Asia struggles under viral load

The buy everything exuberance that rounded out the week in New York had not translated into Asian markets today. Instead, it is surging cases of Covid-19 across Asia that have grabbed the headlines. Singapore introduced strict social restrictions over the weekend, as did Taiwan, with Singapore moving schools back online from the mid-week. Malaysia, already under an aggressive nationwide restriction regime, faces spiralling cases, as does Thailand, while Japan enlarged the number of prefectures in states of emergency.

In fact, Mainland China and Indonesia seem to be the last men standing on the virus front. Indonesia has imposed strict movement controls across the whole country over the end of Ramadan holiday season. But in Jakarta, photos of mostly unmasked holiday crowds thronging at local attractions (we do have some) has me concerned that trouble is coming.

In the bigger picture, it is Mainland China that matters from a cold-hearted economic perspective. An explosion of local transmission there would cause the Asian and global recovery story to be re-evaluated. Thankfully, there is little sign of that outcome occurring. A close second for the rest of Asia, is the effectiveness of the national restrictions being imposed. The following month will be critical. If the measures are effective, my ASEAN outperformance story remains intact. I will admit to a few nerves sitting here in Jakarta, though.

Complaints about the low vaccination rates across Asia are somewhat disingenuous. Yes, the wealthy parts of the Northern hemisphere have snaffled most of the supply of the non-China vaccines. In fairness, though, they did pay for them to be developed at light speed. The export restrictions by the European Union and India on the Astra Zeneca vaccine are having a more profound effect, as are US restrictions on essential vaccine manufacturing ingredients and equipment. That has severely disrupted COVAX and left Asian countries that can afford the posh messenger-RNA vaccines well down the queue.

After a couple of days off at the end of last week, two notable themes have attracted my attention. Firstly, the cryptocurrency space that regular readers will no is so beloved by me. With Elon Musk grabbing all the headlines on his Bitcoin/Dogecoin pivot, the real issue is the $5 million ransom paid by Colonial Pipeline to the ransomware hackers with untraceable Bitcoin.

Attacks on critical US infrastructure facilitated by cryptocurrencies will not go unnoticed by the US government and other countries. I would argue that the regulatory threat to cryptocurrencies has increased exponentially, more so even than big-tech regulation. Bitcoin has been under pressure since the Musk Tweet, but I would argue that the beginning of the end of the wild-West of crypto-mania is now upon us.

Secondly, stock markets have become traders’ markets and not investor markets. The high mid-week US inflation print had me looking like a genius for all of 24 hours. However, the retail sales disappointment quickly saw the inflation genie rebottled and the buy-the-dip army returning to the fold.

Stock markets worldwide are being dominated by tail-chasing flow traders, a warning sign for sure after 14 months of one-way price action. Notably, US 10-year yields remain near the top of their range despite the equity comebacks, even if it is struggling to rise above 1.70%. The Nasdaq has reclaimed its 100-day moving average (DMA) but remains below its March 2020 support line. Interestingly, gold is back at its highs, even as the US 10-year yield remains firm near 1.65%. That inflation genie is looking for excuses to pop back out of its bottle, and it is not going to grant financial markets three wishes.

Asia’s data calendar is relatively light this week, dominated by trade data from across the region ex-China. China has just released Industrial Production and Retail Sales for April, with both number retreating as expected from the post-Lunar New Year restart. As expected, Industrial Production YoY climbed 9.80%, while Retail Sales fell by more than expected to 17.70% YoY, quite a big miss. Like the US, markets will give China a pass mark but may not be so forgiving if a second month ensues. Things will get nervous if the data retreats, but inflationary inputs such as PPI keep on climbing.

One measure of that concern was the move by Chinese authorities at the back end of last week to temper the rallies in iron ore and rebar futures. As usual, they took aim at dastardly “speculators,” but the message is clear, the powers that be are not happy with aspects of the exponential commodity price rally.

Tuesday’s US FOMC Minutes will be of passing interest, if only to see if there is some dissension among the committee members on the lower for longer mantra. Given how nervous markets are now on the taper/inflation front, any dissension hints are likely to be punished by tail-chasing markets. Australia’s employment data on Thursday is always good for some intra-day volatility. A low print probably won’t have a lasting effect on the Lucky Country, though, with the Federal Budget last week having opened the taps in employment creation.

Finally, China announces its latest one and five-year Loan Prime Rate decisions on Thursday. It would be a massive surprise if they raised them, and with stock markets looking drunk at the top, my base case is unchanged. If the global recovery stays on track, that may be revisited in Q4 of this year.

Financial markets finished last week in risk-on mode. Due to its Covid-19 worries, Asia will be less inclined to chase equities higher, load up on commodity currencies, and pursue Friday’s oil rally much higher. With the US, UK and Europe in a different viral place, it would not surprise me if the buy-everything rally got another 24 hours of life this evening.

A mixed day for Asian equities

Asian equities have diverged today after Wall Street finished on a positive note as the tail-chasing army continued to buy the mid-week dip with vigor. The S&P 500 rose 1.49%, the previously unloved Nasdaq leapt by 2.32%, and the Dow Jones climbed 1.06%. Futures on all three have fallen around 0.25% in Asia, as the region’s malaise sparks some risk reduction.

In Asia, China markets have rallied this morning. Healthcare stocks have climbed, while steady economic data and easing commodity prices have boosted sentiment. The Shanghai Composite and CSI 300 are 0.95% higher, while Hong Kong has risen by 0.35%, with technology dip-buying evident in line with the Nasdaq jump Friday.

Covid-19 concerns are evident elsewhere in Asia, where cases are jumping across the region. The Nikkei 225 is 1.40% lower, with the Kospi down 0.80%. Taiwan has fallen another 1.40% today after the Covid-19 restrictions announced Friday, which capped a nightmare week for the Taiex. Government suggestions that they are preparing to intervene to support equities have limited the fallout today.

Singapore has edged 0.15% lower as restrictions are tightened there, with Kuala Lumpur climbing 0.60% after returning from the end of the Ramadan holiday. Jakarta has fallen 1.0%, with investors nervous about the potential for rising virus cases there, and rightly so. Bangkok is 0.80% lower, with Manilla falling 0.90%.

Australia is also bucking the trend, with the All Ordinaries and ASX 200 climbing 0.35%. However, regional virus nerves, and an easing of commodity prices slightly, are tempering the usual slavish tracking of Wall Street. With Europe and the US in a different virus space to regional Asia, they are unlikely to track the Asian retreat. That said, the evolution of Covid-19 across Asia this week is likely to be Asia’s directional theme, subsuming any data releases.

Asian currencies under pressure

The US Dollar finished last week on the back foot as the mid-week inflation fears ebbed and the buy-the-dip in everything crowd emerged from hiding. That saw the dollar index fall 0.46% to 90.30, capping a choppy week. From my perspective, the dollar index has settled into a new 90.00 to 91.00 range, with a break signalling the next directional move.

Assuming the global recovery bulls remain ascendant, the US Dollar may well continue lower versus the DM space. Notably, the Euro, Sterling, Australian and New Zealand Dollar all tested and held important support regions last week. EUR/USD at 1.2050, GBP/USD at 1.4000, AUD/USD at 0.7700 and NZD/USD at 0.7100. With US 10-year yields remaining near 1.65%, USD/JPY comfortably maintained its week’s gains around 109.50.

Asian regional currencies are suffering a Covid-19 hangover, though. USD/KRW has risen 0.65% to 1133.50, USD/IDR has climbed 0.50% to 14,270.00, USD/NTD has risen 0.40% to 28.075 with USD/SGD and YSD/THB both 0.25% higher to 1.3355 and 31.443 respectively. Only the Malaysian Ringgit and Indian Rupee have held their ground, partially because, I suspect, much bad news was already priced in. The Indian Rupee continues to benefit, perversely, from falling oil imports and, thus, less importer US Dollar buying.

The USD/CNY is content to continue ranging around a 6.4400 mid-point as the week begins. A weaker US Dollar this week will see the CNY strengthen towards 6.4000. However, the Covid-19 situation across Asia could see some regional divergence occurring for the first time in a while, particularly if cases continue climbing.

Oil continues to float at the top of the barrel

Oil sharply reversed the Thursday sell-off on Friday, with Brent crude rising 2.70% to $68.80 a barrel and WTI rallying 2.60% to $65.45 a barrel. A weaker US Dollar looks to be the main driver with the Colonial Pipeline reopening lifting sentiment.

Oil rose initially in Asia, but that has quickly petered out, leaving both contracts unchanged in Asian trading. Consumption fears, driven by Covid-19 restrictions across Asia, has sapped any bullish sentiment from local markets today. Nevertheless, both Brent crude and WTI remain close to the upper end of their two-month ranges. That suggests that India is mostly priced in and that recovery hopes continue to provide underlying support. Only a large outbreak of community Covid-19 cases in China will really spoil that narrative at this stage, with the US and Europe running full steam ahead. The rest of Asia’s woes being only a temporary cap.

Brent crude has resistance at $70.00 a barrel, and a break will target $71.50 a barrel in quick time. Support lies at $66.50 and $64.50 a barrel. The late-week sell-off by WTI held its rising channel support perfectly at $63.35 a barrel. It has resistance at $66.60 a barrel, followed by the channel’s top at $68.00 a barrel.

Gold is getting interesting

Gold weathered a severe inflation storm last week, with intra-day volatility reaching emotional levels for most of it. Nonetheless, and despite the noise, critical support at $1800.00 an ounce was never tested, boding well for the longevity of the gold rally.

Having probed below $1810.00 an ounce on Thursday, gold leapt 0.90% to $1843.00 an ounce on Friday as US yields eased slightly and the US Dollar fell. Interestingly, in the bigger picture, gold is maintaining its longer-term gains even as US long-dated yields remain near the top of their ranges. That strengthens the case that gold traced out a structural low in prices at $1680.00 an ounce as mentioned previously; its 61.80% Fibonacci retracement of the rally commenced in March 2020.

Gold may also be benefiting from some rotational flows out of Bitcoin, something I thought I would never hear myself say in 2021.

Covid-19 nerves in Asia appear to have spurred some risk-hedging buying as local equity markets remain under pressure. That has pushed gold 0.55% higher to $1853.00 an ounce, moving up through its 200-DMA at $1848.00 an ounce.

A close above the 200-DMA at $1848.00 would be another powerful bullish indicator, and the level should provide intra-day support. That is followed by $1845.00 and then $1820.00 an ounce. Resistance lies between $1875.00 and $1880.00 an ounce, after which the road is clear for a test of $1900.00 and $1920.00 an ounce.