ASEAN currencies will trade nervously into the FOMC. Any change to the language will see them suffer additional selling, being highly sensitive to US interest rate trajectories at the best of times.
Oil watches from the side-lines
Having staged the mother of all “delta-dips,” followed by the mother of all FOMO buy-the-dip rallies last week, oil now finds itself roughly where it was post-OPEC+ the previous week. Brent crude on Friday was hardly changed, closing at $74.15 a barrel, while WTI finished barley moved at $72.05 a barrel.
Although not directly impacting oil consumption patterns, the nerves sweeping China markets have been enough to see investors mark oil down in Asian trading. Fears growing that the government clampdowns will impact growth. Both Brent crude and WTI have retreated by 0.75% to $73.60 and $71.50 a barrel, respectively.
The $74.00 region for Brent crude, and $72.00 for WTI, look like equilibrium levels. Both contracts should continue to consolidate their gains, with volatility much reduced from last week. As such, I am not expecting any fireworks until after the FOMC conclusion. Brent should trade in a $73.00 to $75.00 a barrel range, and WTI should remain in a broader $71.00 to $73.00 a barrel range.
Gold catches a modest haven bid
Gold once again tested support at $1790.00 an ounce on Friday, only to rally back to $1800.00 an ounce in another positive technical development. Today, the travails in China’s stock markets have seen both digital currencies and gold receive some haven inflows. Gold has risen 0.30% to $1807.00 an ounce.
Gold remains mostly off investors’ radars, with most of the action occurring in other asset classes. It remains confined in a broader range bounded by its 100 and 200-DMAs at $1797.00 and $1823.00 an ounce, respectively. Gold has also traced out clearly denoted support at $1790.00 an ounce, while it has interim resistance at $1810.00 an ounce.
A daily close below $1790.00 an ounce would suggest that a deeper correction to the critical support at $1750.00 an ounce is happening. However, the charts indicate that gold is, in fact, quietly consolidating at these levels in preparation for a resumption of the longer-term uptrend. A close above the 200-DMA would signal this has started. In the meantime, playing the range and patience are the orders of the day.