The conflicting hodgepodge of US employment data released on Friday night hasn’t given Asia much in the way of themes to hang their hats on today, complicated by a Japanese holiday reducing liquidity. An underlying theme of caution still permeates the region, but it is a very mixed picture in equity markets across the region, while currency markets look like they are stuck in the mud, going nowhere fast.
On Friday, the US Non-Farm Payrolls disappointed, adding only 199,000 jobs. The back months were revised up by 141,000 jobs, making a total of 340,000 jobs with some optimistic maths and interpretation, but that is well short of the forecast of between 400,000 and 500,000 jobs. On the other hand, the Labour Force Participation Rate fell once again to 61.90% and official Unemployment fell to 3.90%. Average Hourly Earnings rose MoM rose by 0.60%, and by 4.70% YoY, both well above forecast.
So, the challenge in the US appears to be finding workers to fill jobs, not that there are not enough jobs out there. The JOLTS data amply illustrated that earlier in the week. Headline number aside, there was more than enough to keep the inflation vigilantes awake at night, particularly hourly earnings data. A mid-year lift-off from the Fed remains on track and although the future inflation break evens are universally saying the Fed will succeed in bringing inflation back to 2.0% in the medium term, in the here and now of 2022, a different reality rules.
US equities once again headed south, and US longer-dated yields once again headed North. The playbook failed in currency markets though. Risk sentiment barometers like Australian and New Zealand Dollars held steady, and the Canadian Dollar rallied. Likewise emerging market currencies said “whatever,” and major currencies actually rallied, pushing the dollar index notably lower. That helped gold rally slightly, while oil held steady.
I will circle back to currencies later on, but in Asia today, the piecemeal price action across asset classes on Friday has led to some confused price action in Asian markets today, notably equities. Part of this can be laid at the door of omicron, with Asia refusing to buy into the rich-country Western narrative that it is milder and will have a lower net impact than delta. Much of that “data,” of course, is based on heavily RNA-vaccinated countries, something much of Asia hasn’t had access to.
The evolving situation in Australia and India, with skyrocketing caseloads, won’t give much comfort. Nor will an outbreak in Tianjin in Mainland China, a gateway city to Beijing. China already has widening restrictions on other cities. Hong Kong appears to have had a community outbreak as well. Australia, Taiwan, and Japan have all heightened virus restrictions to differing degrees over the weekend as well. China is especially concerning, with the Mainland and Hong Kong behind a Covid-zero wall, but with low vaccination rates in Hong Kong itself, and the Mainland apparently vaccinated with traditional vaccines, which don’t appear to work against omicron. The odds of a China growth shock because of omicron and Covid-zero are steadily rising by the day.
Elsewhere, China property developers are back in the spotlight as well. Evergrande faces a deadline today to persuade onshore noteholders to not force Evergrande to buy them back by executing puts. Shimao, who defaulted on a loan last week, has allegedly put all its residential and commercial projects up for sale. Finally, Modern Land, yet another troubled and defaulting developer, saw its shares start trading in Hong Kong today after a 2 ½ month suspension. Its stock fell 40% intraday after news emerged of early repayment demands on some of its senior notes. The downside risks continue to accumulate for China despite much research saying buy-the-dip/undervalued of late.
Inflation data from the US and China will dominate the economic calendar this week. China releases its CPI data on Wednesday morning while Wednesday evening sees US December CPI released. At this stage, the risks are tilted towards the downside for China’s data, and higher for the US data. The monetary divergence could see the US rally, not just against the Yuan, but also Asian FX and AUD and NZD. We also have US 3 and 10-year notes, and a 30-year bond auction this week, along with some heavyweight European debt auctions. With US yields rising, and 10-year German bunds approaching 0.0%, the bid to cover ratios are worth monitoring this week. Weak covers won’t be good for equities.
Finally, the Bank of Korea policy decision could get interesting on Friday if USD/KRW continues to hold above 1200.00, or we get a soft-China/firm-US CPI divergence mid-week, which causes another bout of Asian currency weakness.
Asian equities diverge
Friday’s US data dump saw the interest rate hawks win the day, thanks to both the participation and unemployment rate tumbling lower. That saw US equities retreat once again, although a soft Non-Farm headline print took the edge of the negativity. The S&P 500 fell 0.41% with the tech-heavy Nasdaq bearing the bearish brunt once again, falling by 0.96%. The Dow Jones outperformed relatively, almost unchanged at down 0.02%. The perception that value-centric Dow Jones and Russell 2000 companies will be a better inflation hedge continues to rule markets. In Asia the trend continues, Dow futures are unchanged, S&P 500 futures are 0.10% lower, while Nasdaq futures have fallen by 0.35%.
In Asia, we are seeing some divergence, complicated by omicron nerves in Australia, Japan, and China and India. Japan is closed today, but we can assume that if the Nasdaq is lower tonight, the Nikkei will drop like a stone tomorrow. The tech-heavy South Korean Kospi is 1.10% lower. Mainland China sees the Shanghai Composite and CSI 300 0.25% higher, and I suspect some “smoothing” by authorities is happening. Hong Kong has jumped higher by 0.85%, led by Mainland healthcare stocks.
Singapore is 0.75% higher today in what looks like an inflation defensive play with the gains being led by the three local mega-banks. Taipei is just 0.10% higher, while Jakarta is up 0.25% and Kuala Lumpur has gained just 0.15%. Manila is 1.45% higher, and Bangkok is down 0.10%. A weak New York session and omicron cases spiralling into space see Australian markets lower today, but only marginally so thanks to the banking and resource heavyweight backstop. The All Ordinaries and ASX 200 are down just 0.10%, having recovered earlier losses.
The more value-centric European markets are unlikely to suffer the technology ill-winds of the US or the virus nerves of Asia, and I would expect them to open modestly lower today. Of far more interest to Europe, this week will be the government debt auctions and the 10-year bund. If that moves above 0.0%, European equities could take fright, as the only region of the world more addicted to central bank money than Europe, is Japan.
The US Dollar retreats
Perhaps the most surprising move post the US Non-Farm Payrolls, came from the US Dollar, which staged a sharp retreat versus major currencies, even as US yields rose. The dollar index slumped 0.52% to 95.74, before recovering to 95.90 in Asia today. I am at a loss to explain the move lower, in all honesty, I am doubtful that international investors selling US equities alone, could be responsible for it. In the bigger picture, the dollar index is mid-range at 95.90, and as previously stated, I am waiting for 95.50 or 96.50 to break to signal the US Dollar’s next directional move.
EUR/USD and GBP/USD were the main winners of US Dollar weakness on Friday, both gaining around 0.50% to 1.1360 and 1.3590. GBP/USD remains steady and has resistance just above 1.3600 which will signal a further rally to 1.3800 if broken. EUR/USD’s rally looks unconvincing and only a close above 1.1400 will lessen the bearish outlook. Risks are still skewed towards a retest of 1.1200, especially if German Bund yields stop rising. USD/JPY remains a bid on dips from 115.50 to 115.00 as long as US yields remain at these levels, targeting 118.00 initially.
AUD/USD and NZD/USD have added 0.20% today to their modest Friday gains, trading at 0.7195 and 0.6770 respectively. Both continue to be bounced around on RORO (risk-on, risk-off) sentiment swings, but ultimately, are range-trading right now. Key levels for AUD/USD and NZD/USD are 0.7150 and 0.7300, and 0.6700 and 0.6850 for Kiwi. USD/CAD fell 0.65% to 1.2640 on Friday, where it remains in Asia. The CAD strength is surprising, and I suspect the rally in oil and industrial metals is providing a back-stop. USD/CAD has support at 1.2600 and resistance at 1.2700.
Asian currencies remain mostly towards the weaker side of their recent range versus the US Dollar, the exception being the Indian Rupee which seems to be receiving hot money flows once again as the China outlook darkens. USD/KRW remains above 1200.00, USD/PHP at 51.40, USD/IDR at 14,400.00, USD/MYR at 4.2040, and USD/THB at 33.700. USD/CNY and USD/CNH look poised to retest 6.3800 shortly, which would put downward pressure on regional FX. The key directional driver this week will be the US CPI data with high CPI prints lifting Fed hiking expectations and pressuring Asian FX.
Oil ignores US jobs data
Oil prices were almost unchanged on Friday, with Brent crude and WTI maintaining their gains even as headline US jobs data came in soft. Brent crude edged 0.20% lower to $81.80, and WTI fell 1.0% to $78.85 a barrel. In Asia, prices have risen slightly with Brent crude trading at $81.90, and WTI at $79.00 a barrel.
Despite prices easing slightly on Friday, oil continues to hold onto almost all its gains from the start of December. That was despite two OPEC+ meetings where production was increased. Part of the answer lies with OPEC+ itself, where overall compliance with production targets by members has been well over 100% for the last six months. The importance of this cannot be emphasised enough as it implies that OPEC+ itself has very little readily available swing production. Assuming that omicron passes and that the global recovery and international travel continue to recover, the supply/demand dynamics for oil will continue to swing towards higher demand and constrained supply. It would not surprise me in the least if Brent crude and WTI rose to near $100 a barrel in the coming months.
In the nearer term, Brent crude has support at $79.60 and the 100-day moving average (DMA) at $78.15 a barrel, with well-denoted resistance now at $83.00 a barrel. A rally through $83.00 signalling a retest of $86.00. WTI has support at $78.50 and $77.50 a barrel, with resistance at $80.50 and 82.00 a barrel.
Gold remains unexciting
A lower US Dollar on Friday gave gold some solace, rising 0.30% to $1796.60 as it remains side-lined in range trading. Gold remains vulnerable to US Dollar strength, and I have no doubt that any meaningful rally will continue to be unwound aggressively at the first sign of trouble.
Gold has edged lower to $1793.70 an ounce in Asia with no momentum apparent either way. Gold has resistance at $1810.00 and $1830.00 an ounce. Support lies at $1785.00, followed by $1780.00 and $1760.00 an ounce. The downside continues to look the more vulnerable and I believe gold will trade in a roughly $1775.00 to $1815.00 range this week.
