Plenty for Asia to Think About Today
There is plenty for Asia to think about today, with the BoJ unchanged, China clamping down on property developers, Australian lockdowns widening, New Zealand inflation ballooning, President Biden in Sino disconnect mode and of course, the delta-variant across Southeast Asia.
Before we get to all of that, though, a quiet look at the US overnight, Chairman Powell held his transitory inflation line in his second day of testimony on the Hill, with Treasury Secretary Yellen backing him up. However, she expressed some disquiet over rising house prices.
US bond yields fell once again, with the curve continuing to flatten, but the US Dollar, instead surprisingly remained firm, while US stocks retreated. The mixed bag of US data may account for some of the price action. Initial Jobless Claims fell to a pandemic low of 360,000 while the New York Empire State Manufacturing rose to a record high of 43. Industrial and Manufacturing Production slipped, though, as US businesses grapple with supply chain bottlenecks. Therefore, the overall picture remains an inflationary one, and although bond markets seem content with the transitory line, currency markets and stocks are expressing some disquiet, hence the disconnect.
The picture on Capitol Hill is turning murkier by the day and regards to budgets and stimulus packages. I can honestly say I am not sure who on either side is going to vote for what or not, with some competing versions of legislation emerging from both sides. President Biden continued with his Sino disconnect policy, warning US companies about the undermining of the Hong Kong judiciary and doing business there and adding more China tech companies to the US entity list. He also threw a few barbs at Facebook, and the legislative threat to big-tech globally across international jurisdictions just isn’t going away. It is something I have touched on before and may also have weighed on the Nasdaq overnight.
Turning to Asia, President Biden’s comments and actions were never going to set up China markets for a good start, already nervous after middling data this week and government tech-clampdown nerves. China authorities announced today that they would require property developers to disclose commercial paper debt each month, another escalation in China’s deleveraging process for the sector. Geopolitics and domestic clampdowns will continue to cloud investors sentiment in China for the rest of the session.
One bright spot was Singapore’s Non-oil Domestic Exports, which shrugged of virus restrictions in June to 6.0% MoM for June, well above forecast. Geographical growth was strong across the board and with the City-state’s vaccination programme moving at a breakneck pace, I am now expecting Singapore to be ASEAN’s outperformer into Q3 and Q4.
Sadly, for the rest of ASEAN, the delta variant continues to wreak havoc across the region and Goldman Sachs today sharply downgraded growth forecasts for the rest of the year. They aren’t the first, and they won’t be the last to do that. Indonesia, Malaysia, Thailand and the Philippines will remain acutely sensitive to a negative shift in investor sentiment, especially if the Fed blinks on inflation later in September.
Despite solid employment data this week, Australian investors may need to swallow some concrete pills into next week as the delta variant outbreak leads Melbourne into a snap lockdown today. Restrictions look set to be tightened further in the greater Sydney region as well. That is weighing on the currency and equity markets today and by association New Zealand markets as well, with the trans-Tasman travel bubble likely to be further shrunk. The lucky country remains lucky; the stream of impressive economic data shows that. But that will change if the restrictions in New South Wales continue, and the next couple of weeks will be vital for Australian asset markets, which have a lot of good news already baked into them.
I mentioned New Zealand inflation yesterday, and the release this morning blew expectations out of the water. Inflation rose to 1.30% (0.80 exp) QoQ for Q2, while the YoY number surged to 3.30%. Business PMI, meanwhile, leapt to 60.7. That had bank forecasters scrambling to pencil in RBNZ rate hits starting almost straight away and continuing through 2022. The New Zealand Dollar is up 0.50% this morning. The expectations of a much faster and sooner tightening cycle should see the Flightless Bird outperform the Australian Dollar and US Dollar going forward. Only the Covid-19 situation in nearby(ish) Australia is tempering that rally, I believe.
Finally, the Bank of Japan has just released its latest monetary policy statement, maintaining its 10-year JGB yield target at 0.00% and its short-term rate target at -0.10%. As expected, it has adjusted GDP growth forecast for 2021 and 2022 slightly lower but still expects inflation this year to hit 0.60%, which would be an awe-inspiring feat for Japan. None of the announcements was a surprise, and like many central banks right now, the BoJ is noting both global and domestic risks, especially regarding Covid-19, and waiting to see which way the cards fall. USD/JPY was sharply unchanged on the news.
This evening we see Eurozone Inflation, and Core Inflation released, with the former expected to print around 2.0%. That should be right on the ECB’s new “strategy target.” Still, with their inflation forecasts showing a softening over the coming quarters, some monetary policy divergence could be on the cards with the Federal Reserve. Next week’s ECB policy meeting could be the most interesting one for a while, and dovish ECB expectations may go some way to explaining Euro’s relative underperformance this week.
The week rounds out with US Retail Sales data. The MoM figure is expected to fall by -0.40%, less than last month’s -1.30%. The risk here is that Americans may well be spending more on reopening services and having fun rather than goods from the shops. As such, a lower number may set US stock markets up for a weak finish to the week.
That’s a lot to cover today. From an Asian perspective, the delta-variant discount still looms large across Asia-Pacific markets. US-Sino relations appear to be taking another turn South which will further erode sentiment. China’s subtle easing measures are also causing some recovery disquiet while its property sector deleveraging and ongoing tech-clampdown has further clouded the picture. The US and Europe may be doing the heavy lifting on the global recovery trade in Q3.
Multiple headwinds soften Asian stocks.
Asian markets after mostly lower today as US-Sino relations, mixed US data, and a rampaging delta-variant across the region all combine to weigh on sentiment into the weekend. Wall Street closed lower overnight, led by technology, as bullish momentum faded against a background of regulatory noise and Capitol Hill legislative confusion.
Notably, US long-dated yields continued to retreat on a firm transitory message from Mr Powell and Ms Yellen; Wall Street could not rally, despite a procession of decent earnings results. That suggests that markets will be vulnerable tonight to a weak US Retail Sales print as investors cast an eye to an increasingly cloudy third quarter.
The S&P 500 fell 0.33%, while the Nasdaq lost 0.70%, with the Dow Jones recording a modest 0.15% gain on rotational flows out of tech. Futures on all three indexes are slightly negative in Asia. A GDP downgrade by the Bank of Japan, and Covid-19 cases, sees the Nikkei’s late-week retreat continue, falling 0.80% today. The Kospi has fallen by 0.60%, with Taipei falling by 0.75%.
China’s new requirements on property developer debt disclosures, and more warnings from the US on doing business with China overnight, have sent markets lower. The Shanghai Composite has fallen by 0.10%, with the CSI 300 falling 0.50%. President Biden’s comments on Hong Kong’s judiciary independence see the Hang Seng lower by 0.30%.
The downgrade of regional growth prospects by Goldman Sachs is weighing on other markets as well. Singapore’s Non-Oil Export data has kept the STI slightly in the green, up 0.10%, but Kuala Lumpur and Bangkok are down 0.30%, Manila is down 0.80% after the delta variant was detected there today, while Jakarta has edged 0.20% higher. In Australia, spreading inter-state virus lockdowns is muting the sentiment from another impressive set of data releases this week. The All Ordinaries and ASX 200 being barely changed.
European stocks are likely to open modestly lower ahead of Eurozone inflation data, with Europe not showing much connection with Asian markets at the moment. Assuming no upward surprises from the Eurozone inflation, an oxymoron if ever there was one, equity markets on both sides of the Atlantic will remain focused on US Retail Sales this evening.
The US Dollar remains firm.
Despite another fall by US long-dated bond yields and a retreat by tech stocks, the US Dollar continues to surprise and hold onto much of its recent gains of the past week. The dollar index rose 0.21% to 92.56 overnight, edging higher to 92.89 in Asia. The dollar index remains near to resistance at 92.85, and a weekly close above there this evening signals more gains to 93.50 next week. Support remains at 92.00.
The US Dollar strength may not be a dollar story, although currency markets have for some time priced in a more cautionary tale regarding inflation than bond or equity markets. The greenback appears to be supported by the potential weakness elsewhere. Notably, a potentially dovish ECB next week setting up a possible monetary policy divergence in the quarters ahead. The potential headwinds of Covid-19 in Asia and further US restrictions on China are also playing into the US Dollar’s hands, with ASEAN currencies still very much on the weak side.
EUR/USD faded overnight ahead of resistance at 1.1850, falling to 1.1800 as of this morning and a daily close under 1.1770 hints of a deeper retracement below 1.1700 next week. GBP/USD remains locked mid-range between 1.3800 and 1.3900, supported by the removal of pandemic restrictions and yet another Bank of England official making tightening noises overnight. A break of either level will signal its next directional move.
NZD/USD rose 0.50% t0 0.7020 today after blockbuster inflation data had the market scrambling to price in RBNZ rate hikes tout suite. Its rally has been tempered by the viral woes of its trans-Tasman neighbour Australia, but the Kiwi should outperform against both the Australian and US Dollars into next week.
China set a slightly weaker Yuan fixing this morning at 6.4705 but left liquidity neutral at the repo. The spot market is slightly lower at 6.4670, but with the PBOC setting slightly weaker fixes this week, support at 6.4500 is unlikely to be tested. ASEAN currencies will remain under pressure into the end of the week and will underperform until the Covid-19 situation improves materially.
OPEC+ nerves weigh on oil.
Oil prices continued to fade overnight, as markets that were already heavily long weighed up the implications of the apparent higher baseline production levels for the UAE. More importantly to markets, though, is whether it will lead to a flurry of demands from other members for similar concessions, leading to the spectre of much higher volumes of oil hitting global markets as growth start to slow in parts of the world. OPEC’s monthly report overnight lifted its consumption forecast to above pandemic levels for 2022, but oil prices refused to halt their downward move.
Brent crude fell 1.70% to $73.25 a barrel, which WTI retreated by 2.0% to $71.45 a barrel. Both are unchanged in Asia, with regional markets content to remain on the side-lines as the week closes out. The threat of weaker OPEC+ cohesion and higher than anticipated production will cap oil price gains for now. Brent crude has support at $72.00 a barrel, and failure could see a speculative capitulation trade occur, although I expect its duration to be short, if brutal. WTI’s line in the sand remains at $70.00 a barrel, and I expect some similarly ugly stop-loss selling to occur if it fails.
Oil markets will remain on edge until OPEC+ baseline clarity emerges, and the virus situation in Asia shows material signs of stabilising.
Gold holds above the 200-day moving average.
Gold finished modestly higher overnight, with dips well-supported intra-day despite a generally stronger US Dollar. A further fall in US bond yields helped its cause, and gold continues to show positive technical signals that more gains lie ahead.
Although gold finished the overnight session only 0.12% higher at $1829.50 an ounce, it recorded its second consecutive daily close above the 200-day moving average (DMA), at $1827.00 an ounce. In Asia, gold has eased to the $1827.00 support in generally moribund trading, with regional investors eyes elsewhere.
Gold has support at $1820.00 and $1800.00 an ounce, with the bullish outlook intact as long as the 100-DMA at $1792.00 holds on a closing basis. Gold’s next upside targets are $1845.00 and $1860.00 an ounce, although I expect this to be a slow grind higher like previous sessions this week.