The noise level has risen to eardrum-bursting levels across the financial market space, with currencies, energy, and precious metals having volatile intra-day sessions, but finishing near unchanged as the dust settled. The source of the market’s angst is inflation, and whether it is transitory or here to stay. In all honesty, I was in the transitory camp, but I am wavering, with the US NFIB Survey overnight firing on all cylinders, notably the employment and compensation sub-indexes. JOLTs Job Openings for March rose to 8.1 million, although a March number seems a bit backwards-looking into today’s dynamic markets.
A procession of Federal Reserve speakers stayed on message overnight, but that didn’t seem to soothe nerves either. China’s PPI yesterday, along with the rise in base metal commodity prices, probably isn’t helping the transitory inflation cause either with the world nowhere near remotely in a post-Covid phase, only those parts that managed to buy all the vaccines first.
Interestingly, the ostensibly anti-inflation Non-Farm Payrolls miss last Friday has quickly been forgotten as a one-off, with inflation nerves quickly reasserting themselves. That speaks volumes as to the direction of travel for financial markets right now, and it doesn’t lower inflation.
What is bemusing is the price action in certain asset classes and the wild pivoting of narrative as commentators desperately try to explain the price action. The Dow Jones fell heavily overnight while the Nasdaq held steady, an opposite and equal reaction from the session before. Inflation was blamed for the moves last night but also blamed for Monday’s moves. The Nasdaq still looks in trouble, I might add.
Similarly, the US Dollar fell slightly overnight, having retreated and rallied intraday. It was saved by US yields rising overnight, but the dollar index still finished ever so slightly lower. Inflation and Dollar debasement was wheelbarrowed out to explain away the headline fall, but actu8ally, it was inflation expectations firming up the US yield curve that lifted the Dollar of its lows.
Gold, rather intriguingly, fell by nearly 20 Dollars an ounce intra-day as US yields firmed, only to recover all of those losses by the session’s end. An opposite reaction to what we have come to expect from the last few months. Rising yields and US Dollars normally equal weaker gold. Could it be that yesterday marked the return of gold’s inflation-hedging mojo? If so, then the direction of financial markets is absolutely towards higher inflation, which may, or may not, be transitory.
If all of this so far has left your head spinning and wanting to put a cold towel on it, then my work here is done. Desperately looking for nebulous themes, supported by even more nebulous logic, to explain irrational market moves is a classic reaction to a mature directional move. Similarly, tail-chasing back and forth price action across asset classes is a similar symptom. That volatility has been amplified by the vast increase in retail investor participation in equity markets since the start of the pandemic. That segment of the financial world has yet to deal with the concept of an extended retreat in the value of their portfolios.
So, to help readers turn down the noise, I am seeing the world as thus. The dismissal of the Non-Farm Payrolls miss last week suggests that the direction of travel for the markets is rapidly rising inflation and fears it could be “sticky” as the global recovery accelerates. Having been missing in action for 30 years, the return of inflation and its impact on asset classes will be a new concept for most of us. (I still remember it vaguely)
We are over one year into the mother of all buy-everything rallies across asset classes, as a savings glut and central bank free money send asset prices flying in the hunt for a yield anywhere above zero percent. A correction had to come at some stage, and the inflation genie might be the catalyst.
An above expectations US CPI print this evening and/or weak 10-year and 30-year US bond auctions tonight and tomorrow could release that genie from the bottle. The buy-everything trade may become a sell-everything trade for a while. In such circumstance, central banks are even less likely to mention the “T” word, and after a time, thanks to that ocean of money looking for a home, it will become the buy-the-dip-on-everything trade.
In Asia-Pacific, Australia’s federal budget was announced today. Although spending will increase, ostensibly to boost employment, it was not a giveaway budget. It also missed the mark on a few fronts—notably childcare provisions to help women re-enter the workforce. All in all, it was market neutral, although Australian 10-year bond yields moved higher. It certainly won’t raise fears that the central bank will need to counteract the effects of a fiscal pump by tightening liquidity.
South Korean unemployment fell once again, to 3.70%. Hinting that the recovery there is becoming more balanced between the domestic and export-facing sectors of the economy. Australian Building Permits rose 17.40%, another strong data point in a procession of such from the lucky country. Less so was Qantas cancelling its international schedule later this year after the Federal Budget announcements also suggested the country’s borders would be closed until mid-2022. Given Australia’s quarantine capacity limitations, that should have surprised precisely nobody.
The Asian calendar is quiet until India releases March Industrial Production and April Inflation late this evening at 2000SGT. The pandemic will weigh on inflation while Industrial Production will show a pre-third-wave rebound on a YoY basis. Unless inflation surprises to the upside, negative for the Rupee, the data should be roughly neutral.
We receive a slew of pan-Europe Inflation data later today before the week’s main event, US Inflation and Core Inflation for April. Risks are for European inflation also to rise more than expected. If that is followed by a steep rise in the US data, equity and bond markets could be in for a torrid evening.
Asia equities follow Wall Street South
Wall Street ended lower overnight with the Dow Jones and Nasdaq swapping places from the day before as the worst performers. Inflation concerns were blamed, but the price action has all the hallmarks of an extended bull market running out of steam and looking for excuses.
The S&P 500 fell 0.87%, with the Nasdaq finishing just 0.09% lower after recovering from an intra-day tech sell-off. Meanwhile, those cyclical rotational flows from Monday reversed course with the Dow Jones overnight, as it tumbled by 1.36%. For the second day running, the futures on all three indices are under pressure again in Asia, down around 0.75%.
The Nasdaq continues to concern. It broke its March 2020 support line on Monday and failed to recapture it. It has now slipped once again below the 100-day moving average (DMA) at 13,300.00. My technical target is the 200-DMA at 12,500.00, and the Nasdaq will face a severe test tonight if US CPI outperforms.
The negativity has seeped into Asian markets once again, which have been weighed down by Covid-19 concerns in recent times anyway. The Nikkei 225 has retreated 2.45%, with significant support at 28,300.00 being breached today. The Kospi is 2.0% lower.
Taiwan markets plummeted by nearly 9.0% this morning and are presently down 5.0% for the session. Local semi-conductor heavyweights led the rout, but it seems that community-based Covid-19 cases are the source of the Taiex’s woes. Markets are taking fright that virus restrictions may be escalated, which potentially will exacerbate the semi-conductor shortage. If that comes to be, and production is slowed, it is sure to be felt worldwide in other equity markets.
Mainland China, meanwhile, is a bastion of calm, much like yesterday. Both the Shanghai Composite and CSI 300 are down just 0.20%, and one suspects that China’s “national team” are continuing to support local markets. The Hang Seng, in contrast, has joined the Nikkei and Kospi in tumbling by 2.0%.
Singapore has edged 0.65% lower, with Bangkok down 1.25% and Kuala Lumpur holding steady. Jakarta is closed for the Eid holiday, as will Malaysia and Singapore be tomorrow. Australian markets have moved lower after Wall Street fell overnight, and a slightly negative reaction to the Federal budget today. The ASX 200 and All Ordinaries are down around 1.0%.
Potential Taiwan Covid-19 restrictions curtailing semi-conductor production would be yet another knife in the back of under stress global supply chains. It will undoubtedly be felt globally in equity markets if it comes to pass. In the meantime, markets remain fixated on inflation, and if US CPI exceeds expectations, the global equity sell-off will continue and potentially accelerate.
Currency markets are noisy but directionless
Currency markets had a noisy and choppy session overnight but had returned to the mean by the sessions close, with the dollar index falling just 0.12% to 90.16. That has abruptly reversed in Asia, with equity markets are pressure as US CPI nerves increase, the dollar index has jumped 0.20% to 90.30. I expect the intra-day volatility to continue, but for the dollar index to range between 90.00 and 90.50 in the days ahead, unless US CPI surprises.
Major currencies have retreated in Asia, but not materially so. EUR/USD has fallen to 1.2125, just ahead of support at 1.2120. GBP/USD has fallen to 1.4120 but remains bullish in sips as long as support at 1.4100 holds. USD/JPY is trading at 108.85 but is still locked in a 108.50 to 109.50 range, with a breakout, either way, signalling the next directional move.
The risk-sensitive Australian and New Zealand Dollars have tumbled by 0.60% in Asia, as markets moods darken, and equities remain under pressure. AUD/USD has fallen to 0.7800 post-budget, having tested and failed at 0.7900 resistance this week. It could extend losses to 0.7700. NZD/USD failed ahead of 0.7300 and has fallen to 0.7230 today, with an extension lower to 0.7130 now possible.
USD/CNY has rebounded overnight to 6.4400 today, but regional Asian currencies are under more severe pressure as equity market losses mount. USD/KRW and USD/MYR have risen 0.40%, while USD/THB, USD/SGD have risen 0.20%, with USD/CNH climbing 0.15%. As I have stated before, with mostly dirty US Dollar pegs across the region, Asian currencies are acutely sensitive to higher US interest rates and a stronger US Dollar as a result. I expect regional currencies to remain under pressure until the US CPI tells us if those inflation fears are real.
That theme also encapsulates the G-10 space, with the risk barometer AUD and NZD currencies particularly vulnerable. A low US CPI print will alleviate inflation/risk/Dollar pressures, but we can expect a potentially vigorous opposite move if it does not.
Oil markets remain on the side-lines
Oil markets maintained their wait-and-see approach to the noise and tail-chasing seen elsewhere overnight. The Colonial pipeline cyberattack saga is dragging on and is now causing material shortages in the Eastern United States. However, that served only to lift crude prices slightly overnight. Brent crude rose 0.65% to $68.65 a barrel, and WTI rose 0.90% to $65.40 a barrel. In Asia, both contracts have edged 10 cents lower in directionless trading.
Brent crude has resistance at $70.00 and then $71.50 a barrel. It remains clear of its two-month support line, today at $67.10 a barrel, followed by $66.00 a barrel. WTI remains dead centre of its near two-month rising channel bounded by $63.00 and $67.50 a barrel. Only a failure of $63.00 would disrupt the longer-term bullish picture. Interim support and resistance lie at $64.00 and $66.00 a barrel, respectively.
Tonight’s official US Crude Inventories should provide some volatility, particularly the refined product sub-indexes. Colonial should keep both contracts, especially WTI, supported on any dips over the next 24 hours.
Gold: Big ranges but small changes
Gold traded in a 25 dollar range overnight, testing support at $1820.00 an ounce, before rising once again to finish 0.10% higher at $1837.50 an ounce. In Asia, a stronger US Dollar has pushed gold 0.40% lower to $1830.00 an ounce.
Overall, gold remains impressively resilient as US yields firmed up for the second day in a row. The 200-DMA at $1851.00 an ounce remains formidable resistance, but gold now has clear support at $1820.00 an ounce. That is followed by support at $1800.00 an ounce and the 100-DMA at $1796.00 an ounce.
Gold’s reaction to the US yields will significantly define its direction for the remainder of the week if they rise after a higher US CPI tonight. If it remains steadfast, then that bodes well for a test of $1850.00 and further rallies to $1900.00 an ounce in the days ahead. A low-ball CPI should prove equally supportive for gold as well.
Even if US yields provoke an adverse reaction from gold tonight, the technical picture suggests that support between $1795.00 and $1800.00 remains firm.
