Asian markets are mostly positive this morning as Shanghai announced a raft of stimulus measures and both Shanghai and Beijing eased Covid-19 restrictions. The devil is in the detail of course, and corkers in both cities still face challenges either going to work, or even being allowed to leave the house. Nor has the reality that the virus only has to get lucky once, prompting the reimposition of tightened covid-zero restrictions, in the minds of investors. Such minutiae are usually ignored by markets when it doesn’t suit the preferred narrative, and so it is today. Asia is pricing in peak virus in China and a recovery in growth.
Another tailwind was the strong performance by Wall Street on Friday, which closed out a banner week prompting the usual “maybe this is the bottom” response from the financial press and FOMO investors. That was assisted by US data on Friday. Personal Income and Expenditure for April were still robust, but eased from March’s numbers, and Michigan Consumer Sentiment retreated from 65.2 in April to a still-healthy 58.4 for May. Lower data equalling reduced need for Fed tightening equals buy everything. Simple really. Although I must say, I’m struggling to see how a slowing US economy is good for equities, I don’t want to spoil the party though.
Another negative headwind being completely ignored by markets is oil prices. Brent crude has edged above $120.00 a barrel this morning as the European Union continues its efforts to get Hungary on board for a proposed EU ban on Russian crude imports. The underlying driver though is the massive squeeze on refined products we are seeing around the world, which is lifting the base ingredient for all that diesel and petrol that has got very expensive. The world would have been flapping and wringing its hands about the end of days if we had said Brent crude above $120.00 a barrel a month or two or three or four ago, now it is being ignored. By the way, if China recovers, oil prices will as well; just saying.
Also being ignored by markets completely in Non-Farm Payroll week is that the Federal Reserve also starts quantitative tightening this week. The Fed will start to sell $47.50 billion of bonds and MBS’ per month, scaling up to $95 billion per month by September. Meanwhile, the ECB, is still quantitatively easing while talking about hiking rates to errrr, zero per cent. And there is a war in Eastern Europe. Long EUR/USD above 1.0800 anybody?
Despite being less than impressed with either the Fed’s guidance or overall performance over the past year or so, at least they’re not the Reserve Bank of New Zealand. I find it highly unlikely they will abruptly swing to less a hawkish stance between now and September, meaning three more 0.50% hikes into September and fewer jokes being made about their credibility. Additionally, the $8.5 trillion balance sheet needs to reduce is carb and saturated fat intake, so quantitative tightening it is. From my position as a pilot fish cleaning the teeth of the capital markets sharp on the periphery, none of this is being priced in, although I acknowledge that markets can remain irrational, longer than you can stay solvent.
Now that I have fulfilled my role as the voice of reason on a Monday, it is time to have a look at what the week ahead brings. Asia’s calendar is dead today with the week’s highlights being China’s Official and Caixin PMIs coming out tomorrow and Wednesday. Wednesday and Thursday also see a swath of manufacturing and services PMIs from the rest of Asia, while Australia releases its April Trade Balance on Thursday. China’s data will have a very binary impact this week if peak-covid is here. Soft data will likely ramp up fears of a slowdown, with a decent showing likely to see hot money flowing in looking for the bottom. Soft data from the rest of Asia ill raise fears of spreading China contagion. Watch also for Indonesian Inflation on Wednesday. A high print will increase the pressure on Bank Indonesia to finally hike this month.
Holidays will play their part this week. US markets are closed for Memorial Day today, although electronic trading is open in Asia. Indonesia is closed Wednesday while Mainland China and Hong Kong and Taiwan are closed on Friday for the International Dragon Boat Festival. Thursday and Friday see United Kingdom markets closed for a bank holiday and Her Majesty’s Platinum Jubilee. Activity in Asia will likely be muted from Thursday.
Today features German May Inflation with Eurozone, French and Italian Inflation tomorrow. High prints will likely increase the hiking noise around the ECB and could extend the Euro’s recent gains. The ECB should probably stop quantitatively easing first though. Eurozone and US Manufacturing PMIs are released on Wednesday, along with US ADPO Employment that forecasters will pointlessly use to extrapolate Friday’s data. We also have a Bank of Canada policy decision which should feature a 0.50% hike.
Finally, on Friday, we will see May’s US Non-Farm Payrolls data. Market expectations are a moving target this week, but as of today, markets are expecting a fall from 428,000 in April to a still robust 320,000 for May. Trading the data in the hour after its release has always been a sure-fire way to lose money. But if pushed, I would say a lower number will have the market pricing in less Fed tightening, while a higher number might dish out a cold dose of reality to the bottom-fishers in equity, bond, and currency markets ahead of the mid-month FOMC meeting.
Asian markets rally on positive Wall Street and China hopes
US markets closed out the week on another positive note after US data alleviated inflation fears and thus, future Fed tightening, and showed strength among US consumers still. Realistically, after such a positive week, it would have taken a lot to knock the FOMO gnomes of Wall Street off their path of bottom-picking nirvana. The S&P 500 rallied by 2.48%, while the Nasdaq leapt by an impressive 3.33%, with the Dow Jones climbed by 1.76%. The rally has continued in Asia, with Nasdaq futures 0.90% higher, with S&P 500 futures up 0.40%, and Dow futures edging 0.10% higher. US OTC markets are closed for Memorial Day.
Asia is also turning in a positive performance, following the impressive New York close, and boosted by hopes that China’s Beijing and Shanghai hubs are reopening from virus restrictions and a package of stimulus measures released by the Shanghai local government.
Japan’s Nikkei 225 has coat-tailed the Nasdaq 2.10% higher today, with South Korea’s Kospi gaining 1.25%, and Taipei rallying by 1.60%. In Mainland China, the Shanghai Composite is a more cautious 0.30% higher, with the CSI 300 rising by just 0.40%. The ever-optimistic Hong Kong, however, had leapt 2.50% higher, boosted by hopes of an Evergrande bond deal.
In regional markets, Singapore is up just 0.20%, while Kuala Lumpur has fallen 0.25%, and Jakarta is 0.60% lower. A Goldman Sachs report suggesting metals prices have peaked is likely weighing on all three markets, as risk sentiment swings back to more growth-stock orientated markets. Bangkok has gained 0.65%, while Manila has rallied by 1.25%. Australian markets have also liked what they have seen with Wall Street and China, the ASX 200 and All Ordinaries climbing by 1.25% today.
Friday’s New York close and Asia’s rally today should be enough to lift European equity markets this afternoon, although the still simmering EU import ban on Russian oil and Brent crude above $120.00 a barrel will temper bullish animal spirits.
Sill improving risk sentiment sends US Dollar lower
The US Dollar declined once again on Friday as improving risk sentiment continues to unwind the 2022 US Dollar rally. That has spilt over into Asian markets today, with regional currencies booking some decent gains versus the greenback this morning. On Friday, the dollar index edged 0.12% lower to 101.64, losing another 0.13% to 101.50 in Asia. Support remains at 101.00, with resistance at 102.50.
EUR/USD held steady on Friday, closing almost unchanged at 1.0735, with US Dollar weakness being reflected in EMFX and the commonwealth currencies. It has gained 0.20% to 1.0755 in Asia, but overall, seems locked in a 1.0700 to 1.0800 range. Oil’s rally may temper single currency gains, with the multi-decade breakout line, today at 1.0830, still a formidable barrier.
GBP/USD closed 0.20% higher at 1.2630 on Friday, adding another 0.14% to 1.2640 in Asia. GBP/USD looks set to trade in a noisy 1.2600 to 1.2700 range as the week gets underway. The government’s cost of living package may prompt faster BOE tightening, supporting the downside, while the economic slowdown continues to slow upside progress.
USD/JPY is trading sideways, ranging each side of 127.00 as US yields trade in narrow ranges. That is likely to continue with US bond markets closed today. The chart suggests USD/JPY has further downside potential that could target 125.00. Only a move through trendline resistance at 127.80 changes the picture.
AUD/USD and NZD/USD continue to be driven entirely by swings in global risk sentiment. Another strong performance by Wall Street on Friday maintained that upward momentum and both AUD and NZD were prime beneficiaries. AUD/USD rallied by 0.85% to 0.7160, adding another 0.20% to 0.7175 today. It has resistance at 0.7260, and support at 0.7100. NZD/USD rose by 0.86% to 0.6536 on Friday, rising another 0.17% to 0.6547 today. Resistance nearby at 0.6570 opens a larger rally to 0.6650, with support at 0.6475.
Asian FX rode improving investor risk sentiment higher on Friday, moves reflected throughout the EM space. Gains were led by the Chinese Yuan, Korean Won, and New Taiwan Dollar, all gaining around 0.70%, while even the beleaguered Malaysian Ringgit out in a good show, USD/MYR falling to 4.3770. Both the Indonesian Rupiah and the Malaysian Ringgit should find further strength on higher oil prices, even though it increases their domestic subsidy bills. Oil’s strength is likely the reason the Indian Rupee has remained unchanged from Friday through today. CNY, KRW and NTD are rallying strongly today, likely boosted by China’s reopening hopes. USD/CNY, USD/KRW, and USD/NTD have fallen by around 0.80% today. However, if oil prices continue to rise this week, the rally in energy-importing Asian currencies may run out of steam.
Brent crude rises above $120.00
The disconnect between energy prices and optimism in equity markets continues today in Asia. On Friday, oil prices surged once again, driven by an unrelenting squeeze on refined products, notably diesel and gasoline, globally, with the US driving season about to begin in earnest. Brent crude rose by 1.63% to $119.20 a barrel on Friday, rallying another 0.70% to $120.05 this morning. WTI rose by 0.85% to $115.10 a barrel on Friday, rallying another 0.83% higher to $116.05 in Asia today.
Markets pricing in peak virus in Beijing and Shanghai are behind the rally in oil prices today, with a China reopening likely leading to increased oil consumption. Unlike recent times, markets seem unconcerned about oil moving back to March highs, emphasising how much pent-up risk-sentiment demand there appears to be out there.
We can expect no solace from OPEC+ on production increases on Thursday. The grouping cannot pump to meet its present quotas as it is, and a 430,000 bpd increase is all we can expect. Additionally, the EU Russian oil import ban is still a work in progress and if it gets over the line this week, expect supplies to tighten again. As such, the risks are now increasing of a move towards the post-Ukraine highs we saw in February.
Both Brent crude and WTI are at the top of my expected medium-term ranges at $120.00 and $115.00 respectively. A weekly close above these levels would be a major signal indicating more gains ahead. Brent crude’s next technical resistance is at $124.00 a barrel, and then $$132.00, with support at $116.00. WTI has resistance nearby at $116.70 a barrel, with nothing afterwards until $127.00 a barrel. Support is at $115.00 and $113.00 a barrel.
Gold trades sideways
Gold seems determined to bore traders to death after another inconclusive overnight range-trading session. It finished Friday 0.13% lower at $1853.00 an ounce, before gaining 0.44% to $186.75 an ounce in Asia today. Gold’s price action continues to suggest caution, with the US Dollar sell-off not translating to any meaningful gold strength. If global risk sentiment turns lower, gold could quickly follow.
Gold has nearby support at $1840.00, followed by $1836.00 an ounce. Failure sees the possibility of a mini-capitulation by longs that could reach as far as $1780.00 an ounce. Gold has resistance here at $1862.00, ​ then $1870.00, followed by $1886.00 an ounce, its 100-day moving average.
