A Debatable Week | Daily Market Commentary with Jeffrey Halley
The last week of the quarter promises to be more exciting than last week, with an all you can eat buffet of economic releases. Save some room for the dessert section though, because the week’s highlight is sure to be the first US Presidential debate that will occur on Wednesday morning Asia time. President Trump, fresh from a New York Times report today that President Trump paid a grand total of $750 in federal income tax in 2016and 2017, has set the tone for the debate, demanding via Twitter (of course), that “Sleepy Joe Biden” take a drugs test before, or after the debate. Cringe or clap, the first presidential debate is usually the most closely followed and will be critical for President Trump to erode Mr Biden’s lead in the polls. (I would argue though, that the Vice-Presidential debate next week, is arguably more important) A strong performance by President Trump will likely be markets positive, in the US anyway, although perhaps less so in Asia, and China in particular.
House Speaker Nancy Pelosi has stated that the Democrats are working on a slimmed-down version of a follow-up fiscal stimulus package. (appropriations must originate from the House) Off course, being America, what the Democrats define as slimmed, what the Republicans define as slimmed down, and what Texan’s consider slimmed down, could be quite different. Nevertheless, the potential for a breakthrough that allows both sides to claim credit ahead of the election is still possible. A breakthrough should be strongly positive for markets.
Geopolitics is never far from the front of the queue these days, and we have had two developments on the US/China front. ByteDance has secured an injunction in the US courts, stopping the banning of its TikTok app from US app stores. It is more a stay of execution than a complete victory though. Offsetting this news, the US Government has placed export restrictions on US components to China’s largest chip manufacturer, Semiconductor Manufacturing International Corporation. (SMIC) That news shows US and China angst is alive and well, and will likely weigh on Mainland equity markets today, despite the strong session on Wall Street on Friday.
China Industrial Profits were released over the weekend for August, and although still down 4.40% on the year, showed a continuing strong recovery on a month on month basis. That should bring some cheer to Asian markets, as another confirmation that China’s recovery remains on track. That should be confirmed on Wednesday when both official and Caixin Manufacturing and Non-Manufacturing PMI’s are released.
On Thursday Manufacturing PMI’s are released across Asia and Europe along with Japan’s Tankan survey. We are expecting a mixed bag with Asian PMI’s rising, but still mostly in contractionary territory, with much the same story from the Tankan. Europe will see a retreat in its PMI’s as Covid-19 restrictions increase once again there, although they should mostly remain modestly expansionary. It will be vital that China makes a strong showing on Wednesday to maintain the positive momentum and offset the weakening PMI data elsewhere.
Activity is likely to be muted in Asia in the second half of the week. China heads on holiday for one week on Thursday, with Hong Kong, Taiwan and South Korea also away.
The Reserve Bank of India releases its latest policy decision on Thursday and will be closely watched by regional investors. With Covid-19 dealing a crippling blow to the economy, and an already weak financial sector reeling, India is screaming out for easier monetary policy. However, India is suffering from rising prices, leaving it in a stagflationary grip. The RBI will likely have no choice by to leave rates unchanged to defend the currency. A surprise cut should be immediately negative for the Indian Rupee. (INR)
The US releases a torrent of tier-1 data this week, notably GDP, Personal Income and Expenditure, as well as Initial and Continuing Jobless Claims. However, the main event will be Friday’s Non-Farm Payroll data, the last before the US elections at the start of November. With the hiring of US census workers rolling out of the data, jobs growth is expected to shrink to between 850,000 and 950,000 jobs added. With the initial fiscal stimulus effects having well and truly run out, a feeble number will unsettle markets and is likely to see equities sold heavily and the US Dollar rally strongly. I want to say it would give more urgency to Capitol Hill to heed the calls from the Federal Reserve for more fiscal stimulus, but US politics is marching to its own beat, and the Fed, and the rest of us, just have to sit with our fingers crossed.
Asian equity markets open higher.
Asian equity markets have opened higher this morning, following positive weekend data from China, and a strong rebound by New York equities on Friday. Wall Street broke its losing streak on Friday as dip-buyers made their presence strongly felt. The S&P 500 rose 1.60%, the Nasdaq jumped by 2.24%, and the Dow Jones rose 1.34%. In Asia this morning, US stock index futures are also higher, helping the risk-on environment.
The Nikkei 225 has risen 0.70% today, with the Kospi climbing 1.44% as a China semiconductor alternative after the US announced restrictions on China’s SMIC. That same news is tempering China equities, although they have started the day in positive territory. The Shanghai Composite has risen 0.60%, with the CSI 300 rising 0.85%, with Hong Kong 0.40% higher.
Singapore has risen 0.80%, with Kuala Lumper up 0.20%, weighed down by politic turmoil, and Jakarta is flat as Covid-19 concerns and the economy sap local confidence. Australia has only posted modest gains, as expectations for another RBA rate cut rise. The ASX 200 is flat, with the All Ordinaries up just 0.25%.
Asian stocks should consolidate their gains today, although a heavy data week, upcoming holidays, and political event risk, notably in the US, is tempering exuberance. We can expect a volatile week for much the same reasons across global equity markets in general. At this stage, it is too soon to say that the equity correction lower has run its course given the number of variables the week ahead holds.
The US Dollar continues to edge higher.
Continuing fears that Covid-19 may derail the economic recovery, notably in Europe and the US, has continued to support the US Dollar. On Friday, the dollar index rose by 0.26% to 94.58, consolidating the upward breakout through 94.00. The EUR/USD gave ground once again, falling to 1.1620 on Friday, with 1.1600 looming as a short-term pivot point as the week starts.
GBP/USD tested but held, just above its 100 and 200-day moving averages (DMA) at 1.2735 and 1.2715 respectively, carving out multi-day support at 1.2685. With trade negotiations with the European Union starting again this week, Sterling faces risk on a few fronts. The threat of escalating Covid-19 lockdowns, notably in London, Eurozone talks, and tier-1 data releases this week. A daily close below 1.2685 will signal further downward corrections, targeting 1.2500 initially.
The Australian and New Zealand Dollars have risen this morning, with both currencies holding above their 100-DMA’s on Friday. AUD/USD, in particular, has increased by 0.30% to 0.7060, although a daily close above 0.7100 is required to allay fears of further downward corrections. Commodity prices holding firm, and suggestions of RBA rate cuts being pushed back to November, appear to be supporting the AUD this morning.
Elsewhere, political concerns have seen the Thai Baht fade against the US Dollar. USD/THB has risen 0.25% to 31.707 today. The Indonesian Rupiah is steady at 14,900.00 with the market uninterested in testing Bank Indonesia’s resolve ahead of 15,000.00 this morning. The Malaysian Ringgit fell to 4.1650 last week, as Malaysian politics and potentially, a new government, reared their ugly heads. The Ringgit is steady this morning, but is vulnerable to more negative political headlines domestically, and could test 4.1750 and then 4.2000 this week.
In China, the PBOC will be intent on keeping the CNY and CNH markets calm ahead of the one-week holiday starting Thursday, and the full diary of international political and data risk. We expect USD/CNY to remain locked between 6.7500 and 6.8500 until the end of next week. Only a daily close above 6.8500 calls this outlook into doubt.
Although the FOMO dip-buyers of Wall Street were int he ascendant on Friday, the US Dollar ignored this and continued to strengthen. That signals that more level heads regard the current risk environment remaining elevated. Looking at the data and political calendar this week, I wholeheartedly agree with them.
Oil in consolidation mode.
Oil prices were almost unchanged on Friday and have edged only slightly lower this morning in Asia. For now, Brent crude and WTI appear to have reached a truce between the bulls and bears, with both sides happy to await developments this week to provide more clarity on prices. Despite all the noise, this week will generate, the trajectory of Covid-19 in Europe is likely to have the most profound effect. If lockdowns escalate, and European PMI data slows, the consumption side of the equation could tip in favour of lower oil prices.
Brent crude was almost unchanged at $41.80 a barrel on Friday, slipping to $41.65 today in directionless Asian trade. The 100-DMA, today at $41.50 a barrel, continues to provide support for Brent crude prices, as it did every day last week. Its 200-DMA, by contrast, continues to cap rallies, and today lies at $43.60 a barrel.
WTI was unchanged at $40.10 a barrel on Friday, slipping slightly to $40.00 a barrel today in Asia. Like Brent crude, sell-offs continue to be contained by its 100-DMA, today at $39.00 a barrel. Its 200-DMA is providing further support at $39.50 a barrel today. Rallies have been capped over the past week at $41.50 a barrel.
Neither contract shows any directional momentum now, with range trading set to continue for the first part of the week. The daily contracting ranges though imply a breakout is coming. At this stage, I have no certainty as to which way it will be.
Gold prices capped by a strong US Dollar.
Precious metals markets appear to be in wait and see mode as well, with gold edging just 0.30% lower to $1861.00 an ounce on Friday and remaining almost unchanged in Asia today. With a battery of Asian holidays later this week, gold should find support from portfolio hedgers on any dips in the first part of the week.
In the bigger picture though, gold is consolidating at the bottom of is one-week range, and near three-month lows. Having fallen over $100 an ounce in the past seven sessions, longer-term buyers seem reluctant to buy the dip as aggressively now, as they have in recent months. Part of that reason could be because of this week’s heavy data and political calendar.
Gold’s 100-DMA has held gold selloffs for the past three sessions. Today it is at $1847.00 an ounce and forms immediate critical support. Failure opens further losses to the $1800.00 an ounce region. Initial resistance lies at $1880.00 an ounce.
Given the reluctance of gold buyers to full commit at these levels, and with continuing US Dollar strength, more gold price falls cannot be discounted. We have more likely to see gold buyers chasing the market higher if $1900.00 an ounce gets recaptured, then for them to load up at these price levels for now.