Markets Shift to Neutral

Financial markets look to be shifting into neutral gear ahead of heavyweight data starting with China’s Trade Balance due shortly, US CPI this evening, and the start of earnings season in the US, led by big banking. Wall Street went nowhere overnight, the US 10-year Note auction passing without incident, leaving bonds in neutral gear as well. It was much the same for currency markets, although the gold retreated as momentum temporarily waned, and Bitcoin continued to nudge near record highs.

In Asia today, China and Japanese equity markets have rallied, having suffered most yesterday. South Korea has also jumped. With no news of note, that suggests that fast money flows suffering a bout of nerves yesterday, took the overnight session as no news is good news, and loaded up again this morning in typically herd-like behaviour.

The first surprise of the day is from the China Balance of Trade for March. in US Dollar terms, the surplus collapsed to $13.8 bio versus an expected surplus of $52.0 bio. Exports increased in March YoY by 30.60% versus 35.50% exp. The real surprise is March Imports YoY, surging 38.10% higher versus 23.30% exp. Imports rose across the board, led by steel and industrial metals, natural gas and crude oil, and notably, mechanical and electrical products and meat, both of which increased by over 25.0%.

Imports rose impressively b over 25.0% from across Asia, but notably, they rose 41.0% from Taiwan, 32.30% from the EU, and a massive 66.30% from the US. The latter suggests that China may be trying to play catch up with its requirements from the Trump-era trade deal. The immediate impact is negative, but looking into the numbers, one can cut the cake both ways. On the one hand, we could take the export data as a sign that the pace of China’s export-led recovery is hitting a post-Covid peak. But the import data suggests that both the export and domestic sector are firing on all cylinders.

The headline number will probably send shivers through investors initially. But the impressive import numbers from Asia will be a plus for the regional recovery. Overall, once the initial kneejerk has passed, both China and Asian markets should regain their poise. Even if the China export machine is slowing, and the last year was exceptional for several obvious reasons, if domestic consumption is driving imports, that recovery should earn China a pass mark.

Looking ahead, we have the usual plethora of Federal Reserve speakers this evening, but the most attention will be focused on US Inflation releases. US Core and Headline Inflation for March YoY are expected to rise by 1.50% and 2.50%, respectively. However, the MoM data is arguably more critical, with March encompassing the economy’s initial reopening and some of those stimulus cheques being spent. March Core Inflation MoM is expected to rise by 0.20%, with the headline inflation rising by 0.50%.

Markets have become complacent about the inflation question, likely because the equity rally resumed with major indices hitting record highs in the US and Europe, justifying it as the street becoming more “comfortable” with rising inflation. We will see how “comfortable” markets really are if the MoM CPI prints are much higher than expected. I suspect bond yields will jump along with the Dollar in that event, with the Nasdaq and S&P 500 darlings of 2020 getting cyclically rotated for the Dow Jones pensioners.

Asian equities mostly higher

Having suffered yesterday, Asian equities are mainly green today, with yesterdays unloved markets in favour today. That suggests that choppy range trading and tail-chasing continue to rule the roost as equity markets, ex the FOMO-gnomes of Wall Street, search for a directional answer to sink its teeth in to.

Overnight, some long-covering hit Wall Street on a slow news day, with the S&P 500 unchanged, the Nasdaq losing 0.36%, and the Dow Jones easing by 0.16%. In Asia, the range-trade theme continues, with futures on all three creeping higher by just over 0.05% in quiet trading.

In Asia, the Nikkei 225 and Kospi have jumped 1.10% higher, having been unloved yesterday. China markets have received a temporary Balance of Trade scare, with the Shanghai Composite retreating to unchanged. The CSI 300 has shaved some of its earlier gains but remain 0.55% higher on the day. Hong Kong has shrugged off the China data, rising 1.15% as Alibaba continues its post-fine rally.

Regionally, Singapore has risen 0.35%, while Kuala Lumpur has fallen by the same. Taiwan is 0.760% higher, while Jakarta has lost 0.55%. Australian markets remain stuck in neutral after the non-descript New York session, with both the ASX 200 and All Ordinaries unchanged.

At the periphery, the China trade data is positive for the region. Imports were exploding across almost every sub-sector and rising from the Asian area as a whole. Looking at the post-release price action, investors seem more concerned with US Inflation, and the China data dump on Friday. I expect the too and for price action to continue through the rest of the session and into Europe.

Currency markets content to watch from the side-lines

Currency markets have moved into range-trading mode ahead of tonight’s US data, with US bond yields almost unchanged overnight, and no direction to be gleaned from equity markets either. The dollar index eased slightly by 0.11% overnight, but has risen 0.12% to 92.25 this morning, leaving us where we started yesterday.

Unsurprisingly, that has left developed market currencies almost unchanged as well, with EUR/USD steady at 1.1890, GBP/USD at 1.3735, and USD/JPY at 109.65. Key levels remain for EUR/USD at 1.1700 and 1.1925, 1.3675 and 1.3780 for GBP/USD, and 109.00 and 110.00 for USD/JPY.

The risk appetite indicating Australian and New Zealand Dollars edged slightly lower overnight, hinting that currency markets have not completely discounted the threat of firmer US yields. AUD/USD and NZD/USD are hovering just above support at 0.7590 and 0.7000, respectively.

USD/CNY remains marooned around 6.5500 after a quiet overnight session for the DM space in Asia. A holiday in Thailand gives the Baht some Covid-19 respite, but the Indonesian Rupiah and Korean Won both held onto yesterday’s losses.

The Indian Rupee continues to be Asia’s vulnerable standout. USD/INR rose above 75.00 yesterday to 75.20 and remains just below that level at 75.10 today. The expected rise of March WPI to near 6.0% tomorrow will likely cause more weakness for a currency already suffering a QE/Covid-19 hangover.

Oil treads water

Oil prices rose slightly overnight as Middle East concerns underpinned prices. Brent crude finished just 0.20% higher at $63.10 a barrel, while WTI crept 0.45% higher to $59.65 a barrel. Although the closes were neutral, both contracts traded in busy two-dollar ranges, hinting that interest remains high, even if directional momentum does not.

In Asia, oil has moved higher again, with Brent crude climbing 0.65% to $63.55 and WTI rising 0.50% to $59.95 a barrel. China’s import data will have provided some tailwinds, with crude imports increasing healthily. Fears of Iranian retaliation for the unspecified attack on its nuclear processing facility is likely to underpin prices this week. US/Iran talks resume in Vienna today, with markets discounting any hope of progress. That could provide a surprise reason to sell oil if, by some miracle, the two sides find common ground.

In the bigger picture, Brent crude continues to trade noisily between $60.00 and $65.00 a barrel, and WTI’s between $57.50 and $62.50 a barrel. Intraday sentiment and flows continue to dominate proceedings. A breakout of those ranges will signal oil’s next directional move.

Gold eases on fading short-term momentum

Having been led to water so often by gold’s promised nirvana, only to find the watering hole contaminated, it is clear that long-suffering bullish gold investors have no appetite to wear any pain on recent long positions. With momentum fading as the US 10-year yield remained unchanged again, long-covering set in and gold faded by 0.60% to $1733.00 an ounce. Asian trading is even more subdued, gold edging lower $1732.00 an ounce in directionless trade.

In all likelihood, gold will now settle into a $1720.00 to $1750.00 range, awaiting its next directional input, having traced out a double top at the 50.0% retracement this week. Everything now rests with this evening’s US Inflation data and whether a surprise deviation causes a move in the US yield curve, one way or the other. The risks are to the upside with inflation, and thus gold probably faces more headwinds in the coming sessions this week.

Only a close below support at $1700.00 an ounce threatens the premise that gold has traced out a longer-term structural low.