Lots of Moving Parts, Including Ships!

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

BREAKING NEWS: Inchcape Shipping Services report the Ever Given has been successfully refloated. Twitter link here….

The week will be a busy one for financial markets, with lots of moving parts as a new month starts. One part that refuses to move is the Ever Given container ship; it moved slightly over the weekend but is still refusing to budge and continues to block the Suez Canal. The knock-on effects are still reverberating through world trade, and account in no small part for the rise in oil prices on Friday.

Wall Street held its own on Friday despite reports of large-scale stock liquidations by a distressed family office. Asia appears to have shrugged that of this morning, content to follow the underlying positive finish and after China Industrial Profits were released over the weekend. The 179% YoY gain was flattered by China’s lockdowns at the same time last year. However, compared to the 2019 data of the same period, it still shows an impressive gain. That sets up China’s official and non-official PMIs to put on a solid showing later this week.

That should allow Mainland markets to shrug of delisting fears in the US of China stocks that weighed on markets last week. It should also assuage the geopolitical tensions and reprisals against foreign companies that have criticised Xinjiang cotton and China’s decision to start collecting punitive duties on imported Australian wine. Neither in isolation is a significant issue in a global context, but together show a pattern of increasing militancy and belligerence to companies and countries who do not stay “on message” with China’s Communist Party rulers. For many international companies and governments worldwide, doing business in China will get more challenging, not less.

The UK releases GDP mid-week, and Europe releases PMI data, but the Covid-19 spat will continue to overshadow both. Key economies in Europe are also facing more Covid-19 restrictions as the Easter holidays approach at the end of the week. With the EU enacting a vaccine export ban and the members are squabbling amongst themselves, and with the UK, on who gets what. That issue and its implications for the Europe/UK recovery will cast a shadow over the Euro, Sterling and regional equities this week.

Asia also sees the releases of a raft of PMI and trade data this week, which is expected to highlight that the export-led sectors are continuing to power ahead. At the same time, domestic demand (possibly ex-China) remains sub-optimal. India is also set to restrict vaccine exports as Covid-19 cases explode there. With the US and Europe hoarding vaccines (the US paid for developing some of them, so fair play to them, I should add), Asia’s domestic recovery may be somewhat delayed. Rollouts are proceeding at a snail’s pace across much of Asia, and definitely Australasia.

As ever, the US will grab most of the attention, and this week has some significant event risk. On Wednesday, President Biden will unveil the first concrete details of the $3 trillion Build Back Better programme, or BBB as I describe it. That may be the United States credit rating in places after paying for everything. Increased taxes on corporates and high-earners will help pay for some of it, but there is no doubt that more debt issuance is on the way. US yields crept higher on Friday and may potentially spike again come Wednesday.

That may lead to more US Dollar strength and renewed rotational flows on stock markets. (read, sell tech) China held the daily USD/CNY fix at near unchanged levels today to relieve most of the rest of Asia. With a packed US data calendar that could well outperform, and more spending from President Biden, rising US yields leading to a rising US Dollar could see China’s USD/CNY fixes march higher. Asian currencies, with their Yuan event-horizon, and dirty pegs to the US Dollar, could finally take fright this week.

The US also releases ADP National Employment, ISM Manufacturing and US Non-Farm Payrolls in the second half of the week. All should outperform handsomely as the US recovery accelerates, and that could increase the chances of a bond tantrum, US Dollar strength and Asian currency woes. The risk correlated Australian, New Zealand and Canadian Dollar used as a proxy to the dirty peg Asian currency universe are also poised to suffer more.

Friday’s Non-Farm Payrolls are expected to rise by over 600,000 jobs, but I wouldn’t discount a 700K+ print. Friday is Good Friday, and all of Europe will be closed as well as the UK. Market liquidity, or a lack thereof, could well play a part if the Non-Farms prints much higher or lower than expected. In this scenario, some outsized volatility and moves across currencies, equities and bonds could occur.

Lastly, on Thursday, April 1st, OPEC+ holds its monthly meeting to assess its production cuts targets. Although spot volatility in oil markets has been a rollercoaster over the last week, it will be the futures delivery curves that will concern OPEC+ the most. The capitulation of oil last week, Suez Canal bounces aside, has wiped out the backwardation in the futures delivery curves. Without boring readers, markets in backwardation are an indicator of tight supplies.

With Asian importers on refinery maintenance cycles and content to use oil in storage, no solace is likely for oil prices from that direction this week. In this scenario, OPEC+ has almost zero chance of loosening the production cut targets. Of course, OPEC+ has surprised us before, but that is tilted towards supporting prices, and not forcing them lower. Reports are coming in that Ever Given had been refloated in the Suez Canal with oil immediately falling in price. The chances of an OPEC+ move recede to microscopic now.

Asia’s data calendar is quiet today. Vietnam’s Industrial Production and Retail Sales have outperformed, with Malaysia’s Balance of Trade and Singapore Export Prices to come. However, that data will be drowned in the noise of the Ever Given being refloated in the Suez Canal.

Asian equity markets higher.

Asian equity markets are higher today despite China geopolitical worries and the forced liquidations seen on Wall Street on Friday. Asian markets should also receive an intra-day boost from the news that the Ever Given has been refloated in the Suez Canal.

Although US index futures have retreated in Asian trading, the underlying indexes recorded a very positive session on Friday in recovery hopes and boosted by the new Biden infrastructure package’s impending details. The S7P 500 rallied by 1,66%, the Nasdaq climbed 1.24%, and the Dow Jones rallied by 1.39%.

Asia has ignored the US futures today and produced a strong performance. The Nikkei 225 has climbed by 0.95%, although the Kospi is up just 0.20%. The Ever Given news should boost the Kospi as the day goes forward. In China, the Shanghai Composite and CSI 300 have climbed 0.80%, with Hong Kong rising just 0.20% as China tech fears persist, notably the threat of US delisting.

Taiwan has leapt 1.20% higher today, with Singapore climbing 0.55%, Kuala Lumpur by 0.55%, and Jakarta by 0.30%. Bangkok is 0.70% higher after announcing plans to reopen to vaccinated tourists, and Vietnam is 0.80% higher post-data.

Australian markets are lagging through a combination of factors. Brisbane has entered a 3-day Covid-19 lockdown, the Government’s JobKeeper programme ended yesterday, China announced the official start of Australian wine duties, and US futures have retreated in Asia. The ASX and All Ordinaries have fallen by 0.30%.

Overall, the Suez Canal developments will be a robust short-term tailwind for Asian equities, and they will also boost sentiment in Europe. European and UK markets should open stronger this afternoon even if the vaccine/Co vid-19 situation acts as a cap on gains.

The US Dollar rises in Asia.

The US Dollar traded sideways on Friday as US yields tracked higher. It rallied versus the Japanese Yen and gave back some recent gains versus the Euro and British Pound. The dollar index finished 0.12% lower at 92.74, creeping higher to 92.78 in Asia in subdued trading.

In Asia, the US Dollar has risen 0.20% versus the Canadian and New Zealand Dollars while remaining stable against the Australian and other major currencies. USD/CAD has risen through its one-year downtrend line to 1.2605 today, signalling gains to 1.2800 in the week ahead. New Zealand markets have taken the new government property measures negatively, expecting them to crimp growth. NZD/USD has fallen to 0.6985 and would target 0.6800 going forward.

Asian currencies are stable after the PBOC left the USD/CNY fix only modestly changed today. They may also receive a Suez Canal boost over the rest of the session. As outlined above, though, regional currencies are potentially vulnerable to bond market developments in the US this week, and the Yen will need to face JGB auctions this week also.

Oil markets fall on Suez Canal developments.

Oil markets rallied impressively on Friday, capping an extremely volatile week. Expectations of a move by OPEC+ to loosen production targets have receded, US recovery expectations continue to rise, and the ongoing Suez Canal situation all combined to boost prices on Friday. Brent crude rose 3.65% to $64.40 a barrel, and WTI rose 4.0% to 60.80 a barrel.

News that the Ever Given appears to have been refloated in the Suez Canal has sent prices immediately lower in Asia; hopes rising that the delivery bottleneck to Europe will soon reopen. Brent crude has fallen 1.0% to $63.75, and WTI has declined 1.35% to $60.00 a barrel.

Oil’s volatile trading is set to continue, and if the Suez Canal situation is correct, oils recovery pre-Opec+ may well be over. Given the volatility last week, Brent looks set to move to the lower end of its $60.00 to $65.00 a barrel range. Similarly, WTI is likely to drop to the lower side of its $57.50 to $62.50 a barrel weekly range.

Gold’s consolidation continues.

Gold prices continue to quietly consolidate, ignoring the noise from other markets. On Friday, gold drifted 0.35% higher to $1733.00 an ounce, giving up some of those gains this morning, falling slightly to $1730.00 an ounce.

Gold’s overall price action remains construction, though, and the yellow metal is attempting to form a longer-term base, between its 61.80% and 50.0% Fibonacci retracements, setting the scene for a move back above $1800.00 an ounce if all goes to plan.

Gold has support at $1720.00 and $1700.00 an ounce, followed by the 61.80% retracement in the $1685.00 area. It has initial resistance at $1755.00 an ounce, followed by the 50.0% retracement at $1760.00 an ounce.

I expect gold to continue to range between $1720.00 and $1750.00 an ounce this week.