Asian equity markets are off to a bad start today, although the US dollar has been steadily rising versus Asian currencies, and the risk-sentiment barometers, the Australian and New Zealand dollars are having a tough day at the office. There is no one theme that is causing Asian equities to crater, but if I had to pick one, it would be that concerns over the depth of the China slowdown are accelerating, with virus restrictions tightening in Beijing and apparently, Shanghai once again.
The weekend G-7 meeting may also be darkening the mood, agreeing to enact a phasing out of Russian oil imports. The important words here are "phasing out," which was enough to get Japan on board. The language was loose enough to have had little impact on oil prices today, which have fallen today as China slowdown nerves outweigh short-term supply shocks. The G-7 measures are more forward-looking. Still, Asia has a very high dependency on imported energy and the G-7 announcement is certainly not positive for Asia's growth going forward, implying higher for longer energy prices.
Friday’s US Nonfarm Payrolls rose by 428,000 jobs, not far from median forecasts. The headline number was not enough to juice up the Fed tightening narrative but was definitely not going to allow any hopeful rate hike doves their day in the sun either. The result was a gentle continuation pattern. US equities eased, the US dollar ground higher, and US yields also ground higher. The hump in the US yield curve is now gone with the 2-year to 30-year now back to positive and the 10-year yield now comfortably above 3.0% at 3.15%.
So, net-net, we are still in high inflation tightening Fed, China slowdown, higher energy, and food price environment, with the added uncertainty surrounding Russia’s war on Ukraine, which Vladimir Putin may make official today at Moscow’s May 9th parade. Little surprise, therefore, that Asian markets don’t really want to play today.
Shortly we will receive the China April Trade data. It comes as new home sales plunged by 33.0% over last week's holiday period, and bankers seized a New York property of a defaulting China property developer according to Bloomberg. China’s private developer leverage saga has been knocked off the headlines but remains a slow-moving train wreck that is also being exacerbated by the COVID-zero policy. There are downside risks in the import component which could flatter the headline, even as exports remain robust. Lower exports or imports or both will likely give the bears more fresh salmon for dinner.
Later today, Indonesia releases its April inflation and trade data. Expectations are for an increase of 0.80% MoM, and 2.60% YoY, while the trade data should be robust, thanks to economic reopening and resource demand. A much higher inflation rate will increase the pressure on Bank Indonesia to hasten its reluctant hiking timetable. BI is struggling to cap USD/IDR at $14,500.00 at the moment and a high inflation print will see another wave of selling hit the Rupiah.
Later this week, we have China and India CPI where the risks lie in opposite directions. A lower CPI than 1.50% YoY will increase the pressure on the government and PBOC to hit their stimulus buttons. That could be a short-term boon for Mainland equities, but actions speak louder than words, as even China is finding out. After an unscheduled rate hike by the Reserve Bank of India, if India's inflation moves higher than 7.0% on Friday, the pressure will be on for the RBI to act again. That may give some strength to the Rupee but is unlikely to be bullish for local equities.
We can expect some volatility in Philippine markets today as well with the presidential election taking place. It does look at this stage that this marvelous country will shake my faith in democracy and elect a Marcos as President, and a Duterte as Vice-President. Yes, you read those names correctly and yes politics in Asia as a family business is sadly, alive and well. I’m not sure how international investors will view that outcome, but I suspect the BSP’s work is about to get harder in the months ahead. For me, if a Marcos is back in power, I’m looking to get long luxury handbag and shoe producers, who preferably accept cash and cryptos for payment. Let the people eat cake.
In the DM space, US CPI data on Wednesday is the week's highlight. Like the Nonfarm Payrolls, the outcome is binary. A much higher CPI print equals more Fed tightening equals a higher US dollar and lower equities. A much lower CPI equals a relief rally and a correction lower for the US dollar. CPI prints across the Western Europe heavyweights and the UK throughout the week could also ratchet tightening pressure on the ECB and BOE, although I think this will be in vain as the needs of a war-time economy rightly take precedence. That likely means euro and sterling are going to finish the week lower than where they started today.
Asian Equities Slump on China fears
Asian equities are down heavily in the red today as regional markets react to tightening COVID-19 restrictions in China and fears of a prolonged slowdown in the world’s second-largest economy. Friday’s US Nonfarm Payrolls was enough to keep the Fed hiking narrative going and saw US yields lift across the curve pushing Wall Street lower. The S&P 500 fell 0.57%, with the NASDAQ losing 1.40%, while the Dow Jones eased by 0.26%. US futures have also slumped today, S&P 500 futures falling 1.50%, NASDAQ futures tumbling 2.05%, and Dow futures losing 1.25%.
Friday’s price action had set Asia up for a soft start anyway, but China’s COVID-zero restrictions and news of slumping property sales during the holiday week appear to be spilling into a capitulation trade in the equity space across Asia. The Nikkei 225 is down just 1.45% today, perversely making it one of the best major market performers, along with South Korea’s KOSPI, just 0.95% lower.
The picture from Mainland China is grim, the Shanghai Composite is 2.15% lower, with the CSI 300 slumping by 3.15%, and Hong Kong’s Hang Seng plummeting by 3.80%. Renewed property sector fears and audit-related China delisting risks are adding an additional headwind to Hong Kong markets. Singapore is down 1.65%, with Taipei plummeting by 3.40%, Kuala Lumpur has lost 1.70% and Jakarta has slumped by 3.40% as it returns to work after a week’s holiday. Bangkok is 1.90% lower, with Manila falling by 1.60%.
The news is even uglier down under, with both Australia and New Zealand having a high beta to China and Asia growth. Australia’s All Ordinaries have slumped by 3.55%, with the ASX 200 falling by 3.25%, and New Zealand’s NZX 50 losing 2.75%.
European and UK markets had an ugly day on Friday as Russia/Ukraine fears and higher gas and oil prices weighed on the region. A G-7 Russian oil ban won’t help the mood and nor will the price action in Asia today. Additionally, there are worries that President Putin could use today’s commemorative victory over Germany parades to declare all-out war on Ukraine, instead of a “special operation.” European markets are likely to hit the sell button repeatedly and not pass go when they arrive in the office today.
Risk-aversion lifts US dollar in Asia
The US dollar booked some modest gains post-Nonfarm Payrolls on Friday, but the Dollar Index resistance zone at 104.00 held once again. The dollar index finished 0.11% higher at 103.66 having traded in a wide range intra-day. The risk aversion China slowdown price action seen in equities has spilt into currency markets today, lifting the US dollar after US 10-year yields closed comfortably above 3.0% on Friday. The dollar index has risen 0.34% to 104.00 and is, once again, making a determined test of resistance here. Support at 102.50 remains intact. A close above 104.00 will signal rapid gains to 105.00 and in the bigger picture, the technical picture still says a multi-month rally to above 120.00 is possible.
EUR/USD and GBP/USD have fallen by 0.35% today to 1.0508 and 1.2290. EUR/USD support at 1.0470 is in jeopardy, while GBP/USD is threatening the Friday lows of 1.2275, having closed on support at 1.2325 last week. EUR/USD rallies above 1.0650 will be challenging to sustain now, with the 45-year trendline at 1.0800 now distant. Similarly, GBP/USD will run into headwinds between 1.2400 and 1.2500. The technical picture signals much lower levels for both and a formal declaration of war from Mr Putin against Ukraine today will signal a test of 1.0300 and 1.2000 in the coming days, if not sooner.
USD/JPY has crept higher over the past few sessions, rising 0.30% today to 130.95. With the Bank of Japan showing no signs of adjusting its 0.25% JGB yield cap, and US rates continuing to climb as the Fed gets busy fighting inflation, downside pressure on the Yen seems inevitable. Support lies at 128.50, but a rally by USD/JPY through 131.35 sets the stage for a move to the 135.00 area.
Plummeting stock markets in Asia appear to be prompting heavy outflows from Asian currencies today, with USD/CNH and USD/CNY over 0.50%, as are the USD/THB and USD/INR. Elsewhere across the region, the US dollar has booked 0.30% plus gains versus the IDR, SGD, MYR, and KRW. Chinese officials have still not made overt noises about the pace of the CNY sell-off to 6.7050, despite setting a slightly stronger fixing today. USD/INR has traded at all-time highs around 77.255 today and has fallen around 1.80% since the RBI’s last week.
That does leave the RBI in somewhat of a bind, and it is an issue the Bank Indonesia and others around Asia will be feeling sooner, rather than later. In the first instance, thanks to Asia’s huge FX reserves, I expect some judicious “smoothing” to be the first strategy. Indonesia, the Philippines, and South Korea have already taken this route I suspect. If international sentiment continues to fall and the US dollar continues to gain, those noises may get louder, but ultimately, regional central banks will fight a losing battle if China remains comfortable with Yuan depreciation.
Oil prices trade sideways
Oil prices booked modest gains on Friday night after an on-target US Nonfarm Payroll release suggested that the US economy continues to perform well. Brent crude rose 1.86% to $113.05, and WTI rose by 1.80% to $110.50 a barrel. China slowdown fears initially saw all those gains pared in Asia, but as the session has gone on, oil has clawed by most of its losses. Brent crude is down just 0.40% to $112.60, and WTI is down 0.55% to $109.85 a barrel.
A proposed G7 ban on Russian oil imports has had zero impact on oil markets today, with China nerves taking precedence. Nevertheless, it seems inevitable that both the EU and Japan will be competing for more non-Russia supplies in the future, and this is underpinning prices. Soaring energy demand in India due to the heatwave, as well as tight natural gas markets, should mean coal, gas and oil prices remain self-supportive of each other.
That leaves oil at the mercy of the Ukraine/Russia conflict and the EU oil ban supporting the downside, while China's slowdown fears. Ukraine/Russia conflict risks will be sorely tested today if Vladimir Putin declares war officially against Ukraine at today's May 9th parade. I continue to believe that energy markets are under-pricing Russian risks, be it external sanctions, or Russia’s potential response.
Brent crude has formed a triple top at $114.75 a barrel, which will be a formidable barrier in the near term. Support lies at $103.50 a barrel and I am sticking to my broader $100.00 to $120.00 a barrel wider range ahead for now. WTI has resistance at $111.50 with support at 100.00 a barrel. Once again, I remain comfortable with a $95.00 to $115.00 a barrel outlook in the medium term.
Gold trades sideways
Gold has eased by 0.50% today in Asia to $1874.00 an ounce, erasing Friday modest 0.35% gain. There are some constructive notes in gold’s recent price action. It is holding up remarkably well versus a rampant US dollar and a US yield curve where a lot of it starts with three in yield terms. It actually managed to rise slightly on Friday equities fell and the US dollar rose. I suspect some of that support was derived from weekend risk-hedging, which has evaporated today.
Gold is definitely outperforming Bitcoin right now, which has tumbled through support at $37,400.00 on Friday and is trading much lower at $33.740.00 this morning. That should give the gold bugs heart but could also be coincident with the return of China from holidays, or suggestive that there is more than a little risk-hedging based buying quietly going through the market.
Gold looks set to continue vacillating around its 100-day moving average, today at $1882.50, in a wide but real range of $1850.00 to $1920.00 an ounce, for the time being. Risk aversion buyers supporting the downside, while US dollar strength caps rallies. Only failure of the break-out triangle apex at $1835.00 swings gold back into bearish territory. That said, gold needs to close above resistance at $1920.00, and preferably $1960.00 an ounce to signal a renewed structural move higher. I foresee more whipsaw trading ranges in the days ahead.