Asia Pauses for Thought

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

Asian markets appear to be taking a breather this morning, having led the global equity recovery yesterday. US markets found their mojo again overnight, with a day of calm on bond markets greenlighting equities to leap higher on the vaccine recovery optimism that characterised the Asian session earlier in the day.

US ISM Manufacturing PMI powered higher overnight, as did the Eurozone PMI’s, despite Asia delivering a Lunar New Year-affected mixed result. Fed Governor Barkin speaking yesterday, said that he wasn’t concerned by an increase in Treasury yields, with his attention much more focused on the slack in the labour market. It will be interesting to see if other Fed speakers this week convey a similar message.

Taking all of the above, along with the progress of the Biden stimulus package, as well as the J&J Covid-19 vaccine approval, with Novavax seemingly not far behind, it might be a bit premature to put those inflation fears back in the box. Even though the inflation itself is the good cholesterol type, and not the artery hardening wage/price stagnation type. That all means that we have probably not seen the last of the bond tantrum potentially, and it will be interesting to see how other asset classes, notably equities, survive that stress test.

Asian data releases this morning have not offered much insight either. South Korean Industrial Production rose year-on-year but fell month-on-month, with manufacturing soaring YoY as well. Retail Sales were flat YoY but rose MoM. Japan unemployment and job/applicants were unchanged while Australia’s Current Account outperformed, but Building Permits collapsed. South Korean and Taiwan Manufacturing PMI’s rose further into expansionary territory.

All-in-all, today’s data prints are sending mixed signals. On the one hand, manufacturing and exports remain strong, but there are hints that momentum may be slowing. A similar story told by the pan-Asia manufacturing PMI data yesterday, albeit distorted by Chinese New Year. The honest answer is it could go either way from here, but we will probably need to wait until next month’s data to draw a conclusion.

That doesn’t seem to be an issue for the United States, though, where the picture paints a rapidly recovering economy on all fronts. Shortly to be juiced by another $1.9 trillion fiscal stimulus package. Inflationary pressures ebbing? I don’t think so, and if this Friday’s Non-Farm Payrolls outperform, equity markets may find themselves stress-tested again.

All eyes will be on the latest Reserve Bank of Australia rate decision this morning after the RBA entered the market to cap bond yield increases yesterday. Like the US and elsewhere, the yield curve has steepened markedly, with Australia performing very nicely behind its closed borders. The reference rate will remain unchanged at 0.10%, but it will be the RBA statement that will capture the market’s interest.

Having unexpectedly extended QE previously, the street will be looking for signals that it remains uber-dovish and possibly takes a more active role in managing the shape of the yield curve. That will probably be positive for the Australian Dollar at the fringes (like yesterday). Still, the RBA will also be setting itself on a collision course with bond vigilantes in the future potentially.

If the US yields spike again, central banks from Europe to Australia to Japan, and points in between, may find themselves scrambling to contain the fallout in their bond markets. We may have to get used to more two-way price action going forward, a well overdue and welcome development.

Asian equities move modestly higher

US markets played catchup to the Asian rally overnight, posting very impressive results overnight. The S&P 500 rose by 2.38%, the Nasdaq leapt 3.01%, and the Dow Jones rallied by 1.95%. Some profit-taking is evident in Asia, though, with the futures on all three indexes lower by between 0.20% and 0.30%.

Having led the world higher yesterday, by virtue of being the first region to open, Asian markets are only recording modest gains today, not helped by the US index futures also easing slightly. The exceptions are South Korea and Taiwan, who were on holiday yesterday. The Kospi has jumped by 1.86%, and Taipei is 1.60% higher.

Elsewhere though, the picture is mixed for Asia, with some profit-taking evident after the strong outperformance yesterday. The Nikkei 225 is down 0.75%, with the Shanghai Composite 0.70% lower, with the CSI 300 down 0.85%.

Hong Kong has fallen by 1.0%, while Singapore and Jakarta have climbed by 0.25%, with Kuala Lumpur rising 0.75%. Australia’s ASX 200 and All Ordinaries are clinging on to 0.15% gains.

Notably, the biggest falls are in markets with the largest retail exuberance quota and suggest a temporary lull in momentum, not a structural turn in sentiment. European markets are likely to ease in sympathy as we all wait and see what mood Wall Street is in today when it arrives.

Divergent US Dollar strength continues

Even as Wall Street recorded its best day in recent times, currency markets, rather intriguingly, diverged from the buy everything playbook. We have become programmed to expect US weakness after US equity strength, but currency markets are not following the plan. The dollar index rose by 0.20% overnight and has risen by another 0.18% to 91.20 in Asia. That leaves the dollar index just shy of the 100-day moving average (DMA) at 91.28. A close above there this evening, a signal that the short-Dollar squeeze might be back, this time powered by US yields.

Much of the index’s strength is down to the weakness of the Euro, British Pound and Japanese Yen. It is unlikely the central bankers of Europe, Britain and Japan will tolerate any sustained rise in bond yields, in contrast with the messages from various Federal Reserve Governors. The potential widening of yield differentials further between the US and other developed markets is clearly weighing on forex markets more than equity ones at this stage.

All of which has left the US Dollar performing strongly this morning in Asia. EUR/USD is testing support at 1.2020 today; also, its 100-DMA, potentially targeting its January lows at 1.1950 initially and potentially extending to 1.1800. The previously bullet-proof British Pound is also under pressure with GBP/USD testing 1.3900. It could potentially fall to the base of its multi-month rising wedge at 1.3770. USD/JPY is approaching 107.00, but with overbought technical indicators, we could pause for breath at that level.

The commodity grouping all rallied overnight in sympathy with equity markets and a calm US bond market. That has reversed in Asia, with an unchanged RBA unwinding all of AUD/USD’s gains today. AUD/USD has eased to 0.7760, just above its rising wedge support at 0.7730. Failure opens up more losses to 0.7600 initially. The New Zealand Dollar has eased by 0.20% to 0.7250 today, with critical technical support at 0.7200. Failure targets losses to 0.7000 initially. USD/CAD has risen to 1.2680 in Asian trading, not far from its trendline resistance at 1.2700, a line that goes back to March 2020. A rise through 1.2700 sets the scene for a test of 1.3900 and then 1.4000.

Asian currencies are generally on the back foot today as well in the face of US Dollar strength. Notably, the Korean Won has weakened by 0.80% to 1121.50 with resistance at 1129.00. Although the region’s worst performer, the Singapore Dollar, Malaysian Ringgit, and Indonesian Rupiah have all given ground. Notably, USD/IDR has risen above 14,300.00. USD/CNY, though, remains almost unchanged at 6.4695, which should limit fallout amongst its regional peers. Only a move by USD/CNY above 6.5000 is likely to set off a concerted bout of regional currency weakness in the near-term.

Oil catches OPEC-itis

Oil prices retreated once again overnight, another divergence from the buy everything playbook that has served the FOMO herd so well these last 12 months. Brent crude fell by 1.85% to $63.20 a barrel, easing further to $62.80 a barrel in Asia. WTI fell by 2.20% to $60.20 a barrel overnight, easing below the $60.00 mark to $59.80 a barrel in Asia.

The chief concern weighing on oil markets is the looming OPEC+ meeting on Thursday. Expectations are rising that OPEC+ will ease the production cuts further. That is my opinion as well, although OPEC+ has surprised us before. The clamour among some members to refill their coffers, is likely to be a more powerful force then complaints externally about tight supplies. In the interests of OPEC+ discipline, the Saudi’s are likely to accede.

With the speculative market heavily long, the past three sessions’ falls look corrective ahead of Thursday’s meeting. Falling oil prices being incompatible with a recovery worldview evidenced by sky-high commodity prices and tightening bond yields.

Brent crude has support at $62.50 and $62.00 a barrel, with resistance at $64.50 and $67.50 a barrel. Failure of $62.00 could extend losses to $60.00 a barrel. WTI has support at $58.75 and $57.50 a barrel, with resistance at $61.00 and $63.80 a barrel. A capitulation by longs pre-OPEC+ could potentially extend to $55.00, where bargain hunter can and should be out in force.

Golds woes continue

Gold’s woes continue, as it finished the overnight session 0.55% lower at $1725.00 an ounce. Notably, gold staged an intra-day rally that failed at its $1760.00 an ounce breakout point before falling fiercely. That is yet another very negative technical development in an increasingly bleak picture for gold.

Gold has continued retreating in Asia in the face of broad US Dollar strength. It has fallen another 0.60% to $1714.30 an ounce today. Gold’s failure at its breakout point overnight is a strong signal that longer-term bullish positioning is throwing in the towel. Instead of gold finding bargain hunters on previous dips to $1800.00, for example, it is now finding sellers on any meaningful rallies. I also note that the SPDR Gold ETF outflows continue to be heavy, pointing to a further eroding of confidence.

Gold has resistance at $1725.00 and $1760.00 an ounce, its 50% Fibonacci and breakout point. Its next support is at $1680.00 an ounce, the 61.80% Fibonacci retracement. Failure clears the way for deeper losses to the $1600.00 an ounce region.