Normal Service Is Resumed | Daily Market Commentary with Jeffrey Halley
As quickly as it appeared, the doom and gloom of yesterday was consigned to the financial market’s dustbin, with normal service resuming on Wall Street overnight. US equities recorded a strong session led by the usual suspects, big tech. The US Dollar continued its gentle move lower while energy markets crept higher. Notably, gold broke through $1800.00 an ounce, jumping the $20 an ounce anticipated yesterday, before settling around $1810.00 an ounce.
There was no notable news overnight to spur the return of confidence. Covid-19 cases continue to explode in the US sunbelt and around the world. Yesterday was what it was, a one-day correction of an extended multi-day bull run, with monetary policy globally continuing to confer immunity from the pandemic faster than any pharmaceutical company could ever hope to achieve.
This morning’s data releases in Asia have posted contrasting pictures. We finally got a decent data print from Japan, the regions laggard. Machinery orders rose by a much improved 1.70% MoM, although they fell 16.30% YoY. Still, this is the first win in quite some time for Japan.
Australian Home Loans in May fell by a much higher than expected 11.60%. That reflects the lingering hangover to activity from the nationwide lockdowns in the lucky country, with consumers preferring a wait and see approach to the economic recovery. The data going forward will be impacted by the renewed lockdown in Melbourne, with Victoria State self-isolating to control their stubborn Covid-19 situation.
China’s Inflation Rate continued to creep higher, rising slightly above expectations at 2.70% YoY. Food prices were the main culprit, edging higher. The restrictions on overseas imports will likely keep that component elevated for some time. Overall though, the inflation data contains no real concerns, with many countries around the world probably wishing they had that inflation rate.
Australia this morning is busily poking the wasps’ nest with China. Warning Australian citizens that they should reconsider the merits of remaining in Hong Kong over worries they will be singled out for security law love. Looking at the income tax rates and cost of living in Hong Kong versus Australia, and the joys of Lan Kwai Fong’s bars and restaurants on any given night, the Australian Government has a tough sell on its hands. Australian has followed Canada in announcing the suspension of its extradition treaty with Hong Kong.
The Australian press is also reporting that Prime Minister Scott Morrison will shortly announce measures to assist Hong Kong residents wishing to leave. I eagerly await the PM’s strategy on getting that one passed his voters. An AUD 100,000 residency application perhaps? If the PM is successful, I would definitely buy a used car, with three lady doctor previous owners and genuine low mileage, from him.
Either way, China is sure to be non to happy, with some sort of retaliatory measures a 100% certainty. Australian’s in Hong Kong perhaps finding the residency permits withdrawn on “security grounds” and a few more bans on agricultural products possibly? Beating up Australia and the United Kingdom over Hong Kong is much easier than beating up America. Depending on what the PM says, Australian equities and the Australian Dollar could be negative risk point over the coming sessions.
The rest of the day’s data points are strictly 2nd-tier until this evening’s US Initial and Continuing Claims releases. Initial Claims are expected to remain stubbornly at 1.5 million. Continuing Claims will paint the same picture, remaining at 19.0 million. With US states extending or reinitiating movement restrictions and closures, there is potential for a negative surprise from this data. But, having corrected lower already this week, asset markets are likely to shrug it off unless there are blowout headline numbers.
Equities are trading sideways in the Asia-Pacific region.
Equity markets across the region showed solidity yesterday, refusing to bow to the schizophrenic noise from Wall Street. With the former having taken its medications and returned to the buy-everything trade overnight, it’s probably no surprise that Asia has not fully bought into that move either. Big tech dragged US markets higher overnight, the Nasdaq rising 1.44% with the S&P 500 and Dow Jones both rising around 0.70%.
Today, even China Mainland markets appear to be in consolidation mode, after gains of over 10.0% over the past week. Data showing stock margin lending rapidly increasing, maybe adding a cautionary note. It is important to remember that fast-money retail investors dominate mainland stock markets. The Shanghai Composite and CSI 300 are both just shy of unchanged this morning.
Elsewhere the Nikkei has crept 0.40% higher with the Kospi climbing 0.60%. The Hang Seng is just 0.20% higher while Singapore stocks have fallen modestly ahead of the election and public holiday tomorrow. The Straits Times is falling 0.40%. Australian Stocks have shrugged off China fears, the ASX 200 and All Ordinaries rallying 1.0% today. Geopolitics though threatens to cast an increasingly dark shadow.
Overall, Asia looks content to remain in consolidation mode today, particularly on the China Mainland. Headlines will dominate short-term movements with the region preferring to wait for confirmation that Tuesday’s retreat on Wall Street was a one-hit-wonder.
The US Dollar resumes its slow move lower.
With equity markets returning to FOMO v-shaped recovery mode, the green light was given for the US Dollar sell-off to resume, after pausing on Tuesday. Price action was orderly though, with the US index falling just 0.40% to 96.50. The US sold 10-year notes at a record low yield overnight, which also helped the Dollar retreat along nicely.
The EUR/USD regained 1.1300 on its way to 1.1330 overnight. GBP/USD rallied after new UK fiscal stimulus measures were well received, climbing to 1.2610. The trade-centric Australian and New Zealand Dollars also recorded 0.50% gains, rising to 0.6970 and 0.6570 respectively. Regional Asian currencies made moderate gains overnight, although they are mostly unchanged this morning.
The onshore and offshore versions of the Chinese Yuan continue to hold investors’ attention, though. The onshore CNY had another strong fixing today at 7.0085, versus 7.0207 yesterday. That has sent both USD/CNY and USD/CNH through the psychologically import 7.0000 versus the US Dollar this morning. Equity inflows are currency supportive, with China seemingly intent on reassuring offshore investors, that FX risks associated with investing in Mainland stocks are minimal for now. It also rather elegantly serves to take the pressure of current account outflows.
Both Yuan’s look likely to continue strengthening in this context. Initial targets being 6.9500. Only a sudden flight to US Dollars ex-China will muddy the picture. With markets putting Tuesday’s correction quickly behind it, that seems unlikely for now. The scope of any US retaliation for China’s Hong Kong security law being the primary risk point.
Oil drifts higher as range-trading continues.
A fall in US gasoline inventories by 4.85 million barrels overnight, offset the unexpected rise in official crude inventories by 5.65 million barrels. That limited any negative sentiment and reassured investors that petroleum consumption remains robust in the US, despite the economic hit caused by the increase in Covid-19 cases across the sun belt states. With sentiment balanced, oil followed equity markets modestly higher. Brent crude rising 0.70% to $43.10 a barrel, and WTI rising 1.0% to $40.85 a barrel.
Both contracts are unchanged this morning in Asia, with critical resistance on Brent crude at $44.00 a barrel, and on WTI at $42.00 a barrel. Only a fall below $40.00 a barrel for Brent crude, or $37.00 a barrel for WTI, would suggest that the rally in oil prices has run its course.
Oil prices continue to remain balanced between Covid-19 induced growth concerns, and recovery expectations in Asia and Europe. Oil’s downside is likely to be limited unless the US situation deteriorates dramatically. OPEC+ discipline is high, and the grouping will no doubt find the willingness to extend the headline cuts if the situation calls for it.
Gold finally breaks $1800.00 an ounce.
Gold finally found the momentum to successfully break through formidable resistance at $1800.00 an ounce overnight. As expected, the move through $1800.00 sparked a quick jump to $1819.00 an ounce, as stop-loss, model and algorithmic buyers leapt into the market. After the initial frenzy died down, gold settled back to $1809.00 an ounce, recording a 0.80% gain for the session.
With the US real yields continuing to track deeper into negative territory after last night’s 10-Year Note auction, and with the $1800.00 level monkey of its back, gold is now well poised to make new, and possibly rapid advances higher.
Gold’s next technical target is the September 2011 high at $1921.00 an ounce. The charts show no technical resistance of note in between. Sell-offs should now be contained by $1795.00 an ounce, $1780.00 an ounce at worst. Intra-day resistance lies at the overnight high at $1819.00 an ounce.
Gold is unchanged at $1809.00 an ounce in Asia, in line with the quiet day being displayed in other asset classes. With New York’s session leading the moves, Asia will remain content to watch from the side-lines. With negative real yields, across the US yield curve though, gold should now find plenty of willing buyers on any intra-day dip.