Buy The Dip Friday
Buy the dip in everything should be the theme of the day in Asia after the FOMO gnomes of Wall Street spent their overnight session doing much the same thing. Market risk sentiment improved noticeably as US banking heavyweights rolled out a procession of strong earnings prints, weekly Initial Jobless Claims fell by much more than expected and US YoY and MoM headline and Core PPI rose by less than expected. Later in the session, the US Crude Inventories nudged the buy everything bulls along with official crude inventories leaping to 6.1 million barrels.
Markets completely ignored the fact that the PPI data was flattered by a slump in airline fare prices, while ominously, the energy and food components surged. But I have long learned that markets are naturally inclined to see what they want to see when the days narrative is strong. President Biden will also help sentiment today, having signed the temporary US government debt ceiling extension into law this morning.
There is a small sigh of relief in Asia today as well as China rolled over CNY 500 billion of maturing MLF’s at an unchanged 2.95% and injected CNY 10 bio in short-term liquidity via the repos today. China announces its one and five-year Loan Prime Rates next week, but I expect any easing to come via a RRR cut to the banks, rather than a straight rate cut.
I have said previously that in Q4 we can expect a lot more two-way price volatility across asset classes as the reality of the Fed taper, and potentially other central banks, gradually with draw the monetary punch bowl, no more so than in the equity space. The buy-everything gnomes will have the day as the week comes to a close, but I note the US Dollar, which was sold heavily overnight once again, retraced all those losses by the sessions end. US yields have stopped rising temporarily, but they’re not really retreating either. That is a subtle signal that markets will no longer trade in a linear fashion going forward and I believe a stronger US Dollar and firmer US yields will the major themes of Q4 thanks to the Fed taper and sky-high energy prices. Two more Fed Presidents talked about its time to taper last night by the way, just saying….
The data calendar next week looks relatively quiet meaning that a week of schizophrenic tail-chasing by markets on daily mood swings in sentiment beckons. The buy-everything like its 2020 sentiment could continue through next week though if US earnings power higher few cautions sounded on the 2022 outlook. I wouldn’t bet my house on it though as I suspect China’s ongoing sectorial clampdowns, and China’s property developer space still have more to give.
On that note, Asia’s most important data will be released on Monday as China announces Q3 GDP, and September Retail Sales and Industrial Production. There is a fair degree of binary risk around this data. Soft data will unnerve markets and increase concerns about the global recovery. Firm data should keep the bullish sentiment alive a while long Fed taper be damned. Softer prints will make Wednesday’s one and five-year LPR decisions more interesting, but again, I expect easing to come via a RRR cut.
Circling back to today, Asia’s data calendar is empty while Europe is dominated by a series of regional inflation prints, including France and Italy. Given that they’re not Germany, they will be of passing interest only. This evening’s highlight will be US Retail Sales and Michigan Consumer Sentiment, although the NY Empire State Manufacturing Index for October is going to be more interesting for nerds like me. Softer sentiment and/or retail sales (which are expected to ease by -0.20% anywhere), might undermine the bullish sentiment sweeping markets, although it is unlikely to derail it. The Empire State data is expected to fall to 27 from 34 in September. A bigger drop will be of more concern to me, implying that labour market tightness, supply chain issues and input costs are taking their toll.
Asian equities coat tail US rally.
US data overnight swung sentiment back into positive territory, boosted by strong earnings from US banking heavyweights. That saw an impressive rally on Wall Street where the S&P 500 rallied by 1.71%, the Nasdaq powered 1.73% higher, and the Dow Jones climbed by 1.55%. A sign-off of the temporary US debt ceiling extension by President Biden this morning has kept the music playing, with futures on all three indexes rising 0.30% in Asia.
That pent-up buy the dip demand has, unsurprisingly, flowed through to Asian markets to varying degrees. The Nikkei 225 has jumped 1.35% higher, with the Kospi climbing 0.90%. In China, the Shanghai Composite is sounding a more cautious note, rising just 0.10%, but the narrower Shanghai 50 has climbed by 0.50 after the PBOC rolled over CNY 500 bio of one-year financing today. The CSI 300 has climbed 0.30%. Although not a stock market holiday, the Chung Yeung Festival could be impacting domestic investor volumes today. Returning from the same holiday yesterday, Hong Kong’s Hang Seng has risen by 0.65%.
Across Asia, Singapore has risen by 0.50%, while Taipei has leapt by 2,10% with Mainland China Hisense, a major consumer goods manufacturer, saying that chip shortages could last another two to three years. After benefiting from the turmoil of the last few days, some profit taking is evident in other ASEAN markets. Jakarta is 0.20% lower, with Kuala Lumpur unchanged and Bangkok edging down by 0.25%. Manila continues a stellar week, rising by 0.45%. India markets are closed today for a national holiday.
Australian markets, set to rise after the overnight rallies anyway, received a boost that NSW will scrap all quarantine requirements for vaccinated incoming international travellers from November 1st. That continues notable trend of loosening border requirements seen by ASEAN countries this week. The ASX 200 and All Ordinaries are 0.50% higher.
The usual end of week/weekend risk concerns are tempering gains in much of Asia, the ever effervescent retail-driven Japan markets the usual exception. Nevertheless, with the recovery in risk sentiment in New York continuing through Asia, European markets should happily follow-the-leader and start this afternoon’s session on a positive note. Assuming there are no negative data or headline surprises from the US this evening, there should be no reason for equity markets not to end the week on a positive note in New York.
The US Dollar is sharply unchanged.
The dollar index finished almost unchanged at 94.00 overnight but that hide what was quite a choppy session. The index slumped to 93.75 intra-day as risk sentiment leapt higher in markets but retraced all those losses by the session end. With US data and earnings supporting investor sentiment for now, the dollar index looks vulnerable to more softness assuming no negative surprises this evening. The fact that it managed to finish unchanged overnight suggests that its yield-driven, taper-expectation strength remains intact. The dollar index could revisit the overnight lows at 93.75 today, but only a weekly close tonight under 93.50 suggests a deeper correction. Heavy speculative long US Dollar positioning in the futures markets is likely to limit gains today as nervous longs look to exit ahead of the weekend.
The US Dollar has eased in Asia, pushing EUR/USD and GBP/USD 0.10% higher to 1.1610 and 1.3687. EUR/USD remains rangebound between 1.1550 and 1.1650, but GBP/USD has risen through resistance at 1.3680. With more hawkish comments coming from BoE officials still, a retest of the overnight highs at 1.3730 are a possibility, with a weekly close at that level signalling a test of 1.3800 next week. One note of caution on US Dollar weakness is USD/JPY, which has continued to rise to a 22-month high at 113.90 today. The yield differential play is very much alive and a test of 114.50 seems likely next week. Buying of GBP/JPY, AUD/JPY and NZD/JPY is often used to reflected positive sentiment in currency markets and should mean USD/JPY dips remain shallow.
AUD/USD and NZD/USD rode the waves of improved investor appetites overnight. AUD/USD rising 0.50% to 0.7415, its 100-day moving average (DMA), where it remains in Asia. NZD/USD was the star of the night, jumping 1.0% to 0.7035, boosted by a huge jump in its September PMI to 51.70% early this morning. It has climbed again to 0.7050 in Asia with 0.7100 its next technical target. The PMI is a strong statement that business confidence remains high despite Auckland’s deepening Covid-19 woes. Off course, if global investor sentiment heads south into the weekend, both antipodeans will likely unwind all of the overnight gains as quickly as they appeared.
In Asia, the PBOC returned to a neutral USD/CNY fixing at 6.4386 today after modestly weaker CNY fix yesterday. That seems to have done its job with USD/CNY hovering around the fix level at 6.4370, having traded a lot lower in the band recently. It seems that the PBOC’s subtle hint about excessive CNY strength has been heeded by local markets. Nevertheless, I am not expecting a weakening trend to emerge, as export price elasticity is likely rising along with China’s imported energy bill.
The Korean Won has strengthened today after the Bank of Korea spent the week sell dollars to defend the 1200.00 level. The Bok’s Lee said that a November rate hike is possible, and USD/KRW has retreated to 1181.50 as a result. USD/KRW staged a notable downside break through support at 1190.00 yesterday and the worst is probably over for the Won for now. Regional currencies are also stronger today as improved international sentiment weakens the US Dollar.
The CFTC Commitment of Traders report is likely to reveal heavy US Dollar long positioning versus the major currencies still. Some culling of that lop-sided open interest is probably necessary before the US Dollar rally resumes. However, the Fed taper will still rule the roost in Q4, along with increasing uncertainty around energy markets and inflation. That will maintain the supportive environment for US Dollar strength through Q4.
Oil prices are ominously firm.
A weaker US Dollar spurred energy prices higher overnight, helped by Saudi Arabia comments that suggested OPEC+ would not be drawn into ramping up output due to natural gas prices. Only a surprise jump in official US Crude Inventories to 6.10 million barrels took the edge of oil’s rally towards the end of the session. Brent crude finished 0.90% higher at $84.10, and WTI closed 1.15% higher at 81.45 a barrel.
Despite oil prices being at the top of their weekly range, Asia has continued buying this morning, pushing Brent crude 0.45% higher to $84.50, and WTI 0.30% higher to $81.75 a barrel. The fact that Asian markets are content to chase prices higher at weekly highs, instead of lurking on price dips, is a strong signal that energy demand remains robust.
The relative strength indicators (RSIs) on both contracts have moved higher into overbought territory and I still do not rule out a violent $5 to $8 barrel retracement lower as a result. Any sell-off will be as short in duration as the fall, should it occur. Looking at the price action today though, it seems that oil could remains in heavily overbought territory for a few sessions yet.
Brent crude has support at $83.00 and $82.00 a barrel with a rise through nearby resistance at $84.60 a barrel signalling a move to $87.00 by early next week. WTI has support at $80.50 and $79.50 a barrel with resistance nearby at $82.30 a barrel. A close above signals further gains to $85.00 a barrel.
Gold testing important resistance.
A slightly softer US Dollar and improving general investor sentiment lifted gold lifted gold 0.16% higher to $1796.00 an ounce overnight. Intra-day it tested $1800.00 before edging lower. Although the speculative frenzy of the Wednesday was not evident overnight, gold has still manged to maintain all its gains and it now threatening to erode the $1796.00 to $1798.00 100 and 200 DMA resistance zone. Gold edging lower to $1795.00 in a sull Asian session.
Of course, gold’s fate is entirely in the hands of the US Dollar and its direction, trading almost perfecting in an inverse correlation at the momentum. If US Dollar momentum continues to fade throughout today, gold could well move through $1800.00 and onto $1820.00 an ounce. If, for some reason, the US Dollar strengthens again today, gold could well find the short-term fast money running for the exit. That could see a sharp drop through $1780.00 to $1760.00 an ounce.