OANDA Daily – A game of two halves

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

We're seeing a bit of this in financial markets at the moment. The US stock market roared back to life overnight as the tier-2 NY Empire State Manufacturing Index for September massively beat expectations, printing at 34.3. that was enough to flush out the pent-up dip buyer demand out there with markets proclaiming the US recovery was back on track. That ignores that fact that the previous day, the same market was wringing hands about the low US Inflation prints and worries that we had reached "peak recovery." They also ignored US Industrial Production and Manufacturing Production overnight, both of which missed to the downside quite badly. But why let facts get in the way of a good story? I won't even mention that slowing growth and rising costs equals stagflation. I am not sure how one even positions oneself for that outcome. While Wall Street and US markets are selectively fact picking to suit the narrative of the day, which I expect most of Asia to happily follow, another game of two halves is brewing down under. New Zealand's Q2 GDP data blew forecasts out of the water, rising by 2.80% QoQ Q2 (1.30% exp). I can tell you that New Zealand is overheating because we are looking to build a garage for our house there. We were turned down by three engineers and architectural draughtsmen because they had too much work on. And the builder can either do the job in January 2022, or January 2023. We're just happy we got a builder before you ask. The data will be tempered by the Q3 lockdowns, but the RBNZ should be locked-and-loaded for an October hike now, even if Auckland is still under restrictions. Only the delta-variant escaping Auckland and into the rest of the country will change that narrative. Australian Employment, by contrast, was a disaster. August Employment fell by a higher 146,300 jobs (-80k exp), although the fallout on the currency was offset by the Unemployment Rate falling to 4.50%. Much better than market forecasts of 4.90%. The Bureau of Statistics notes though that there is evidence of Australians leaving the workforce permanently, which would of course, flatter the unemployment rate. The culprit is the extended lockdowns in New South Wales and Victoria and the question is, will they rebound as sharply as previously once restrictions are lifted? The lucky country's resource export machine is firing on all V-8 cylinders right now, and the RBA is letting more doves fly than Prince. (RIP) Expect the fallout on the currency to be limited, especially with the US Dollar falling overnight. There is a lot of noise around the US, Britain and Australia and their new security partnership this morning, which is designed to enhance stability in the Indo-Pacific. The main feature being the intention to sell nuclear powered submarines to Australia. China will make noises but behind closed doors be unconcerned. Britain's fine armed forces have a limited capacity to sustain an extended conflict in Asia. Apart from upsetting the French, who have an AUD 90 billion contract to build Australia's next generation of submarines, it appears the nuclear submarines, once they have paid termination fees to the French, will be built in Adelaide. That means they'll probably arrive in 2050 and be 100 times over budget. Good politics ahead of a federal election next year in Australia, but not much else. It won't worry China and it won't impact on markets. North Korea and South Korea have traded missile tests over the last 24 hours. North Korea from a land site and the back of a train, South Korea from a submarine, which is a very rare club membership. The condemnations between Japan, North and South Korea are flying thick and fast today, and the escalation of the Korean Peninsula arms race is weighing on both South Korean and Japanese equity markets today and will continue to do so for the rest of the day. I do not see any lasting fallout though if you will excuse the accidental pun. Evergrande is weighing on sentiment in China markets today after the housing authority apparently notified China's major banks that no interest payments on loans would be forthcoming on September 20 th . The ratings agencies took the slasher to Evergrande's discredit rating once again overnight and follows scenes of protests in China over unpaid wealth management productions to unfortunate customers. Coming after the carnage in gaming stocks this week after the latest Government investigation targeted Macau's casinos, China markets don't have a lot to cheer about today. It seems that only the large SOE's, effectively government departments, remain safe, hence their recent outperformance. The Evergrande saga, with its $300 billion of liabilities is reaching an endgame, with EverTeflon running out of non-stick material. I can see the mother of all debt/equity swaps being "encouraged" by the government, but in the meantime, the combination of the toxic cocktail outlined above will weigh on China equities. As I have said previously, buying the dip is a perilous business right now in China. Overall, the week is going to plan thus far. As expected, markets, particularly in the US, are cherry-picking news headlines and tier-2 data to fit the narrative of flip-flopping daily sentiment. August US Retail Sales this evening, should they print lower than -0.80% will probably see the overnight moves reversed as peak-recovery moves to ascendency once again. That said, given the selective memory recall displayed this week, could just ignore that data and focus on the Philly Fed Manufacturing Index or Initial Jobless Claims if they suit the dish-of-the-day narrative. Hopefully, next week's cast of thousands line-up of central bank policy decisions, staring the Federal Reserve, delivers more thematic clarity. In the meantime, I shall leave my earplugs in to drown the noise and continue to believe in the gospel of buying-the-dip in a central bank-primed, unlimited money at zero per cent world. China worries and missile tennis weigh on Asian sentiment Wall Street powered higher overnight after the Empire Manufacturing Index flushed out dip-buyers from the side-lines. The S&P 500 finished 0.85% higher, with the Nasdaq rallying 0.82%, while the Dow Jones climbed by 0.71%. In Asia, futures on all three have edged 0.05% higher. However, the strong overnight session on Wall Street has not resulted in a mechanical rally across Asian markets. It is a mixed picture today with mutual missile tests, and the ensuing sabre-rattling, sending Japan and South Korean markets lower. The Nikkei 225 is down 0.33%, while the Kospi has retreated by 0.61%. In China, markets are also on the back foot as Evergrande concerns rise, with authorities telling China banks not to expect interest on loan repayments next week. Combined with the Macau casino inquiry and poor data yesterday, China markets are struggling today. The Shanghai Composite is 0.30% lower with the CSI 300 down by 0.40%. Hong Kong has slumped once again, falling by 1.60%. Regional Asia is faring somewhat better, if failing to match the exuberance of the Wall Street session. Singapore has risen by 0.30%, while Kuala Lumpur and Taipei are flat. Jakarta and Bangkok have risen by just 0.10% while Manilla has climbed 0.60%. Australian markets have been boosted by climbing energy prices and a positive overnight session, with the ASX 200 rising by 0.60%, and the All Ordinaries by 0.80%. The localised issues in Asia will not be enough to knock Europe of course, although rising energy prices, notably natural gas, may be giving markets their food for thought. Nevertheless, I expect European markets to open positively today as we wait to see what sort of mood Wall Street is in this evening. A soft retail sales number could dampen the overnight enthusiasm. US Dollar retreats as confidence returns Markets ignored softer US Industrial Production data overnight, concentrating on the higher than expected NY Empire Manufacturing Survey. Justifying that I suppose by saying one is forward looking, and one is backward looking. The return of risk appetite, which saw equities rise, pushed the US Dollar lower as haven trades were unwound. The dollar index retreated a modest 0.20% even as US yields firmed slightly, suggesting intra-day sentiment is ruling the roost now. As ever these days, the index is almost unchanged in Asia and the index continues to trade comfortably within its recent 92.30 to 92.90 range. Hopefully, next week's FOMC and other central bank decisions give us more thematic food for thought. The major currencies traced out modest gains on greenback softness with EUR/USD at 1.1815, GBP/USD at 1.3840 and USD/JPY at 109.30 this morning in Asia, almost unchanged from overnight. Much higher inflation data from the UK yesterday didn't translate into Sterling strength or calls for BoE rate hikes. That suggests that the data has been priced into the market's outlook. AUD/USD has retreated slightly to 0.7328 this morning after the soft employment data balanced out by improving risk sentiment overnight. 0.7300 remains near-term support while 0.7350 and 0.7400 provide resistance. NZD/USD has risen by 0.17% to 0.7120 today after blockbuster Q2 GDP numbers. With the RBNZ rate hike locked and loaded for next month, support at 0.7070 should remain intact. One note of caution to the universal bullish outlook would be if the delta variant escapes a still locked-down Auckland. A truck driver who left the Auckland bubble has tested positive today. If cases appear out of Auckland, all bets on Kiwi are off and we have plenty of examples across the Tasman and elsewhere to base that on. Although USD/JPY has been unmoved by the North/South Korea missile tests, USD/KRW and USD/TWD has moved higher by 0.25% today, along with USD/PHP in what seems to be a South China Sea trade of sorts. The rise seems reactionary rather then structural, and with the rest of USD/Asia unchanged from overnight following yet another non-descript PBOC USD/CNY fixing, I expect those rallies to run out of steam as the day progresses. USD/Asia remains locked in a pre-wait-and-see-FOMC status it seems, and I expect that to continue for the next week. Interestingly, neither the Malaysian Ringgit, nor the Indonesian Rupiah, are gaining any tailwinds from the rise in oil prices suggesting both remain vulnerable to US Dollar strength, despite excellent trade numbers from Indonesia yesterday reducing current account fears. Oil prices leap higher Oil prices staged an impressive rally overnight having spent the week ignoring the gloom sweeping other asset classes. Official US Crude Inventories surprised by falling by a much higher than expected 6.40 million barrels. The slow return of production and refining post-Hurricane-Ida being the main culprit. The relentless rise in natural gas prices, now starting to cause nerves to fray in Europe, is also helping to elevate oil prices and is a situation that I believe will get much worse before it gets better. Brent crude carved through $74.00 a barrel on its way to an impressive gain to $75.50 overnight, rising slightly to $75.60 in Asia. $74.00 now becomes a support/pivot point. China's announcement that it is selling some of its strategic reserves to the domestic market has had zero impact on prices and dips to the $74.00 region should find keen buyers. Brent crude has resistance near by at $76.00 and if that gives way, Brent crude should target the $78.00 a barrel area. WTI leapt 2.65% higher overnight, climbing to $72.60 a barrel, advancing to $72.70 in Asia. Any dips to $71.00 a barrel should be well supported, at least until we see concrete recovery progress from the Gulf of Mexico hub. A rise through the overnight high at $73.10 suggests a test of $74.00 a barrel, which could extend to $76.00 next week. Gold flashes more danger signals Gold's price action overnight flashed more warning signs to bullish investors as prices fell despite the US Dollar weakening and US yields remaining barely changed. Gold finished the overnight session down 0.60% to $1793.50 an ounce. Gold rally on Tuesday failed at the 200-day moving average (DMA), and the uninspiring price action overnight is a huge warning signal that gold is living on borrowed time at these levels, with the path of least resistance looking more like lower by the day. Gold has resistance at $1808.50, the 200-DMA which caped gains so well this week, followed by the 100-DMA at $1816.50 and a formidable series of daily highs around $1834.00 an ounce. Support lies initially at $1790.00 followed by the more crucial $1780.00 an ounce zone. Failure there is likely to see gold fall rapidly to $1750.00 an ounce and potentially lower. Credit : OANDA Read more market analysts’ commentaries here

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