Yesterday, more data from South Africa suggesting Omicron symptoms were mild gave a green light for the fast-money gnomes of Wall Street to pile back into the buy every-thing global recovery trade. Helping proceedings was news that a deal had been struck in the US Congress to raise the US debt ceiling, avoiding a potential December default.
US equity markets had a mighty session, with the S&P 500 and NASDAQ enjoying their best days since March. The US yield curve steepened once again while oil prices jumped, and the US dollar maintained its gains. Once again, buy-the-dip has triumphed and in the case of oil, last week was probably the lows for potentially the next 12 months.
I have stated that V for volatility would be the winner in December, rather than directional momentum, and I believe that still holds true. While the buy everything trade will have its day in the sun for the rest of this week, some serious non-virus risk points are looming. Friday sees US CPI and a print at or above 7.0% is going to raise the heat at next week's FOMC. We have a central bank policy frenzy next week, but all roads lead to the FOMC. And the odds of faster Fed taper and a signal of earlier rate hikes is rising. Markets continue ignoring this reality at their peril, and if reality bites next Wednesday (US time), the “growth” trade on equities could be in for some tough love.
Another “grey swan” is Russia and Ukraine. The Putin/Biden meeting appeared to be constructive, but the West continues to underestimate the Russian psyche regarding border security, as it does with China. A quick look at the history books will give readers all the answers they need. I will deal with the consequences of an invasion in later newsletters but think $150 oil, the mother of all dips to buy in US equities, and Europe paying the price for the strategic ineptitude of tying their energy security to Russia.
Apart from Japan, which slavishly follows the US equity market direction these days, Asia is once again, painting a more cautious picture. China’s property sector is the primary reason, with Evergrande (HK:3333) failing to pay its Monday offshore obligations, Kaisa suspending its stock on the HKEX and another developer, China Aoyuan Group (HK:3883) stated it cannot guarantee to be able to meet commitments due to liquidity constraints. As the saying goes, “there’s never just one cockroach,” and the list of distressed China developers seems to be growing daily.
Nerves over constrained China growth in 2022 due to an orderly, or disorderly, restructuring of the property developer sector are weighing on Asian markets. Nor has the China technology sector crackdown run its course either, despite plenty of press time that stocks in the sector look like a “bargain.” The light at the end of the tunnel continues to be the train coming the other way and the Financial Times lead story today is that China is preparing a blacklist to tighten restrictions on China tech companies seeking overseas listings.
It is increasingly clear that China is giving the option of Hong Kong or bust with regards to pseudo overseas listings, with the riches of US valuations being closed off. China tech may be trading at a “discount,” a situation I believe will become structurally embedded in their pricing under President Xi’s shared prosperity regime. As the saying goes, “the market can remain irrational, longer than you can stay solvent.” In the history of investing, never a truer word has been spoken. Thank you, Mr Keynes.
Today’s other risk point in Asia has already occurred, the Reserve Bank of India policy decision. Despite stagflationary pressures rising once again, the RBI remained unchanged on policy rates. However, it is the RBI Governor’s statement taking place as we publish, that will have markets on tenterhooks as there may be a signal that rate hikes are coming in 2022. That would temporarily boost the rupee, but India equities, bloated with hot money from offshore flooding into the tech-IPO space, may start running for the exit. Another choice saying is that “an emerging market is a market you can’t emerge from in an emergency.” Hints of hawkishness from the RBI could open that reality to offshore investors.
Later today sees the US JOLTs Job Openings data released, expected to show some 10.4 million unfilled jobs in America. That will be another reason for next week’s FOMC to consider the t-word we can’t use to describe inflation now, as even less t-word than previously. US API Crude Inventories posted a surprise 3.1 million barrel drop yesterday, and official US inventory data later today is expected to show a rise of 2.0 million barrels. A similar fall like the API data overnight will throw more fire on oil’s rally.
China caution weighs on Asian equities
Wall Street enjoyed an outsized session of gains on Tuesday, as hot money flocked back into the global recovery trade on diminishing Omicron fears. The S&P 500 rose 2.07% with the NASDAQ leaping 3.03% higher, while the Dow Jones added 1.42%. Futures on all three indexes have continued to rally in Asia, climbing by around 0.35%.
Asian markets are having an uneven day, with gains being lesser in scope or barely-existent. The chief driver of caution is the deepening woes surrounding the China property sector and its potential impact on 2022 growth. That said, hopes of more stimulus measures from China and falling COVID-19 cases has seen Mainland equities post solid gains.
The Nikkei 225 has jumped 1.50% higher today, with the KOSPI adding 0.90%. In Mainland China, the Shanghai Composite is also 0.90% higher and the CSI 300, more emerging and technology company facing, has added only 0.10%. The same theme is playing out in Hong Kong, home to many of the China tech and property developer heavyweights. The Hang Seng has eased lower by 0.10%. With the negative headlines streaming in still from those sectors, the Hang Seng will remain challenged even as Mainland equities rise on stimulus hopes.
Singapore has fallen by 0.25% with Kuala Lumpur down by 0.10% and Jakarta rising just 0.25% today on China concerns. Bangkok has risen by 0.50% as easing Omicron concerns boost sentiment in the tourism sector. Manila is 0.25% higher, while Taipei has climbed by 0.45%. Australian markets are all-in on the Wall Street rally, much like Tokyo. The ASX 200 has rallied by 1.45%, with the All Ordinaries leaping higher by 1.65%.
With the Putin/Biden meeting passing without incident, and with European equities ignoring the China property sector concerns, Eurozone equities should continue rallying this afternoon as Omicron fears fade. The US JOLTs data later is unlikely to derail the pent-up bullish momentum on Wall Street, which may have to wait until Friday’s US CPI data.
US dollar fades on resurgent growth trade
The US dollar faded overnight as evaporating Omicron concerns saw hot money flooding back into the global recovery trade. The gains were mostly seen in the EM space, however, where even the Turkish lira managed to rally last night. In the major currency space, the US dollar held steady, likely due to the US yield curve modestly steepening overnight.
EUR/USD, GBP/USD and USD/JPY are holding steady at 1.1290,1.3255 and 113.50 in Asia, barely changed for the last 24 hours. The lack of strength versus the US dollar, even as the greenback fell elsewhere, suggests that all EUR, GBP and yen remain highly correlated to the Fed taper-trade and that the balance of risks is still tilted towards the downside for all three.
AUD/USD, NZD/USD both rallied overnight as global investor sentiment sharply rebounded. AUD/USD has risen to 0.7130 and NZD/USD has risen to 0.6790. The 0.7000 and 0.6700 areas remain key support zones for both and although the sun is shining in the lands downunder today, both are highly vulnerable to a swing in sentiment once again, or the reality of tighter US monetary policy next week. The rallies could extend into the end of the week but should be approached with a high degree of caution.
The same can be said about the strength in Asian currencies being seen overnight and today versus the US dollar. The swing in sentiment back to the global recovery has seen decent strength across the board in the Asia FX space, but once again, is subject to the whims of investor sentiment. It is clear that a lot of fast money rushed into the space overnight, but if anything, Asian currencies, even without China nerves, are more vulnerable than most to the reality of potentially tighter US monetary policy.
Oil surges on lower Omicron concerns
Oil prices rose overnight as Omicron concerns continued to fade, and US API Crude Inventories showed a surprise draw of 3.1 million barrels. Assuming momentum remains positive in global markets, a fall in official US Crude Inventories (-1.7 mio exp), will probably be an excuse for oil prices to rally once again. Base metals are also rallying in Asia today, as is natural gas, ostensibly on expectations of much higher infrastructure spending in 2022. If that is so, then oil prices have also found another reason to be bullish in 2022.
Brent crude rose by 2.0% to $75.10 overnight where it remains in Asian trading. WTI leapt 2.45% higher to $71.70 a barrel, where it remains in Asia. Both contracts have recovered above their respective 100-day moving averages with initial resistance at $76.00 and WTI $73.00 respectively. I continue to believe that the lows of last week will be the lows for possibly all of next year.
Gold creeps higher
The wave of Omicron inspired growth optimism sweeping financial markets overnight appears to be tempting a few gold bulls back into the market in search of a bargain. Gold rose 0.30% to $1784.00 an ounce overnight, adding another 0.35% to $1790.00 an ounce in Asia today. Gold could well continue staging a modest recovery this week, as long as sentiment remains positive.
In the bigger picture, gold still looks confined to a $1770.00 to $1800.00 range this week, unable to sustain momentum above or below those levels. The 50,100 and 200-day moving averages (DMAs), clustered between $1790.60 and $1795.00 provides immediate resistance, followed by $1800.00, and then $1810.00. Support lies at $1770.00 and $1760.00.