Pass Me Some Suga | Daily Market Commentary with Jeffrey Halley
Financial markets limped to a neutral close on Friday after a roller-coaster week, notably on equity markets. The thrill of the amusement park rise is unlikely to subside this week though, with a packed calendar for financial markets to sink their teeth into, starting with the appointment of a new Japan Prime Minister today.
Barring any surprises, the victor should emerge as Chief Cabinet Secretary Yoshihide Suga. That decision should not be market moving as we fully expect a steady hand to remain on the tiller of Abenomics. Mr Suga has signalled that no further rises in sales tax are on the horizon, but all else should stay the same. Of more interest will be if Mr Suga signals that a new election will be held to mandate his new government. Finance Minister Aso signalled as such in recent days, although Covid-19 may affect the timing.
The central bank calendar is packed with the Bank of Japan, Federal Reserve and Bank of England all due to announce their latest rate decisions. Regionally, both Taiwan and Bank Indonesia release rate decisions. Of that esteemed grouping, the Bank of England and Bank Indonesia hold the most interest. We can expect rates to remain unchanged amongst the others, with the usual lower for longer, do whatever it takes rhetoric from them.
The Bank of England (BoE)could well signal that it intends to increase quantitative easing and may put the prospect of negative rates on the table. Readers will know that I hate negative interest rates as a policy, but the BoE may have no choice but to do both given the Brexit ructions an impending increase in unemployment on the near horizon. The odds of a hard Brexit have risen exponentially last week, as trade negotiations with the European Union have stalled. The UK Government’s tabling of a bill that unilaterally changes the terms of the Brexit agreement has drawn domestic and international condemnation. The actions of the government, and a probable dovish BoE will be most acutely felt in the currency markets, where the British Pound is likely to remain under some severe stress.
Bank Indonesia (BI) has an altogether different set of problems that look very much like a Hobson’s choice. With Jakarta -where the author is sitting- restarting a strict Covid-19 lockdown today, the economy is almost sure to come under more downward pressure. That was evidenced by Indonesia equities being cratered after the lockdown was announced last week. Indonesia, South East Asia’s largest economy and population centre, is screaming for more rate cuts, and the central bank ostensibly has plenty of room to deliver. However, the Indonesian Rupiah fell strongly last week despite plenty of BI, having been punished by investors for directly monetising some government bond issuance earlier in the year. BI’s line in the sand appears to be at a USD/IDR rate of 15,000.00, with the Rupiah closing at $14,900.00 on Friday. BI may have no choice but to reassure international investors by holding rates firm at 4.0%, even as the domestic economy sinks deeper into recession following Jakarta’s decision.
Another Asian country facing some tough choices is India, which sees the release of CPI this afternoon. The CPI print is likely to be, around 7.10% YoY, well above the Reserve Bank of India’s target. With Covid-19 rampaging across the country, India finds itself in the worst of all worlds, falling growth and rising prices. That stagflationary dark corner of economics is a dangerous one, and monetary policy cannot solve both issues simultaneously. Again, the immediate effects are likely to be felt in the currency market, and I struggle to see the Indian Rupee maintaining its recent gains versus the US Dollar. That would be bad news for the inflation equation, unless oil prices continue to fall on international markets. In a Covid-19 world, increasing productivity, (one stagflationary solution), will be nigh on impossible. India, like Indonesia, will likely have to just wear the pain, and hope that vaccines arrive enmasse in late Q4 2020; a strategy more than a few countries appear to be increasingly adopting.
In contrast, China will release Industrial Production and Retail Sales tomorrow. Industrial Production is expected to rise to 5.20% Y0Y. Retail Sales for August are expected to grow from -1.10% to 0.0%, confirming a recovery trajectory that belies the headline number. On Friday, China’s aggregate financing data for August blew expectations out of the water, rising to 3.6 trillion Yuan. Even if the PBOC is keeping a firm hand on interest rates, stimulus is in full cry in China. That will be good news for regional markets exporting to China, but also for China domestic markets, where both the export and domestic sectors appear to be recovering nicely. That partially explains the firmness of the CNY of late versus the US Dollar, and I expect that to be the direct reflection of the China recovery, with Chinese equities marching to their own beat.
China announced stricter capital requirements for non-bank financial companies over the weekend. Notably, this encompasses entities such as Ant Financial, and comes after the government capped lending rates by the sector two weeks ago. Ant Financials’ eagerly anticipated IPO should not be affected, though, with the government’s actions having been anticipated as a known known.
Things will get somewhat murkier for Byte Dance and its TikTok app tomorrow, which is the deadline for a sale of its US operations from the US government or be closed there. Now also needing Chinese government approval for a deal to proceed, Byte Dance has said it would not sell the core source code as part of a US divestiture. The pendulum appears to be swinging towards Byte Dance walking away from a US sale unless some sort of US extension is allowed. That may way on the Chinese tech sector today, emphasising as it does, the challenges China tech will have emerging from their enchanted garden behind the great firewall of China.
Japan’s SoftBank is also in the news, announcing a $40 billion sale of its Arm Holdings chip designer to Nvidia for $40 billion. The Financial Times is also reporting that SoftBank has revived a plan to go private. The combination is likely to lift SoftBank’s share price in Tokyo today, having been under pressure following revelations about giant positions in US tech-stock call options.
Equities head higher in early Asia.
US equity index futures moved higher early this morning following a mixed finish by the physical market on Wall Street on Friday. The rally is likely driven by the weekend announcement that Nvidia will by ARM from SoftBank. SoftBank’s sale and talk of privatisation are expected to lift the Nikkei 225 as well, with the appointment of a new Japan Prime Minister today unlikely to weigh on Japanese stocks.
Friday saw equity markets limp to a mixed finish, with the S&P 500 rising just 0.12%, the NASDAQ falling 0.56%, and the Dow Jones climbing by 0.51%. The futures on all three indices though, have increased strongly this morning, with all three up by between 0.75 and 1.0%.
In Japan, the Nikkei 225 is up 0.55%, with Australia’s ASX 200 and All Ordinaries up by 0.55%.
The positive early price action should overflow into regional markets, although the Byte Dance situation may temper Chinese equities, particularly on the CSI 300 and ChiNext. One outlier maybe Indonesia, with the Jakarta’s new Covid-19 lockdown starting today. Much will depend on whether the Indonesian Rupiah comes under heavy selling pressure again. Should that occur, that may spook local equity markets.
European markets may struggle to catch the tailwind of early Asia, with increasing Covid-19 cases across the continent an increasing concern. Brexit travails are likely to act as a brake on any exuberance with UK markets.
Currency markets stuck in neutral.
Despite a rather noisy week, with impressive intra-day ranges seen, the week’s close was a neutral one, with most G-10 currencies confined within their weekly trading ranges. The dollar index barely moved, closing down 0.09% at 93.27. The story was much the same in the regional Asian space, which mostly contented themselves with consolidating gains versus the US Dollar in recent weeks.
Sterling was a notable exception though, as rapidly increasing Brexit concerns saw a weekly close below its six-month trendline support, today at 1.2910. The GBP/USD finished just 10 points lower on Friday at 1.2790. The technical picture is ominous now, with resistance at 1.2910, and support lying between its 100 and 200-day moving averages (DMA) at 1.2695 and 1.2735. A daily close below this zone signals deeper losses ahead. The British Pound sell-off has been entirely driven by politics thus far but is unlikely to receive any help from the Bank of England, which may talk negative rates on Thursday. Sterling is likely to remain as popular as that great British delicacy, jellied eels, this week.
The Indonesian Rupiah is another one to watch, closing near to $15,000.00 to the US Dollar, at 14,900 on Friday. Jakarta’s new lockdown, and mixed signals from the central government on that front, could mean the Bank of Indonesia will have to intervene aggressively, yet again, to support the currency today. With a BI rate decision on Thursday as well, this week promises to be a tough one for both the central bank, and the currency.
With equities of to a positive start, and robust China data expected yet again after impressive aggregate financing data on Friday, pro-cyclical Australian and New Zealand Dollars, as well as Asian regional currencies should outperform in today’s session.
Oil’s price action is ominous.
Oil edged lower on Friday, finishing at the bottom of a tight trading range. Brent crude fell 0.25% to $39.80 a barrel, and WTI climbed slightly by 0.50% to $37.45 a barrel. Oil has edged higher in early Asian trading, both contracts up 15 cents, coat-tailing the positive start by equities.
The technical picture remains ominous for both contracts though, and for Brent crude in particular. The announcement that the blockade of Libyan oil export terminals may be about to end will add to the woes of OPEC+’s meeting this week. Libyan supplies hitting an already saturated international market is just the news OPEC+ did not want to hear, and likely explains Brent’s underperformance vis-a-vis WTI.
From a technical picture, Brent has traced a series of lower highs over the last week, and a contracting daily range, signalling another price breakout is coming. More worryingly, it recorded a weekly close below its 100-DMA at $40.00 a barrel suggesting that the next significant move is down. Brent crude’s chart suggests that further losses to $37.00 a barrel are the path of least resistance, and the international supply/demand picture reinforces that view.
WTI’s 100-DMA has halted daily declines through all the last week, and today, sits at $37.20 a barrel, just below current levels. It too is showing a series of contracting ranges implying a breakout is coming. A daily close below the 100-DMA suggests further losses to lasts weeks lows around $36.00 a barrel, and possibly as far as $34.50 a barrel.
OPEC+’s virtual meeting this week will be a fraught one. An abundance of supply, the possible return of Libyan exports, member compliance and a softer demand outlook, will unsettle the grouping. I doubt that OPEC+ will “blink” this week and signal a move back to higher production cuts, the will just isn’t there. Assuming that as a base case, oil prices are vulnerable to deeper downward corrections this week.
Gold remains side-lined for now.
Gold prices slipped slightly on Friday, falling a modest 0.30% to $1940.50. That has left gold anchored firmly in the middle of its one-week range. While gold has weathered the storm of an equity sell-off last week, which should be pleasing for investors, it does appear that the attention of financial markets is elsewhere for now.
It is likely that status quo will continue until the FOMC meeting passes on Wednesday evening, and we have more visibility on monetary policy and the direction of the US Dollar. That said, gold’s bullish longer-term fundamentals have not changed.
Gold has well-denoted support between $1900.00 and $1920.00 an ounce, with trendline resistance at $1970.00 an ounce today.