False dawns
Wall Street equities bounced overnight following the US Government’s three-month reprieve for Huawei’s official blacklisting. The delay itself is more an administrative move allowing US companies to get their houses in order with the Chinese telecom giant, than a magnanimous one by Washington DC. Not one to let reality get in the way of a good story, equity markets ratcheted higher as the street interpreted the move as an easing in trade frictions. Beijing may still see it quite differently.
It’s been a mixed bag this morning in Asia Pacific with New Zealand’s retail sales rising 0.70% q/q – a solid if not stunning result. Japan’s May Tankan survey rose to 12, beating the previous month’s print of eight. The just-released Japanese balance of payments showed an unexpected fall in the April surplus to JPY60.4 billion, while March machinery orders rose an unexpected 3.8%. A rising yen likely explains the falling surplus, but overall, the data shows an economy relatively untouched by trade frictions. If only they could find some inflation, last seen 30 years ago.
Indonesia may gain some unwelcome attention today with protests against the Presidential election results scheduled in Jakarta and losing candidate, Prabowo Subianto set to challenge the results in the Constitutional Court. However, the incumbent President Joko Widodo was the clear winner, likely meaning any nerves on the local stock market and Indonesian rupiah should be transitory.
Early tomorrow morning, the FOMC minutes will be released, and the street will pick them apart, searching for clues as to whether the Federal Reserve is about to blink and cut rates. I suspect they will be disappointed.
FX
The US dollar remained strong overnight, rising against the euro and notably, the yen after the Huawei stay of execution by Washington DC. The USD/JPY pair has been on a consistent upward trend for the week, bottoming at 109.00 as the yen safe-haven trade ran out of steam. The dollar rose to 110.55 overnight with resistance likely to be found around 111.00.
Sterling spiked more than 100 points to 1.2810 overnight as Prime Minister May hinted that a second referendum could be packaged up as part of her Brexit deal. However, the British pound fell just as quickly fell back to its 1.2710 starting point as politicians from all sides trashed her proposals, leaving GBP mired at four-month lows while the Prime Minister awaits her end of days. A settlement remains as distant as ever.
Equities
The Huawei deferral sparked a rally among under-pressure tech and semiconductor firms overnight. The Nasdaq jumped 1.10%, the S&P 500 rose 0.85%, and the Dow Jones climbed 0.75%, marking a dramatic 24-hour reversal in sentiment.
I won’t dwell on the nuances of the words delay, deferred and permanent – standing in front of short-term sentiment is never a good trading plan unless you have deep pockets. Suffice to say, it should come as no surprise if Asian stock markets jump on the hope-versus-reality train and move higher today on a perceived drop in trade friction.
The street will, of course, be vulnerable to headline bombs. Most notably, China has been very, very quiet on its intended retaliatory measures against the US. Make no mistake, they’ve not gone away, and any unexpected announcement by Beijing on that front could turn sentiment very quickly indeed.
Oil
A slow news day on the trade front and an even quieter one in the Middle East for a change saw both Brent Crude and WTI trade aimlessly. Brent Crude remained almost unchanged at USD72.15 a barrel, while WTI fell slightly by 0.50% to USD62.40 a barrel.
Perhaps worth noting, at these prices both contracts are sitting on short-term technical support levels. A break below USD72.00 on Brent opens up a correction to the USD70.00 region. WTI has traced out solid resistance at USD63.75 a barrel, and a fall below USD62.00 could open up a further correction to USD60.00.
Oil will trade nervously at these levels in Asia, with any negative trade news likely to see stop-loss sellers come to the market.
Gold
Gold fell to USD1,270.00 an ounce overnight, before bouncing back to USD1,275.00 an ounce to close out New York in a volatile session. Although traders could take heart that USD1,270.00 held the first time, the bounce is anaemic at best, and the daily chart does not paint a pretty picture.
Gold suffered from a stronger greenback and reduced trade-tensions, albeit temporarily, and is struggling to find friends, even at these levels. The USD1,265.00 an ounce region is the key technical support zone, and a daily close implies a much deeper pullback is on the horizon.
