Expecting the Expected

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

President Biden released the first details of his highly anticipated infrastructure programme overnight. The package itself totalled around $2.25 trillion of spending over 10 years, with approximately $1.60 trillion of corporate tax rises phased in over 15 years. No mention was made of higher income taxes for higher earners or capital gains taxes, but one suspects that will come when the President announces the details of the remainder of his $1 trillion wish list.

Net-net, the package looks to be roughly revenue-neutral over the next decade, give or take $500 billion here or there, which should help ease it through the Senate reconciliation process. Of course, getting it past his own party will be the initial challenge, and we can expect a few months of tortuous progress ahead through both Democrat and Republican objections.

The market reaction to the package announcement was muted, to say the least. Given taxes on US corporate global profits will rise (no more parking it in Ireland or the Netherlands), it was somewhat surprising that the tech-heavy Nasdaq rallied overnight. Similarly, US bond yields hardly moved, and although currency markets had a very choppy day, the US Dollar finished marginally weaker.

I suspect the news was priced into financial markets at a much higher level than I expected, muting its impact. Also in play were month and quarter-end rebalancing flows from institutional investors globally. I suspect those flows both softened the package’s impact and go a long way to explaining the moves across most asset classes overnight.

The US ADP Employment Change for March disappointed at 517,000 jobs added, although the February number was revised higher to 176,000 jobs. That effectively left the data as a nil-all draw leaving tomorrows US Non-Farm Payrolls all to play for. Depending on who you speak to, the US will add between 600,000 and 1.2 million jobs highlighting the uncertainty out there. With such a wide range this time around, and with liquidity expected to be much lower than usual due to Easter holidays across the world, we can expect a much larger impact across asset classes than usual from the data, especially if it prints at the extreme end of expectations.

Being the first day of the month, the Asian data calendar is packed. Australian Retail Sales fell 0.80%, with the impact primarily due to localised Covid-19 restrictions and not signalling “peak Lucky country.” The trade surplus fell to AUD 7.529 billion in February from AUD 9.61 billion in January, with the fall in exports attributable to Covid-19 restrictions in key markets and possible Lunar New Year effects. Imports rose by 5.0%, though, suggesting domestic demand remains robust.

China’s Caixin Manufacturing PMI eased to 50.6, its lowest since April 2020, and well below the 51.3 markets’ anticipated and a 4th consecutive lower monthly reading. That may cause a few nerves in the markets, with fears that China’s recovery could be faltering. I suspect those nerves will be brief, though, especially as South Korea, Indonesian, Japanese, Malaysian and Vietnamese Manufacturing PMIs from South Korea, Indonesia, Japan, Malaysia and Vietnam were all higher than expected today. Additionally, Japan’s Tankan Large Manufacturers survey also outperformed, rising to 5.0 today.

The drops can be explained away partly by Covid-19 restrictions in Europe, the US and other key export markets over the past few months, and given the strength seen in data elsewhere in Asia, China will receive a pass mark today. European manufacturing PMI’s have also remained robust through the Covid-19 restrictions, as have US ones, and I expect that to be repeated by both regions later today.

Despite the optimism surrounding the rollout of Covid-19 vaccines in a select group of countries, the virus continues to wreak havoc elsewhere. France overnight extended its latest lockdown nationally, including the closing of schools. Canada’s Ontario province has announced a 28-day lockdown this morning, and Japan has extended its Covid-19 restrictions to two more prefectures, including the city of Osaka. Equity markets are ignoring these developments in Asia, content to follow the US close last night. The widening restrictions globally should be bullish for technology at the margins, but will most keenly be felt in energy markets.

Regarding energy, OPEC+ holds its monthly meeting today with the Joint Technical Committee (JTC), providing no guidance to the Ministers today, with the JTC meeting on Tuesday finishing inconclusive. There will almost certainly be some squabbling as is customary for OPEC+, with OPEC quietly downgrading global consumption by 300,000 bpd overnight due to Covid-19’s impact. That is to some extent offset by US production easing slightly to 11 million bpd.

However, with oil in storage plentiful in Asia, production recovering in the US, widening Covid-19 restrictions and more Iranian crude heading to China, OPEC+ will have no choice other than to leave production targets unchanged. Although Brent futures are in backwardation for far month delivery, spot prices are now in contango, suggesting oil for prompt delivery is plentiful. Only a reversal of production cuts would catch markets off guard this time around, but with OPEC+, stranger things have happened.

Asian equities rally

Asia Pacific stock markets are off to a positive start today on the back of positive regional data and Wall Street finishing on a positive note. Overnight the S&P 500 gained 0.37%, with technology outperforming. The Nasdaq leapt by 1.54%, with the Dow Jones almost unchanged. Month-end rotation trades dominated proceedings after the ADP data, and the Biden package, caused no ructions in the US bond market.

US futures are modestly higher today, and the PMI and Tankan tailwind has lifted the Nikkei by 0.60%, with the Kospi rising 0.55%. Mainland China’s Shanghai Composite and CSI 300 have advanced 0.85%, with Hong Kong climbing 0.70%.

In ASEAN, Singapore is 0.20% higher, while Kuala Lumpur has risen by 0.50%, with Jakarta unchanged as a weaker Rupiah weighs on sentiment. Australian markets have risen more modestly than the month-end exuberance seen yesterday, with the ASX 200 edging 0.20% higher and the All Ordinaries rallying 0.55%.

With much of Asia Pacific on holiday tomorrow, activity is somewhat muted, especially with the US Non-Farm Payrolls to come Friday night. Asia’s performance today should be enough to lift European shares at the open, although France’s national lockdown, and Ontario’s in Canada, are likely to take the edge of bullish spirits. Pan-Europe PMI data should lift proceedings if it performs positively as expected.

The US Dollar marks time

The overnight session saw some wide ranges in both the dollar index and the major currencies, as quarter and month-end flows dominated. With the Biden infrastructure package passing without incident on the US bond market, the US Dollar gave back some of its week’s gains. Despite a near 50 point range, the dollar index finished almost unchanged at 93.23, edging lower to 93.21 in moribund pre-holiday Asian trading.

On the major currencies, EUR/USD’s intraday rally petered out above 1.1770, and it has faded back to 1.1725 in Asia. That leaves it still in danger, just above support at 1.1700. GBP/USD continues to hold firm at 1.3785, supported by EUR/GBP selling as Sterling continues to benefit from its vaccine premium. USD/JPY has corrected lower to 110.60 today, unwinding its overbought short-term technical indicators yesterday. It still has the potential to retest 111.00 and then 112.00 before the week’s end.

The Ontario lockdown has seen USD/CAD rise by 0.20% to 1.2590 in Asia, and once again, the pair has bounced off its longer-term support line, today at 1.2530. The Ontario situation is a developing story, and with USD/CAD having spent a week now above its technical breakout point, it is set to retest 1.2650 into the weekend.

The Australian and New Zealand Dollars continue to wallow at the bottom of their ranges at 0.7575 and 0.6970, respectively. Neither commonwealth has managed to recapture previous support, pointing to deeper losses in the week ahead. As barometers of global risk appetite, their unimpressive price action by both is as good an indicator that further US Dollar strength is on the way as any.

Asian currencies are having a quiet session, with the US Dollar modestly stronger versus the grouping today. With much of the region on holiday tomorrow, I expect them to stay in wait-and-see mode ahead of the US data tomorrow night.

Oil prices fall ahead of OEPC+

Oil prices fell overnight as the OPEC+ JTC produced no guidance for the Ministerial meeting today, and OPEC quietly reduced their global consumption forecast by 300,000 barrels per day due to Covid-19 restrictions. Official US Crude Inventories fell by 900,000 barrels, but that was not enough to support prices, with markets pricing in no change to the OPEC+ production targets as a done deal. France’s expansion of its lockdown from regional to national added to the gloom for consumption in the near term, with futures markets indicating prompt delivery supplies are ample.

Brent crude eased by 1.50% to $63.00 a barrel, and WTI fell by 1.60% to $59.45 a barrel. The Ontario lockdown announcement this morning has seen both contracts ease another 0.25% in Asian trading. Oil seems to have found an equilibrium at these levels, with both contracts sitting in the middle of their admittedly wide, one-week ranges. The risks are likely to be skewed to the downside though even if OPEC+ remains unchanged as expected. If they grant Russia a slightly higher quota, the downside momentum will increase.

Brent crude has support at $62.55 and $60.40 a barrel, with resistance at $64.80 and %65.50 a barrel. WTI has support at $58.80, $58.30, and $57.20 a barrel, with resistance at $61.15 and $63.20 a barrel.

Gold is down but not out

Gold staged a robust rally overnight, unwinding much of the previous sessions falls. Gold rose 1.35% to $1707.50 an ounce overnight, gaining support from a weaker US Dollar intra-day, but holding onto those gains as the US Dollar reversed course later in the session. Once again, I suspect that month and quarter-end portfolio rebalancing flows had much to do with gold’s strength, in the absence of any other apparent factors to explain the price action.

Gold has managed to rally once again of the 61.80% Fibonacci retracement support at $1685.00 an ounce and has now traced out four daily lows just below $1680.00 an ounce. That is a positive technical development and suggests that the longer-term bottoming structure is still holding on, albeit by a thread. Gold needs to recapture resistance at $1720.00 an ounce for gold bulls to breathe easier once again.

Gold has risen another six dollars to $1713.50 an ounce in Asia as local investors add some risk-hedging insurance ahead of the long weekend. Gold has support at $1705.00 an ounce, followed by a band between $1675.00and $1685.00 an ounce, a series of daily lows and the Fibonacci retracement. Resistance is at $1720.00 an ounce, followed by $1745.00 and $1760.00 an ounce, the latter being the 50% Fibonacci level.