Asia was off to a mixed start this week with individual asset classes struggling to find a central unifying theme. Equity markets were mixed after China announced a pilot program of property taxes in some cities, and COVID-19 cases rose on the Mainland. Cases remain extremely low, but ominously, were quite spread geographically. There is plenty of percent internationally to see how Delta plays out in COVID zero countries and it will be interesting to see how this develops in China. It is a potential dark cloud if it results in widespread social restrictions.
Evergrande (HK:3333) (OTC:EGRNY), having made an offshore coupon payment in the nick of time on Friday, faces another in four days’ time on the 29th of October. Its Chairman has said work has restarted on property projects in China, and it is going big on its EV division in the decade ahead. Where all that money is coming from, I know not, and markets seemed to be sharing the same thoughts.
The US dollar made a comeback on Friday thanks to Fed Chairman Powell’s remarks that it was time to taper, but not hike. He also said inflationary pressures would persist well into next year but remained transitory. Clearly, central bankers’ definition of transitory inflation is a bit different to many of us, with two years seemingly transitory.
Still, I agree that raising interest rates is not the answer now when the drivers of the inflationary surge are beyond the reach of domestic monetary policy. Although Mr. Powell was stating the obvious on rate hikes, the limited boost in the US dollar likely reflects those remarks. However, US 10-years were holding comfortably above 1.60% and with next week's FOMC meeting locked and loaded to announce the Fed taper, I suspect we are nearing the bottom of the US dollar retracement.
Before that though, we have a raft of earnings announcements this week, kicking off with HSBC (NYSE:HSBC) this afternoon. Faceplant, I mean Facebook (NASDAQ:FB), is later today and after Snap (NYSE:SNAP) got an Apple (NASDAQ:AAPL) caught in its throat, markets will have an itchy trigger finger over the sell button if the social network says the same.
Additionally, this week, it is a FAANG-sters paradise, heavyweights such as Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Apple also announcing, along with some international financial heavyweights and real economy stalwarts like Caterpillar (NYSE:CAT), General Motors (NYSE:GM), and Ford (NYSE:F). It will be big-tech, however, that decides whether the US earnings season party continues, before the FOMC reasserts its dominance next week.
Over the weekend, the Saudi Arabian Energy Minister said that OPEC+ would remain cautious over output. Oil had a banner Friday as it was and has moved higher in Asia. Ominously, natural gas futures rose over 4.0% this morning, and China Coal futures were also 4.0% higher, perhaps testing the limits of the ability of China’s central government to talk prices down.
A resumption of the energy rally will be a bullish factor for the US dollar. In the US, Nancy Pelosi said the Democrat’s spending package was 90% done. Market impact was limited for now, as, like me, the street seemed to want to see the detail before it was reconciled through the Senate. The debt ceiling has gone quiet as well but will undoubtedly come back to the front pages soon enough with December not too far away.
The data calendar in Asia was quiet today, but we do have both regionally, and in the Northern hemisphere, despite the dominance of US earnings in investors' minds. South Korean Q3 Adv. GDP will be slightly old news, but Singapore’s Manufacturing Output and Employment later in the week should confirm its export recovery remains intact, even as the domestic economy lags. Today's CPI will be a non-event as the MAS tweaked monetary policy higher recently already.
Japan’s Retail Sales, Australian Q3 CPI and China’s Sept Industrial Profits will grab the headlines on Wednesday, with the Australian CPI potentially increasing the noise around the RBA’s ultra-dove stance. Sub-par China Industrial Profits will, similarly, increase the noise around the China slowdown and probably weigh on all of Asia. Thursday’s Bank of Japan policy decisions will be a non-event ahead of the election on the 31st of October.
Heading North, German IFO is released this afternoon and in the US, Consumer Confidence tomorrow, Durable Goods Wednesday, GDP Thursday, and Personal Income/Expenditure Friday round out a busy week for them. Europe’s highlight will be the ECB policy meeting on Thursday with an outside chance that they could lay the ground for tapering, although I’m not holding out much hope from the European Central Bank of Japan.
We may well have another week ahead of us of higher equities and a weaker US dollar as earnings have their week in the sun. Next week, and the week after, it's business time once again with the US FOMC, and China’s Central Committee meeting the week after. Evergrande may throw a spanner in the works as well if they don’t pay by Thursday and I wouldn’t rule out some “shared prosperity” announcements before the China meeting.
China weighs on Asian markets
It was a mixed day in Asia today as Wall Street limped into a cautious close on Friday. Jerome Powell’s taper comments weighed on interest rate sensitive technology stocks, already SNAP’ed earlier in the session. The S&P 500 closed down 0.11%, with the NASDAQ retreating by 0.82%, while the more cyclical Dow Jones rose by 0.21%. Futures on all three indexes edged just 0.05% higher in Asia.
The NASDAQ performance was weighing on Tokyo with the Nikkei 225 slumping by 0.90% today, although the South Korean KOSPI moved 0.45% higher. China’s COVID-19 cases and introduction of a property tax in parts of the Mainland have offset Evergrande’s Friday coupon payment and bullish comments from the Chairman today. The Shanghai Composite was 0.38% higher, but the narrower Top 50 were down 0.32%. The CSI 300 and Hang Seng were unchanged, and it wouldn’t surprise if some ‘national team” “smoothing” was going on.
China concerns were limiting gains in regional markets with Singapore’s Straits Times down 0.05% with Taipei also unchanged. Kuala Lumpur was 0.15% higher as energy prices rose in Asia today, with Jakarta also edging 0.10% into the green. Bangkok fell 0.50% and Manilla down 0.75%. By contrast, the rise in energy and commodity prices, as well as a reopening in Melbourne on Friday, and a reopening of international borders in New South Wales were lifting sentiment down under. The ASX 200 was 0.30% higher, with the All Ordinaries up 0.40%.
The pre-market HSBC Holdings (NYSE:HSBC) results were likely to dominate sentiment in early Europe. Facebook will be front and center in investors' minds today in both Europe and the US, and I expect a noisy range trading session ahead of the social network's results.
Powell’s taper supports greenback
Jerome Powell signaled that he was on board with starting the Fed taper on Friday, which gained the US dollar a temporary stay of execution. The dollar index finished down 0.1% at 91.60. However, the US dollar resumed its easing path in Asia as those comments faded, falling 0.09% today to 9.52, just above support at 93.50. Although US yields eased on Friday, the 10-year remains well above 1.60% and although the greenback could weaken towards 93.00 this week if US tech-heavyweight earnings non-produce, a looming FOMC meeting and taper, I believe, will signal the end of the US dollar correction lower.
EUR/USD edged higher to 1.1660 today but was continuing to find headwinds ahead of 1.1700. It needed a daily close above 1.1700 to signal more gains, although the single currency remained more vulnerable than most to the Fed taper, as this week ECB policy meeting is unlikely to risk the easy money forever boat.
GBP/USD gave back some recent gains, falling 0.30% on Friday as COVID-19 cases spiral amid fears of new restrictions. It rallied by 0.25% to 1.3785 today though, as progress has apparently been made on the Northern Island Brexit protocols, and amid general dollar weakness. It needs to overcome strong resistance at 1.3835 to signal new gains while remaining vulnerable to news surrounding minimum wage hikes.
The fall in US yields on Friday saw USD/JPY quickly retreat by 0.45% to 113.50 on Friday. Only a retreat through 113.00 changes the bullish outlook for the pair. Some risk-hedging buying by local buyers of yen ahead of the weekend election may cap gains this week, but otherwise, USD/JPY remains entirely at the mercy of the US/Japan rate differential. USD/JPY may resume its rally after another lower forever BOJ policy meeting this week as well.
USD/CNY remained calm, with a neutral fixing by the PBOC today leaving USD/CNY unchanged at 6.3820. The PBOC signaled a large liquidity injection today was related to upcoming tax and debt payments by the private sector. China seemingly remained unconcerned about yuan strength, probably with one eye on its imported energy bill. USD/KRW fell by 0.80% today to 1168.00 with 1200.00 its key pivot point. The Thai Baht rally continued as it reopened, USD/THB fell 0.60% to 33.122, while the Malaysian ringgit and Indonesian rupiah continued to find support from strong commodity and energy prices.
Oil strengthens in Asia
Oil prices rose on Friday as Jerome Powell signaled that supply chain disruptions and the “transitory” inflation will be with us for quite some time yet. Brent crude rose 1.10% to $85/70, and WTI leapt by 1.95% to 84.15 a barrel, taking out resistance at $84.00 a barrel. With the Saudi Arabia Energy Minister signaling over the weekend that OPEC+ will remain cautious on production increases, both Brent crude and WTI tracked higher in Asia from the get-go.
News that the US Democrats were close to a final spending package, along with sharp jumps in natural gas and coal this morning, were also boosting oil’s positive outlook. Brent crude has risen by 0.60% through resistance at $86.00 to $86.20 a barrel. WTI has risen by 0.50% to $84.55 a barrel.
Although the relative strength indexes (RSIs) on both contracts have moved back into overbought territory, it is physical market demands, and not technical factors, that are driving price movements right now. Although a sharp correction lower on a bearish headline cannot be ruled out in either contract, and sell-off is likely to be followed by an equally sharp rally as the buy-the-dippers, speculative and physical, pile in.
A daily close of Brent crude and WTI above $86.00 and $84.00 a barrel this evening would be a bullish technical indicator, signaling that the next move higher in oil prices is underway. In the bigger picture, only a fall through their respective trendline supports at $83.25 for Brent, or $80.00 a barrel for WTI, changes the bullish outlook.
Gold rollercoaster session
Gold had a rollercoaster session on Friday, rising as high as $1814.00 an ounce at one stage as the break of $1800.00 triggered stop-loss, momentum and model buying. The Powell taper comments put a floor under the US dollar and saw an intra-day retreat, but gold still finished 0.54% higher at $1792.50 an ounce. In Asia gold resumed its rally, climbing 0.30% to $1798.00 an ounce.
The price action on Friday, a vicious rally, followed by an equally vicious sell-off, highlighted how non-sticky the fast-money players were in gold when it started to see some intra-day volatility. The whipsaw price action suggested that any rally in gold will struggle to maintain a multi-day outlook while those types of flows dominated volumes.
However, Mr. Powell did say that “transitory” inflation pressures will be with us for some time to come, and it was increasingly looking like some sort of inflation hedging was being built into gold prices. Gold’s challenge will be whether it can weather an FOMC tapering announcement next week, especially if, as expected, US yields and the US dollar start their move higher again. I frankly, have my doubts.
That said, gold was slowly but surely forming what appeared to be the second shoulder of an inverse head and shoulders pattern through a series of higher daily lows. In the bigger picture, a rise through $1835.00 an ounce, would trigger the multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive, targeting a move back above $2000.00 an ounce.
There is no doubt the shorter-term technical picture looks bullish though, especially as gold has closed and remained above the 100 and 200-day moving averages at $1791.00 and $1793.85 an ounce. A daily close above this zone tonight should signal more gains. Behind them, gold has support at $1780.00 an ounce. Resistance appears initially at the overnight high around $1814.00 before gold faces a formidable zone of multi-month daily highs between $1832.00 and $1835.00 an ounce.