Once again, Asian equity markets are refusing to chase the carrots dangled by an impressive US earnings season, with regional markets all under pressure again today. China, once again, appears to be the culprit, although not all the negativity is its own making. China Industrial Profits rose by a healthy 16.30% YoY this morning, although the YTD number retreated to a still impressive 44.70%.
Elsewhere though, the news is somewhat gloomier. COVID-19 cases moved higher to 59 with the fears of wider lockdowns weighing on sentiment. The US withdrew China Telecom's (HK:0728) US license, citing national security fears. The Global Times, China’s English language daily, reported that more real estate bond defaults are likely, and China has halted China/Europe freight trains thanks to massive border congestion. Hong Kong coal futures are also 5.30% higher in early trading and with oil prices stuck at recent highs and winter coming, China’s energy crunch hasn’t gone away. Taken in totality, it appears to be enough to weigh on equity markets in China, and by default, the rest of the region, with Microsoft (NASDAQ:MSFT) and Alphabet's (NASDAQ:GOOGL) impressive results unable to lift the malaise in US markets either.
Australian Inflation moved to a 6-year high today, increasing nerves that the RBA will shift from its ultra-dovish stance. The RBA Weighted Mean CPI YoY rose from 1.70% to 2.10% this morning. I suspect those nerves are overdone though, as even at 2.10%, the CPI has only just managed to creep into the RBA’s preferred 2.0% to 3.0% range. Nevertheless, the Australian dollar has gained some support and down under stocks are in the red.
The rest of the day's calendar is empty in Asia with only German Import Prices to give food for thought ahead of tomorrow's ECB meeting, where the biggest job for Ms Lagarde will be dousing down inflationary expectation fires and assuring the market that ECB remains on its Japanification track. The euro’s rally has stopped dead in the water, and if the ECB reaffirms that they intend to continue life-support forever, with low longer-term inflation projections, the single currencies retreat should start once again.
The US calendar is more interesting with September Durable Goods Orders and the official US Crude Inventory report. The former is going to be drowned out by earnings from Apple (NASDAQ:AAPL) and other heavyweights such as General Motors (NYSE:GM) and Boeing (NYSE:BA). The music of a strong US earnings season should continue even as it appears that some declining marginal utility is creeping in. Earnings are enough to hold the big three indexes at record highs, but not enough to reinvigorate the rally onto new highs.
I wouldn’t bet it won’t happen, but investors may now be quietly turning their attention to next weeks FOMC meeting, which, as yet could be an unpriced judgement day for markets.
North Asia woes see the usual ASEAN pivot
US equities eked out tiny gains overnight despite excellent results from heavyweights such as Microsoft, and Alphabet after-hours. All three major indexes closed out at record or near-record highs, but it increasingly seems that markets have priced in so much good news expectations on the earnings from, that stocks are struggling for further upward momentum. That said, the lack of downside earnings shocks means that equities are not inclined to rush for the exit door either.
In this context, Apple’s earnings call today will be vital. With markets running on vapours, an expected excellent result should keep the status quo with US markets. However, if Apple was to show supply chain stresses and challenges in future sales because of that, it could be the catalyst for a downside correction. Investors may well be begrudgingly starting to ponder the full implications of next week’s FOMC meeting and the start of the taper.
During Tuesday's US session, the S&P 500 limped to a 0.18% gain, while the NASDAQ edged 0.06% higher, and the Dow Jones produced a minuscule 0.04% rise. In Asia, the negative headlines seeping out of China are also weighing on US futures in Asia for the first time this week, also indicating waning bullish momentum. All three are slightly in the red despite the impressive after-hours Alphabet release.
In Asia, the fast-money FOMO market of Japan has corrected lower this morning after a banner session yesterday. The Nikkei 225 has fallen 0.60% with South Korea’s KOSPI falling 0.75%. Mainland China has headed directly south today as that stream of negative headlines has hit the wires. The Shanghai Composite is down 0.95% with the CSI 300 falling by 0.80%. Hong Kong has tumbled, led by Mainland heavyweights, the Hang Seng tumbling by 1.70%. Taipei is holding its own unchanged for the day.
As is often the case these days when the North Asia heavyweights have a bad day at the office, ASEAN markets see a pivot of fast-money investor inflows. Singapore has climbed by 0.60% today with Kuala Lumpur edging 0.05% higher and Jakarta rallying by 0.50%. Bangkok is 0.15% higher while Manila has climbed by 0.30%. The multi-year highs for inflation in Australia have ramped up RBA nerves, pushing the All Ordinaries down by 0.30%, and the ASX 300 by 0.10%. ASEAN and Australia’s higher beta to primary resources seems to be supporting regional equities with market sentiment swinging to inflation-watching today.
European stock markets should open modestly higher later today, but they, and US markets, will once again be beholden to the tender mercies of the US earnings season this evening, especially Apple.
The US dollar maintains its gains
Although long-dated US yields have eased slightly this week, short-dated ones continue rising. This flattening of the yield curve, along with high energy prices, appears to be continuing to support the US dollar versus the G-7 currencies. The Dollar Index maintained its gains overnight, finishing 0.15% higher at 93.96.
EUR/USD held steady at 1.1600, as did GBP/USD at 1.3770, while USD/JPY rose 0.40% to 114.15 before exporter selling saw it fall back to 114.00 in Asia this morning. A dovish ECB tomorrow likely sees the EUR/USD sell-off recommence targeting 1.1500 initially. GBP/USD will be at the mercy of the UK budget this afternoon while USD/JPY is befitting from the flattening of the US yield curve, A hawkish FOMC next week could see it rise to 116.00.
Elsewhere, the commodity currencies continue to maintain gains thanks to positive risk sentiment from the US earnings season and firm resource prices. Momentum appears to be stalling in USD/CAD and NZD/USD though with a rise through 1.2410 in USD/CAD potentially triggering a short squeeze. Likewise, a fall by NZD/USD through 0.7130 will signal a temporary end to the Kiwi rally. AUD/USD remains constructive thanks to rising inflation and RBA expectations, with a rise through 0.7550 signalling more gains potentially reaching 0.7700.
Asian currencies remain near the higher end of their recent ranges, thanks to a neutral PBOC and a rise in investor sentiment over the past week. Once again though, momentum seems to be stalling. It looks like the Asian currency space is now moving to wait-and-see mode ahead of next week’s FOMC.
Oil consolidation continues
Oil prices continue to move sideways, despite some decent intra-day volatility. In the bigger picture though, both Brent and WTI continue consolidating near the top of their recent ranges thanks to favorable supply/demand characteristics in both the physical oil market and firm natural gas and coal prices.
Brent crude finished the overnight session 0.10% higher at $86.10, while WTI rose 0.73% to $84.35 a barrel after US API Crude Inventories rose by less than last week. In Asia, both contracts have edged 0.35% lower to $85.90 and $84.05 a barrel.
Today's official US Crude Inventory data looms as the next volatility point with stocks expected to rise by 1.9 million barrels. Attention will be focused on gasoline and distillate inventories as well, and sharp drops similar to last week could boost oil prices once again. Similarly, if stocks at the Cushing hub drop further, nerves over supply issues will increase as we head into the colder Northern hemisphere months.
The technical picture still has the respective relative strength indexes in modest overnight territory which means a sharp correction lower to flush out speculative longs cannot be ruled out. However, as previously noted, I expect any sudden fall to be met with an equally fast rally. Brent crude has resistance at $86.70 and WTI at $65.40 a barrel. Trendline support at $83.90and $80.65 a barrel respectively and should be the limit for any downside correction. Only a daily close below those levels suggest a deeper correction is possible.
Gold retreats
Gold fell from above $1800.00 an ounce overnight, finishing the session 0.83% lower at $1792.00 an ounce. In Asia, its retreat continued as it falls 0.20% to $1789.15 an ounce, moving it back below the 100 and 200-day moving averages at $1789.20 and $1793.40 an ounce.
The price action is somewhat disappointing, and it appears that gold is struggling to maintain gains above $1800.00. It appears that despite longer-dated yields easing in the US, the rise of the short-dated yields and the flattening of the US yield curve is weighing on gold, as is the US dollar's quiet, but firm strength this week. Notably, gold’s fellow supposed inflation-hedge, Bitcoin, appears to be suffering a similar fate.
Investors may well be turning their attention to next week’s FOMC meeting now and looking past earnings. It is almost certain that a start to the Fed taper will be announced, and I do not believe this has been remotely fully priced by markets. US yields should start to move higher once again, as will the greenback. In this environment, gold will struggle to hold near $1800.00. A move above $1835.00 would be a powerful bullish technical signal, but my base case is that golds retreat resumes into next week.
Gold now has resistance ahead of $1795.00 and again at $1813.50 an ounce, its recent highs. Trendline support, a very nice line extending back to its $1720.00 low in late September, is now nearby at $1882.50 an ounce. Failure of $1780.00 therefore, likely signals deeper losses targeting $1750.00 in the first instance.