Asia is treading cautiously!
Asia is treading cautiously this morning despite the blowout US Non-Farm Payrolls data on Friday pushing Wall Street to an impressive finish. Greater China, Australia, Europe and Canada, to name but a few, are on holiday today, and volumes are likely to be muted as a result.
Friday’s session was notable for what did not happen, then what did. The US Non-Farm Payrolls rose by 916,000 jobs, far higher than expected and broad-based across sectors. Going forward, we can expect one million-plus prints if the US vaccination efforts stay on track. US equities rose, but the rally was predominantly in the Nasdaq and not the Dow Jones. Longer-end bond yields actually fell, notably the 30-year. That dragged the US Dollar lower and lifted gold impressively for the second day in a row.
The price action suggests that the shorter-term market was positioned for a blowout payrolls number, which for once, played the game. The noise will now move to “peak bond yields,” which I suggest will be premature. US Market and ISM Services PMI’s this evening is likely to outperform, and US PPI will be closely monitored at the end of the week, as will US Initial Jobless Claims. Any of these could spring an inflationary surprise.
The latter part of the week also sees the release of the FOMC Minutes and a speech by Fed Chair Jerome Powell. US equity markets have been schizophrenic of late, even as they consolidate at record highs. Trading has been dominated by cyclical/2020-darlings tail-chasing on a rolling daily basis. That suggests a lack of conviction at these levels, and those choppy ranges have been reflected, to some extent, in currency, bond and precious metals markets.
With the US Non-Farm data now likely to print at one million-plus per month going forward as the US reopening achieves orbital velocity, Jerome Powell will have to be very careful with his words this week. The Services and PPI data could reinforce the rising prices backdrop. Drop-in President Biden’s proposed $2.3 trillion infrastructure package, and we have plenty of fuel to keep the inflationary fires burning. We have not seen the last of Dollar strength, higher yields or cyclical rotation.
In Asia, the calendar is understandably thin today. Thailand Inflation is expected to be around zero per cent MoM, and unfortunately, the Bank of Thailand doesn’t have any gas left in the policy tank with interest rates at record lows. Singapore Retail Sales should climb into positive territory MoM, but demand remains constrained, as evidenced by the recent car sales data.
Philippines Inflation, like India’s, will approach 5.0% tomorrow as Covid-19 wreaks havoc on logistics and food prices even as domestic demand shrinks. Like India, the Philippines will have to just keep riding the stagflationary storm and hope that currency markets remain forgiving. The Bank of India announces its latest policy decision on Wednesday, and like the BSP, it will stay unchanged. The Rupee and the Peso, along with the Rupiah, remain vulnerable to more increases in US yields and US Dollar strength.
China releases its Caixin Services PMI tomorrow, with a rise to near 53.0 in prospect, from last month’s 51.50. China domestic air travel for this Ching Ming holiday of the past few days has apparently risen to pre-pandemic levels. That signals that domestic consumption is starting to play catch-up, even as China’s manufacturing/export facing sectors see slowing rates of monthly improvements.
A blowout Caixin will probably see the Chinese Yuan firm as markets price in a greater certainty that the PBOC raises its Loan Prime Rates in late Q3. As far as China equity markets go, I will content myself to watch from the side-lines. There are far too many moving parts going on in the minds of China’s retail traders for me to decipher at the moment. Both the CSI 300 and Shanghai Composite charts remain ominous.
Finally, despite the noise of the US Covid-19 vaccination efforts, the virus continues to wreak havoc elsewhere. Ontario, Canada, Metro Manilla, India, Brazil remains troublesome epi-centres, and the list is not complete. But there is nothing like intelligence on the ground. My friend’s weekend walks in Paris with her petit chien, and resulting social media posts, reveal a very “liberal” interpretation of France’s latest lockdown by Parisian’s. No social distancing, a smattering of masks, the list goes on.
If Parisian’s lack of social discipline and high entitlement quotients are indicative of Europe as a whole Europe will remain a thorn in the side of the global recovery, and OPEC+’s hopes, for longer than the market is currently pricing. I remain long Boris, short Macron. Jeremy Clarkson would be proud.
Thin Asian equity markets.
With Mainland China, Hong Kong, Taiwan and Australian markets away today, regional trading is muted, even cautious. Although the impressive US data on Friday propelled Wall Street to a strong finish, and with no notable news over the weekend, regional Asian markets have crept modestly higher.
On Friday, Wall Street lapped up falling bond yields and robust US data. The S&P 500 rose 1.18%, the Nasdaq leapt 1.76% higher, and the Dow Jones climbed by 0.53%. When cyclical rotation should have dominated, the Nasdaq’s outperformance, in particular, suggests that US equity markets are perhaps more sensitive to falling bond yields than global recovery plays for now.
In contrast, the Nikkei 225 has risen 0.80% this morning, while the Kospi remains unchanged. Singapore has climbed 0.80%, while Kuala Lumpur, Jakarta and Bangkok are unchanged. Liquidity is gravitating to Japan and Singapore at the expense of regional markets, and investors appear content to play wait-and-see until tomorrow. With Europe on holiday today, volumes will rapidly taper this afternoon in Asia.
Currency markets are quiet.
Holiday-thinned trading conditions have left those Asian markets still often content to sit today’s session out on the side-lines. The US dollar index rose just 0.11% on Friday to 93.02, balanced between strong US data and infrastructure prospects and US long bond yields that unexpectedly fell quite sharply. In Asia, the index has edged 0.08% lower to 92.95 in non-descript trading.
Overall, the dollar index had a volatile week last week, ranging noisily between 92.85 and 93.45. The technical picture shows the index consolidating recent impressive gains despite the noisy tail-chasing ranges. Only a fall through 92.50, its 200-day moving average (DMA), suggests that the US Dollar rally has run its course for now.
EUR/USD survived a test of 1.1700 last week, but its recovery ran out of steam ahead of 1.1800, and the single currency is trading at 1.1768 this morning. Those two levels remain Euro’s technical pivot points as the week starts. Likewise, GBP/USD has recovered to 1.3835 as the week starts but has yet to recapture its multi-month upward channel, which lies just above at 1.3870. Sterling’s outperformance versus the Euro should resume this week as traders build the UK vaccination premium back into the EUR/GBP cross.
Despite the noisy US data on Friday, Asian regional currencies had a quiet session relatively. The fall in US bond yields did not result in an immediate Asian currency rally, with markets preferring to await the return of Mainland China tomorrow.
Oil edges lower in Asia.
Muted holiday trading has seen some unwinding of Friday’s rallies, with Brent crude and WTI edging lower. On Friday, Brent crude rose 2.60% to $64.65 a barrel, and WTI rose by 3.05% to $61.65 barrel after the impressive Non-Farm Payroll data. Both contracts have edged 20 cents lower today.
The seemingly invincible accelerating US recovery has offset OPEC+’s announcement on Thursday of a scaling back of production cuts starting in May. Notably, Saudi Arabia will also unwind all of its unilateral production cut by July. The addition of another 2 million barrels a day into international markets by OPEC+ is a calculated risk on the global recovery, maintaining momentum. Thankfully, with monthly decisions now, the group has the flexibility to temper those proposals if things don’t go to plan.
The OPEC+ decision, perhaps nudged along by increasing Iranian production heading to China, probably means we have seen the best of the oil rally now for the next few months. Positive progress on Covid-19 in Europe and India, and the Biden infrastructure proposal in Washington DC will be needed to get Brent crude back to the $70.00 a barrel area anytime soon.
For now, Brent crude continues to move in a wide $60.50 to $65.50 range, with WTI is pinned in a $57.50 to $62.50 range, with a slight upside bias on both.
Gold surprises once again.
Gold rallied impressively for the second day in a row on Friday, climbing 1.30% to $1730.00 an ounce. Gold has now unwound all last week’s losses, although it has drifted lower to $1725.00 an ounce in moribund Asian trading.
It is becoming clear to me that gold’s sensitivity is not to future inflation expectations but rather, to moves in US bond yields, notably the 10-year tenor. The 10-year and 30-year yields have fallen quite notably on Thursday and Friday, and gold has duly recaptured all of its losses. So, gold has become, in effect, a US zero-coupon bond. (Gold doesn’t pay interest)
The rally on Friday has moved gold back into the middle 50.0% and 61.80% Fibonacci retracement levels at $1760.00 and $1680.00 an ounce. That implies that the long-term base that gold has been trying to form is back in play again. Alas, gold’s correlation to the US yields may make that too simplistic a theory and given that I believe that the US yield curve steepening has not run its course, gold, therefore, remains a sell on rallies.
Gold has initial resistance at $1745.00 an ounce, with support at $1715.00 and $1705.00 an ounce. With Europe on holiday today, I suspect it will remain in a $1720.00 to $1730.00 an ounce range until New York arrives.
This commentary is kindly contributed by Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA