Despite China’s Central Government ordering domestic coal producers to increase production to alleviate energy shortages in Mainland China, obstacles keep on appearing. Production in one of China’s coal production hubs, Shanxi, has been severely disrupted by heavy rains forcing the suspension of output from 60 coal mines, Bloomberg reports.
Wet weather has also been disrupting extraction at key supplier Indonesia of late as well. Unsurprisingly oil prices are up 1.0% in early Asia, with natural gas futures rising by 2.0%, while front month iron ore futures in Singapore were also up. Steel making uses a lot of coal; it's leapt higher by over 4.0%.
Reuters is also reporting that Northern Indian states have been suffering electricity outages as coal supplies there remain exceedingly tight. Friday’s RBI policy decision left rates unchanged, but the central bank announced it would stop its bond buying program that isn’t called quantitative easing. Ostensibly bullish for the Indian rupee, pressure on the INR continued anyway, and I suspect energy is at its core.
Mainland China and India are the no 1 and 2 largest users of coal. Meanwhile Russia keeps “subtly” tying more gas supply to Europe with certifying Nord Stream 2 and OPEC+ have shown no signs of wavering on previously agreed production targets. With winter approaching in the Northern hemisphere, none of this news is bearish for energy prices and oil is rightly higher in Asia today.
It also isn’t bearish for inflation either. Higher energy prices/shortages will inevitably make their way through global value chains in the form of rising prices and potentially shortages of industrial and consumer goods. I for one, am particularly concerned about the knock-on effects on fertilizer production (which uses natural gas in the manufacturing process.) If global food production starts getting affected, either by shortages and/or much higher prices, things are going to start getting real.
All of this makes the constant blathering from central bankers around the world about inflation being “transitory” ring more and more hollow. If transitory inflation is now defined as being elevated by last the two or three years, what is sticky inflation? Two to three years sounds more like half an economic cycle these days to me.
Of course, much of the inflationary forces are due to pandemic disruptions and thus, out of the hands of central bankers. Some of it though, is a knock-on effect of the ham-fisted quantitative easing policies of the past decade and a bit, pimping up asset price appreciation to give the illusion of recovery, while sharply increasing economic and social inequality under the surface.
Stealing the future wealth creation of our children and NPV-ing to the present day via QE forever and zero percent rates to back stop growth today, had to be paid for eventually. Perhaps that time has come via inflation, which has been on holiday for nearly 20 years. The only bright spot is that the world actually needs a few years of high inflation to deflate the global debt mountain that all of those economics Ph.D.’s at the central bank of (insert name here), have enabled the financial system to create.
The threat of inflation is likely one reason Wall Street didn’t endure a massive “taper-off” move on Friday after another Non-Farm Payroll shocker. Although the August data got a chunky upward revision to 366,000 jobs, the September print was only 194,000 jobs versus expectations of 500,000-plus, including from the author.
As ever, a look under the hood is always a good idea, one the initial headline reactions have passed. Private payrolls actually showed a healthy gain with government employment, particularly in education where schools are enduring a disrupted reopening. That and the leisure and hospitality sector continue to be the employment laggards, despite millions of jobs being available in the latter.
What saved the markets from a “taper-off” move was unemployment falling to 4.80% from 5.20%, led by a fall in participation rates. The Fed engineered mother of all stock market rallies may have seen retirement pools bulge and early retirements thinning total workforce. Bulging personal savings and a disrupted return to school may also be stopping some workers from returning.
That all points to wage inflation, not PPI inflation and US bond yields shot higher, the 10-year settling above 1.60% while equities fell, and the US dollar held its own. That left the Fed taper live for a December start in the minds of the markets and I shall not disagree. It appears that the US has a labor force problem, and not a jobs problem. Transitory inflation? Hmmmm………..
South Korean and Taiwan markets were closed today, and it is a partial holiday in the United States although the stock market is open. South Korea looms as one of the region’s highlights though, with the Bank of Korea policy decision tomorrow.
Markets were pricing an unchanged base rate of 0.75%, however there is a small chance that it might slip in a 0.25% hike which would boost the beleaguered won. Singapore’s MAS announces its semi-annual monetary policy outlook on Wednesday, but I am expecting no surprises with the MAS settings tilted solidly towards supporting the economic recovery.
Australia releases employment data on Thursday, usually good for some intra-day volatility. More attention will be focused on Sydney’s partial reopening today. It is a quiet data week for China with only CPI on Thursday to excite. Only a print well above 1.0% for September is likely to provoke a market reaction. Attention remains focused on Evergrande (HK:3333) (OTC:EGRNY) and its still suspended shares. Although it has slipped from the headlines, we can be sure this story has more to run.
The data calendar is thin in Europe today, but a slew of CPI releases from across the Eurozone in the second half of the week could reveal whether inflationary pressures seen elsewhere in the world, are washing up on Europe’s shores. The US also releases NFIB small business optimism tomorrow, important for its outlook on wages, hiring, and also the effect of material shortages and/or price increases. The JOLTS job openings data should hold around 11 million vacancies and is one of the main reasons why Friday’s Non-Farms did not provoke a “taper-off” move. CPI on Wednesday will be closely watched in the context of the above before Retail Sales on Friday.
Finally, Q3 US earnings season starts this week, with the banking heavyweights due to report in the second half of the week. Their outlook for 2022, will arguably have more market-moving potential than the data calendar this week.
Asian equities race higher
With the Fed taper trade alive and well, despite a shocking Non-Farm Payrolls print, US yields moved higher sending Wall Street to a soft close. The S&P 500 eased by 0.19%, while the rate sensitive NASDAQ dropped by 0.51% with the value-centric Dow Jones finishing just 0.04%. US futures on all three in Asia took a bath earlier in the session but have recovered most of those losses to be hovering each side of unchanged.
The recovery in US equity futures has been driven by a very positive day for the most part in Asia, with no one theme driving the rally. The Nikkei 225 climbed an impressive 1.55% with a much weaker yen boosting exports, COVID-19 cases falling, and the Japanese PM saying he wasn’t contemplating a hike in capital gains tax. South Korean and Taiwan markets were closed for holidays.
China equites were also rallying despite government officials signaling that a clampdown on monopolistic practices by big-tech would continue. E-com giant Meituan (HK:3690) (OTC:MPNGY) received a smaller than expected fine from the Chinese government for just that and in a classic case of no news is good news, sent the Hang Seng sharply higher, led by Mainland tech giants.
That seemed to have lifted sentiment on Mainland markets as well despite the flooding in Shanxi darkening the energy outlook. The Shanghai Composite was 0.20% higher although the narrower Shanghai 50 was up by 1.03%. The CSI 300 climbed by 0.55% while the Hang Seng leapt 1.80% higher.
Singapore gave back some of its travel-stock related rally after the Government announced more international vaccinated travel lanes over the weekend. But the SPDR Straits Times (SI:STTF) remains up 0.20% on the day. Kuala Lumpur was also easing movement restrictions, and combined with oil’s rally, the KLCI has risen by 0.60%. Jakarta and Bangkok were 0.30% lower but the PSEi in Manilla leapt 3.70% higher today as virus cases fell and a large shipment of COVAX vaccines was received over the weekend.
A healthy rise in commodities prices today and the official reopening of Sydney as well, has helped Australia overcome another gaming company scandal, which weighed on stocks earlier in the session. The ASX 200 and All Ordinaries rose 0.65%.
European stocks were set to open in a neutral posture, Friday’s weak US close offset by a strong showing in Asian equity markets today. A raft of second-tier regional data was unlikely to move the needle one way or the other. The energy crisis in the background was likely to limit gains, as will a euro that was stubbornly clinging to 1.1600 region.
As is their want of late, European markets will hitch their wagon to the direction of travel of the US markets, and it will be interesting to see if taper nerves persist. With the US bond market closed I would be on the side of a buy-the-dip day which should lift European stocks later in the session.
Firm Yuan Setting Pushes U.S. Dollar Lower In Asia
Friday was a choppy session for currency markets with the US dollar on the back foot most of the day before staging a post-Non-Farm taper rally as US bond yields moved north. The dollar index finished just 0.10% lower at 94.10, edging to 94.08 in a dull Asian session. The dollar index was back to the middle of its 93.50 to 94.50 range. Despite higher US bond yields, the technical picture suggested that resistance around 94.50 became more imposing after multiple forays were repelled ahead of it last week.
I also note that the CFTC Commitment of Trader’s Report showed US dollar longs hitting two-year highs. That is as good a sign as any that speculative momentum has slowed over the end of the last week. I still believe in the higher US dollar/Fed-taper story, and higher yields will provide an underlying bid on dips. But it would not surprise me in the least if the US dollar spent this week on the softer side to cull some of the heavily overweight speculative long interest.
In the G-10 space, EUR/USD continued to mark time, rising slightly to 1.1580 in Asia. EUR/USD still looked vulnerable to another move higher in US yields, but a break of 1.1550 or 1.1650 was required to signal a new directional move. Sterling was outperforming after two Bank of England officials signaled an earlier rate hike could occur over the weekend.
The November BOE meeting will be interesting now as inflation pressures mount that don’t look transitory anymore. GBP/USD rose 0.37% to 1.3665 today, well above the 1.3615 pivot point. A rally through 1.3700 could spark a short-squeeze to 1.3800, while GBP/USD now looks well supported into 1.3600.
USD/JPY was on the move after US yields rose on Friday. USD/JPY rose 0.54% to 112.25 on Friday, jumping by another 0.38% to 112.65 in Asia. The culprit was the US/Japan yield differential and this will continue to drive the crosses direction. With the US in taper mode, push up US bond yields, and Japan looking to open the fiscal taps, supported by an ever-dovish Bank of Japan, those forces will continue.
USD/JPY looked set to test longer-term resistance between 114.00 and 114.50 while dips to 111.00 will be well supported. Heavily short yen positioning in the US futures may limit USD/JPY gains initially, though. USD/JPY looks like a true buy-the-dip candidate, however.
With Asian markets brimming with confidence today, the sentiment-driven AUD and NZD rose to 0.7330 and 0.6735 today. AUD/USD outperformed, rising 0.35% as Sydney’s reopening, and firm commodity and energy prices flowed through to the currency. The larger technical picture still looked shaky though, as both Antipodean’s remained completely at the mercy of the ebbs and flows of global risk sentiment. A negative China headline, or a soft US equity session will see both currencies quickly retrace their gains.
The PBOC set a slightly firmer Yuan fixing today at 6.4479, while adding CNY 10 billion of liquidity via the repos. The Yuan also hit five-year highs on a TWI basis. With one eye on their potential imported energy bill, it is probably no surprise that the yuan has been kept on the firmer side.
Although, a RRR cut this morning by the PBOC may make that situation slightly more challenging. The strong CNY has provided support to Asian currencies which have edged around 0.20% higher on average versus the greenback. A procession of reopening announcements by ASEAN markets over the weekend was also lifting recovery sentiment.
A partial US holiday will dull volumes today, but I doubt the Asia FX fairy-tale will continue once they return, and if energy and US yields keep moving higher. Commodity/energy centric currencies such as the Indonesian rupiah and Malaysian ringgit were, for once, best places to whether the storm. Huge energy importers like South Korea, Japan, and especially India, were among the more vulnerable.
Oil Prices Rise In Asia On China Weather
Oil prices weathered the US data storm on Friday, with Brent crude and WTI almost unchanged, consolidating at the top of their ranges. Brent crude closed at $82.55, while WTI closed slightly higher on the day at $79.40 a barrel. One storm they were not weathering was the heavy flooding in China’s Shanxi province, a coal mining hub where 60 mines have had to cease production. That has sent oil prices sharply higher today. Brent crude rallied 1.40% higher to $83.70 a barrel, while WTI leapt 1.80% higher to $80.95 a barrel.
Brent crude took out last week’s double top at $83.50 and was likely to test $88.00 a barrel this week. Support appeared at $82.00 and then $80.00 a barrel. WTI chopped through resistance at $80.00 and was moving through $81.00 a barrel as I write. Dips to $80.00 and $78.50 a barrel will be well supported. Only a fall through $75.00 changes the bullish technical picture which shows no meaningful resistance until $90.00 a barrel, interesting times.
A US holiday is reducing liquidity but the scramble for energy supplies by Asia and Europe in natural gas and coal markets continued to provide a strong backstop for oil prices, especially with OPEC+ showing no signs of increasing production.
US Bonds Repel Gold Recovery Rally
Gold rallied strongly on Friday, rising over 20 dollars to test $1780.00 an ounce. However, the US Non-Farm Payrolls kept the Fed taper trade alive and saw US bond yields rise once again. That was enough to sap fragile confidence in the gold rally, which gave back all its intra-day gains to finish just 0.10% higher at $1757.20 an ounce. An ebbing of the fear gauge in Asia, where equities have powered higher, has unwound some haven buying of gold and saw it 0.10% lower at $1755.00 an ounce.
The failure of the gold rally will have disappointed gold bulls and made them more nervous about committing to new longs once again. However, I believe that with the US dollar potentially correcting temporarily lower this week, gold will find plenty of support of dips this week. The US bond market closure for a holiday today will help gold’s cause in that respect.
That is all predicated on US yields trading sideways this week, but if so, gold should trade in a $1740.00 to $1780.00 an ounce range with an upside bias. Critical support lies at $1720.00 an ounce, while the $1800.00 region, with the 100 and 200-day moving averages (DMAs) each side of it, remains a formidable barrier.