It's been a reasonably pedestrian day in Asia's risk markets as investors bide their time ahead of "Biden Time " later, when the US infrastructure details get laid out.
And it is always a struggle to break higher ground when the market focus coalesces around a hugely risky NFP week as investors likely need a little more "proof is in the economic pudding" before taking the next leap of faith.
OIL
Given there is very little suspense going into the OPEC+ meeting with virtually everyone reading the same side of the oil can that says: "OPEC+, having maintained production cuts at higher prices last month, seems less likely to open the taps at current levels."
And despite the vice-like and highly oppressive grip the US dollar is having over the commodity spectrum, perhaps we are starting to see pre-infrastructure announcement position adjustments.
Support for commodity prices and EM assets could eventually come from infrastructure spending in the US. Perhaps the parallel with higher UST yields isn’t the 2013 taper tantrum but much-improved US growth prospects in the weeks following the 2016 presidential election when there were high hopes for an expansive US infrastructure bill which sent the rallying cry across the commodity space.
The big question is whether this gets through Congress. Biden's good news is that when Trump presented his $1.7 trn plan to Congress in February 2018, it was trendy among the public. However, Trump couldn’t muster sufficient bi-partisan support.
USDJPY is up to 110.90 from as low as 110.28 on big demand out of Tokyo. Demand has picked up since USDJPY broke through 110.00 into the month and quarter-end. And Japanese fiscal year-end turns perhaps adding to the momentum.
But with US yields moving higher it looks like its " open season" on vulnerable low-yielders where a dovish central bank (BoJ) is likely to keep rate divergence in play
USDTHB keeps heading higher, up to 31.39 so far today. Corporates tend to buy the pair into month-end, and there is seasonal repatriation of dividends by Japanese companies in March.
China PMI
China’s manufacturing (51.9 vs 50.6, cons: 51.2) and non-manufacturing (56.3 vs 51.4, cons: 52.0) PMIs beat expectations for the first time since December. These data should provide some respite for EM assets in the context of rising UST yields. Investment-led growth has provided important support to commodity-driven EM exporters. UBS China Economics sees diminishing credit impulse through 2021 as a headwind for EM amid rising global yields. After all, prior declines in China’s credit impulse in 2011-12 and 2014-15 were not accompanied by rapidly-improving activity and fiscal stimulus in the G10 economies.
Most of the sub-indices in the manufacturing survey implied stronger growth momentum in March. The production index improved to 53.9 from 51.9, and the new orders sub-index jumped to 53.6 from 51.5. The raw material inventories sub-index rose 0.7 points to 48.4. The employment sub-index went up to 50.1 from 48.1, marking the first expansion in the labour market since May 2020. Trade indicators also strengthened - the new export order sub-index was at 51.2 in March vs 48.2 in February, and the import sub-index was 51.1 in March vs 49.6 last month.
One would normally expect risk asset to find some legs as China economic data remains steady with the non-manufacturing PMI data exceeding. But we are in such an odd policy paradox right now globally. Stronger data in China feeds into the PBoC normalizing mantra, while robust data in the States directly leads to higher yields because data beats flame the fires of inflation.
You are dammed if you do, and you are damned if you don't, so chose your stocks wisely.
But with US yields moving higher and US futures on a positive tangent and holding impressively steady this morning, it suggests investors are starting to fine-tune their US real rate playbooks for growth and feel comforted by the Federal Reverse Board dovish plumage, which continues to anchor short end rates via the AIT channel.
US EXCEPTIONALISM
The combination of higher US yields, a strong US dollar and a robust US equity market in some circles referred to as "US Exceptionalism" is about as toxic an environment for Gold investors as it gets.
Gold struggled and broke through $1700 overnight. As long as yields continue to strengthen, this will remain a headwind for bullion. Gold is down about 12% year to date, with the largest quarterly decline since 2016. Treasuries sold off, and the move toward the US dollar's safety weighs on the metal, which should continue. The only hope is a divergence from the inverse relationship with yields. As gold slipped below $1685, strategic and real money buying emerged, but it wasn't enough to offset the pressure from banks, technical sellers and another round of heavy selling on the auction. Suggesting the producers might be seeing the writing on the wall, so when miners start selling, is it time to worry?
Vols were bid on the day as spot broke $1700, but supply quickly took advantage of the highs. While rates retraced on Tuesday, gold showed signs of exhaustion. I'd expect the metal to benefit from any selloff in equities and for it to be better supported around $1680-$1660, the year-lows so far.
BITCOIN SHRUGS
Bitcoin climbed higher on more news of mainstream financial adoption of cryptocurrencies by major players. Visa (NYSE:V) said it would allow the use of the cryptocurrency USD Coin to settle transactions on its payment network, while PayPal (NASDAQ:PYPL) is allowing US consumers to use their cryptocurrency holdings to pay at millions of its online merchants globally.
FOREX
In Germany, AstraZeneca (NASDAQ:AZN) headlines seem to have pushed the euro lower once again. It is remarkable how good news is currently discounted (PMIs, Ifo, German inflation) while bad news still impacts things despite its repetition. FX is getting entirely driven by Fed policy normalization getting priced into the curve.
Germany’s vaccine regulator said on Tuesday it had recorded 31 cases of a rare blood clot in the brain, nine of which resulted in deaths, after people received a covid-19 vaccine from AstraZeneca, Reuters reports.
Watch Biden's Speech On Infrastructure
US President Biden will deliver a speech on infrastructure on Wednesday. This could make for an interesting Asia open on Thursday. Higher UST yields are still very much front and center. The Washington Post reports that Biden will outline a $2.25 trn package, including $650 bn on transport, $300 bn on housing, $300 bn on a manufacturing revival, $400 bn in clean energy credits and hundreds on billions on broadband. This all suggests the US is not beating around the bush where the next battle lines are getting drawn as the global economic behemoths, China and the US, enter the ring to duke it out for the Heavyweight Title of the Internet Champion of the World.
With spring in the air and President Biden expected to formally unveil a $3T infrastructure plan Wednesday, just as the acceleration in activity from stimulus checks hitting doormats is feeding into the alt-data, it could provide a smoother and lengthier runway for risk to initially take flight.
But spending the money is the easy part. However, the more difficult decision is how to pay for it. And with all roads intersecting at "tax hike junction," Wall Street won't be enamoured, so all that is yummy around the infrastructure deal will need to be taken with a pinch of tax man salt.
The People's Bank of China has been injecting CNY10 bn into the banking system through 7d reverse repo to match the number of funds maturing on the day since March. Onshore liquidity remains relatively loose.
The central bank’s neutral stance on liquidity has likely eased concerns over potential sharp tightening. The market is now reading this OMO pattern as a signal that the onshore liquidity will remain stable for some time; however, as of April approaches, onshore liquidity may tighten as economic data continues to improve, tax payment picks up, and rates bond issuance rises significantly.
China Securities Journal has published a front-page article commenting that the PBoC is likely to stabilize liquidity in April as the liquidity demand would surge.
MARKETS
US equities slipped again Tuesday, S&P down 0.3% despite a rebound in financial stocks. US 10-year yields ultimately finished the session steady at 1.71% after moving as high as 1.77% during the NY session, the highest since January 2020. European yields are higher, Germany up 3.2bps.
Oil fell back 1.6%.
Over the past 24 hours, both Germany and Canada have restricted the AstraZeneca vaccine's use so that it will now be used on people over 60 in Germany and over 55 in Canada. In both countries, the decision reflects concerns over blood clot side-effects in young people. Notable locally, given Australia's dependence on the Astra jab.
The beat on US consumer confidence in March, up 19.3 pts, a near-record monthly jump, to 109.7. acted as a double-edged sword for pockets of the market as the combination of stimulus and robust data support equity prices. However, tech faces some challenges if the "risk-on" signal continues to manifest into higher real yields. Suggesting investors need to calibrate their US real rate playbook for growth as the US rates debate remains at the forefront of all conversations.
The Street uniformly believes US data is at an inflexion point, and Friday's payrolls will be the beginning of a sharp acceleration on the US jobs markets. However, the constant discussion at every virtual market corner remains concerned about intense bond market reactions to robust incoming data and inflation risks beyond the base effects.
The more robust data could drive US yields furiously higher and hammer a massive wedge at the index level between financials, which tend to act better to higher yields, and the large-cap tech stocks that go on a buyers strike.
Let's step back from the " hair on fire " view. The fact that stocks remain at record highs despite US yields ripping higher suggests at some level; investors are buying into the Fed AIT, which anchors short end rates but allows bond yields to rise, encouraging more banks to lend.
OIL PRICES
The rough patch of oil endures as the short-lived bounce from the Suez Canal blockage has given way to a mighty US dollar and the COVID resurgence, raising more questions than answers around how quickly global demand will recover.
And rubbing salt in the wounds, American Petroleum Institute reported a bearish to consensus increase of 3.910 million barrels of crude oil in the US crude oil inventories for the week ending March 26.
Indeed, the higher US yields and a more potent USD combination apply vice-type pressure on all commodities today, and oil was no exception. Gold was down precipitously overnight. And regardless of what kind of bull spin I've been trying to justify stepping in front of the move. The bullish signals remain far and few as we stay on a bumpy path for oil prices compounded by the market's depth (liquidity) continuing to wilt.
We've come a long way on the US dollar and yields, so we could see a bit of profit-taking ahead of the US ADP and especially NFP later this week, which could give commodities and oil market some room to breath.
And 4th wave disquiet after US President Biden's comments urging the continuation of mask mandates along with the US CDC director's warning on a fourth wave, threaten to bring some of the recent weeks' European lockdown anxiety state-side which is rounding out the revolving carousel for risk for oil prices over the short term.
OPEC+ needs to continue to present a unified front. However, markets are starting to sense that the divergent view from the two largest producers in the OPEC+ group could become a problem at some point even if they can paper over their differences in the near term. But traders are in desperate need mode for a helping hand from OPEC this week.
May 21 Brent expiry is on tap, which may be adding to some downside risk as folks opt to close out as opposed to roll and carry.
FOREX
EM currencies are heading lower, especially for higher yielders USDTRY and USDINR.
INR's regional outperformance this year amid solid equity inflows should be tested in the context of sharply rising covid-19 cases. And the much-improved service-sector activity could be walking back more than a few steps after Mumbai imposed a nighttime curfew.
The Malaysian Ringgit
Higher US yields continue to act like a wrecking ball crashing any semblance of positive ringgit sentiment.
Malaysia getting removed from the FTSE Watchlist did little to stem the tide, likely because foreign bond investors have turned into better sellers of bonds than local bond buyers.
Oil prices slipped again overnight, which will do little to assuage the bearish view.
GOLD
Gold is not managing to bounce much with the selloff having accelerated through the previous support at 1700. With US yields continuing to make new highs and equities holding up, this doesn't feel like a great environment for gold.
I would expect gold to benefit from any selloff in equities and for the metal to be a little better supported around the 1680-1660 area, which marks the month and year's lows.