Markets stuck between recovery and Delta hedging

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

The overnight session in the US was a messy and directionless one. On the one hand, the rapid spread in delta-variant Covid-19 in the US and China, along with the rest of Asia's well-known problems, is causing some to question the pace of the global recovery. On the other hand, US JOLTS Job Openings climbed above 10 million overnight, following an impressive US Non-Farms on Friday. Two more Fed officials made comments with a decidedly hawkish tilt. That has left markets torn between two lovers and feeling like a fool with various asset classes choosing to go their own way. (Two songs in one sentence, sometimes I even impress myself) US yields took the tapering path along with the US Dollar, rising once again overnight. The greenback's rally is a mixture of virus risk aversion, rising US yields, and tapering expectations. Equities took the delta hedging path, rotating out of growth and into the safety of big-tech. Gold's flash crash yesterday morning mostly reversed, but it still closed a lot lower than Friday and remained at the mercy of moves in the US Dollar. Oil has gone all-in on delta hedging, with prices falling again overnight on growth concerns. Still, nobody can complain about a lack of volatility. News that the US Senate will vote on the $1 trillion infrastructure bill tomorrow has failed to shake Asia from its virus malaise. However, a watering down of some cryptocurrency provisions looks to have helped lift the digital Dutch tulips overnight. Likewise, news that Japan Prime Minister Suga may be requesting another crowd-pleaser sized stimulus package from Parliament to offset their Covid-19 slowdown has fallen on deaf ears today, although a slighter higher than forecast Japan Current Account for June seems to have lifted the Nikkei slightly into the green. The data calendar is very quiet in Asia otherwise. In Australia, NAB Business Confidence and Building Permits slumped as the state-wide virus lockdowns start to make their presence felt in the data. That should keep the Australian Dollar on the back foot, with the South Pacific Peso breaking out to the downside of a rising wedge on the daily charts overnight, an ominous technical development. Philippines GDP Growth QoQ for Q2 fell by just 1.30% today, with the YoY number rising 11.80%. Don't be fooled by the headline numbers though, the YoY, in particular, is flattered by the base effects of last year. Reinstated mobility curbs will further torpedo those figures going forward. Indonesian Retail Sales is expected to climb by 10% YoY for June later today. Again, the number will be flattered by base effects from last year and misses the worst of July's delta-variant tragedy and movement restrictions. Singapore's GDP for Q2 will also miss the worst of the circuit breaker, not circuit breaker and the most complicated dining out instructions in the world, that befell it in Q3. Still, with 70% of its population fully vaccinated, citizens will enjoy more freedoms as long as they're vaccinated. I can now also go to the mall here in Jakarta, as long as I'm vaccinated. (I am) It is an intriguing trend we see globally; I believe. If you choose not to do your duty for your country and remain on the side of rejecting injections with vaccines laden with tracking microchips designed by Bill Gates, your world will become very narrow. I am sure ranting on the Internet, no travel while being unemployed and effectively confined to your home while wearing your anti-surveillance tin-foil hat will get boring eventually. Nevertheless, this is a positive development for Singapore, which remains on track to reopen internationally later this year. I feel that Singapore and Singapore equities will outperform ASEAN in Q4, with the rest of the region struggling under the virus yoke. On the other hand, I anticipate a deluge of photos of alcoholic beverages being sent to me from the Red Dot as friends celebrate their new freedom. One day it will be my turn. The data calendar becomes thin indeed over the next 24 hours, and it looks like this week's end-game will centre around US inflation data due for release tomorrow evening. Following the US Non-Farms and the JOLTS data, and with an increasing number of Fed officials circling "sustainable progress" like wolves, a headline print North of 5.50%, or 4.50% for the core read, could be enough to break the tapering dam. If markets rapidly decide to price in a move at the September FOMC meeting, look for another rally in the US Dollar, a jump in US yields (finally), and perhaps a tough day at the office for equities. It will be bad news for Asia as well; please refer to yesterday's note for my reasoning; I can't face another 2500 word crowd-pleaser today, and neither can you. Until the US Inflation data arrives tomorrow, markets will be left to drift around on headlines, with a bias towards delta hedging limiting those bullish FOMO animal spirits. Another mixed day for Asian equities Wall Street had a mixed session, torn between delta concerns and Fed tapering following a jump in the JOLTS job opening above 10 million and hawkish comments from Fed officials. In the end, Wall Street chose delta hedging, rotating modestly out of growth and back to their technology happy place. The S&P 500 eased 0.09%, the Nasdaq edged 0.16% higher, while the Down Jones fell by 0.31%. In Asia, US futures have continued to sag, all three indices down by around 0.15%. With no firm direction from New York, Asian markets have gone their own way. The Nikkei 225 is just 0.10% higher, while an unimpressive IPO debut by Krafton has dragged the Kospi down 0.65%. Regulatory risk and further cases of the delta-variant in Mainland China continues to unnerve markets there. The Shanghai Composite is 0.15% lower, but the CSI 300 has fallen by 0.40%. Hong Kong has managed to eke out a modest 0.15% gain. Reopening day (for those vaccinated) has lifted Singapore by 0.55% as markets price in a light at the end of the tunnel. Malaysia is on holiday while Taipei has fallen by 0.80% on China concerns, Manilla has retreated 0.40%, and Jakarta is down 0.90%. Bangkok has bucked the regional trend, rising 0.25%. Australian markets are trading sideways, with the ASX 200 and All Ordinaries edging 0.15% higher. Except for Singapore, most of Asia appears to be virus watch and nervous about Fed tapering, with investors reducing exposures into the US CPI data tomorrow night. Europe is likely to follow the same cautious path and open slightly lower this afternoon. I anticipate equity markets continuing this pattern with a very light data calendar until the US CPI data. As previously stated, a higher than forecast US CPI print tomorrow will negatively impact Asian equities as the threat of divergence in monetary policy paths combine with delta worries. The US Dollar Rally Continues The US Dollar rose overnight once again, propelled higher by rising US yields, hawkish Fed-speak and perhaps some delta-variant risk-hedging flows. The dollar index rose by 0.20% to 92.97 overnight, with a resistance test at 93.20 seemingly inevitable. That will open further gains to 93.50 and then 94.30. Only a fall through 92.60 changes the narrative. The Australian Dollar fell through the bottom of its rising wedge overnight, reflecting rising risk sentiment from the virus and higher US interest rates. The fall through 0.7360 sees AUD/USD at 0.7320 this morning with an initial target of 0.7250, and if the US CPI outperforms tomorrow, it could fall to 0.7000 in the week ahead. USD/JPY rose to 110.35 overnight, where it remains in Asia. A rally through 110.60 signals further gains to 111.60 initially. As a purely US/Japan yield differential play these days, the US CPI tomorrow night will be critical in signalling its next directional move. Both the Euro and especially the Swiss Franc look vulnerable to further losses for the same reasons. EUR/USD could test support at 1.1700. USD/CHF has gained 1.50% over the last two sessions to 0.9200. A high US CPI print should see the pair test 0.9270. The US Dollar rally resumed in earnest versus Asian currencies yesterday, China aside. My fragile four of India, Indonesia, Malaysia, and Thailand could well be joined by the Philippines in the coming days, with the Peso retreating heavily over the last couple of days. Tapering by the Us Federal Reserve starting in Q4 will be a game-changer, as none of these countries is in any position to even think about tightening monetary policy in response. The relief valve will inevitably be weaker currencies unless they choose to burn through their admittedly impressive foreign currency reserves. Delta lingers in the background of all of them limiting gains anyway, but a firm US Cpi print tomorrow night sets up Asian FX fr another bout of weakness. Oil markets sag under "delta hedging" Asset classes are going their own ways now regarding their assessment of the risks of the delta-variant. Oil markets continued falling overnight as energy markets fret about future consumption patterns caused by delta-variant restrictions, actual or threatened, just as OPEC+ starts ramping up monthly production. The cases cropping up in China are a genuine concern. If they spike markedly, resulting in inevitable firm action from the government, we can expect oil prices to reflect that reality. Brent crude closed below its 100-day moving average (DMA) overnight at $69.80 a barrel, finishing 1.50% lower at $69.20. WTI closed below its 100-DMA at $67.30 a barrel, falling 1.70% to $68.00 a barrel. Today's return of Japan and Singapore markets has seen some bargain hunting occurring from physical buyers, which has lifted Brent crude and WTI by 0.65%, respectively, to $69.65 and $67.25 a barrel. Today's rally is much weaker in scope compared to the falls overnight, and oil's technical picture remains fragile. Overnight, both contracts fell quite a bit further intra-day than the daily closes suggest. Notably, Brent crude and WTI traced out double bottoms on the daily charts at $67.50 and $65.00 a barrel, respectively. These levels form the first critical support line for both contracts, with failure $65.00 for Brent crude and $62.50 a barrel for WTI. Resistance lies at the respective 100-DMAs, which today are at $69.90 for Brent crude and $67.30 a barrel for WTI. Whilst delta concerns remain elevated; further gains will likely be limited to $72.00 and $71.00 a barrel. With sentiment fragile, tonight's US API Crude Inventories could negatively affect prices if inventories rise sharply. The API data is often ignored by markets in favour of the official numbers that come out tomorrow night NYT. But when the data is running with the market sentiment wind behind it, it can often blow the boat onto the rocks. Gold prices recover, but don't be flash-crash fooled Gold recovered most of its early Monday morning flash crash losses but still finished the day down 1.90% at $1729.50 an ounce. Gold has traced out some anaemic gains in Asia, rising 0.25% to $1733.50 an ounce as Singapore and Japan investors returned from holiday. However, gold closed well below its $1750.00 an ounce breakout, leaving the technical picture looking grim. A firmer US Dollar and US yield curve ensued that gold would never make it back to $1750.00 an ounce overnight, as the flash-crash left bullish gold traders traumatised anyway. That said, gold will probably consolidate ahead of the US CPI tomorrow as its Relative Strength Index (RSI) remains in oversold territory. I am anticipating a $1720.00 to $1750.00 an ounce range ahead of that data. In months past, I often mentioned structural support in the form of the 61.80% Fibonacci retracement of the March 2020 rally, which lies around the $1680.00 to $1685.00 an ounce region, depending on how thick the lines are you draw on your charts. Being over 50 now (I covet Harley Davidsons) and wearing glasses, I chose the "broader" lines. The flash crash yesterday bottomed around this region (according to my charts), emphasising its longer-term importance. Accordingly, although I expect gold to range between $1720.00 and $1750.00 over the next 36 hours, a daily close below the Fibonacci support at $1680.00 to $1685.00-ish is a powerful signal that gold is set for a deeper correction, initially targeting $1550.00 and then $1500.00 an ounce. It seems that gold inflation-hedging abilities in the modern age are confined to hyper-inflation and not bog-standard "normal" inflation, transitory or otherwise. Gold's fate hinges on tomorrow night's US CPI data.

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