It was another tail-chasing event overnight, this time led by Goldman Sachs who said a US recession is a real possibility and that the US dollar might fall as a result.
That of course would lead to terminal Fed Funds rates sooner, so sell US dollars and buy US bonds. Oddly enough, the eternal bottom fishers of the equity market didn’t follow suit, and neither did oil markets, which rose again overnight, despite an EU deal on banning Russian imports continuing to be held up by Hungary.
All-in-all, the price action is suggestive of a market that can’t decide what it wants to do here, and in the equity market’s case, has still not been released from Accident and Emergency.
Equity markets were creeping higher today in Asia as Shanghai recorded a third day of no COVID-19 cases outside of quarantine facilities. Pencil in peak-COVID equals peak COVID-zero equals buy risk assets equals buy equities, Asian currencies, and gold, and sell US dollars.
Ignoring the shocking data dump of yesterday although markets might argue that is “backwards-looking.”
The world really should know by now that in a COVID-zero country (you know who they were), the authorities have to get lucky 100% of the time, and the virus has to get lucky once.
Let’s not get in the way of the “one dip to rule them all” narrative, markets have been conditioned to it these past two years. I won’t pour too much water on the optimism, I’m as keen as anyone for China to move past this.
In fact, it is right to start being nervous about recessions. Apart from having any faith in Federal Reserve forward guidance, given their track record these past two years, we should all get nervous when they say, “soft landing.”
The Bank of England governor overnight said there wasn’t much he could do to stop inflation from hitting 10% this year. He was particularly concerned about food prices, with the impact on that value chain from the Ukraine/Russia conflict yet to be fully felt.
He did trot out the favored central bank mantra of unforecastable events causing inflation to accelerate; I don’t completely agree with him there. In any case, concerns around recessions make me feel that a decent correction lower from the US dollar and US yields are increasingly likely.
That should provide some temporary relief to the euro and Asian currencies and possibly gold and cryptos; at least until the Fed hikes by another 0.50% in June. I’m still not sure it provides markets with a reason to turn long once again on equities.
The data calendar isn’t giving us too many clues in Asia today. Singapore's non-oil exports held steady in April on a YoY basis but fell heavily, MoM. Thailand’s Q1 GDP barely exceeded forecasts as it rose 2.20% YoY.
Meanwhile, Indonesia’s trade surplus in March leapt higher to $7.56 billion, thanks to a near 48% jump in exports YoY, with imports climbing a below forecast 31.0%.
Jakarta Airport was mobbed on Friday, and the infamous traffic is back, so Indonesia is definitely rebounding for now. If nothing else, it reinforces the thesis that commodity-exporting countries are likely to remain a least-worst choice in the stagflationary environment of 2022.
Later today we receive India’s April WPI for food, manufacturing, fuel, and inflation. All of those data points have upside risks and could lock and load another Reserve Bank of India rate hike next month.
The Philippines BSP will probably hike by 0.25% finally this week, with Indonesia to follow in June. While supportive of their currencies, it is likely to be a headwind for their equity markets with all three at the beginning of their tightening cycles.
Weak UK Employment data this afternoon could deepen the gloom around the British Pound, especially with the BOE raising the white flag over inflation and pricing in a recession next year.
The saga of the Northern Island Protocol continues and is another risk point for UK markets if the government decides to enact legislation unwinding part of it unilaterally, provoking a trade response from Europe.
US Retail Sales this evening should be good for some volatility, especially if it comes in lower than the expected 0.90% increase for MoM for April. We also get manufacturing and industrial production as well.
Weaker than expected numbers will increase the R-word noise and could see the US dollar accelerate lower. Throw in the usual mix of Federal Reserve talking heads and another chop-fest session for New York looms.
Asia’s next major data point this week will come Friday when China announces its one and five-year Loan Prime Rates. We should expect the 3.70% 1-year LPR to get trimmed, but the PBOC has consistently disappointed on this front this year.
Otherwise, we should continue watching the headline ticker for daily omicron cases. Most especially, in Shanghai, where if literally one case appears again, any relief rally in Chinese markets could disappear in a puff of smoke.
Asian equities edge higher
The seeds of a general relief rally didn’t land on Wall Street equities overnight, which had a mixed session, likely because it was driven elsewhere by recession concerns.
The S&P 500 fell by 0.39%, the NASDAQ fell by 1.20%, and the Dow Jones edged 0.12% higher. In Asia, hopes that the worst was past for the Shanghai lockdowns prompted US futures to rise. NASDAQ futures jumped by 0.65%, with S&P 500 futures climbed 0.35%, and Dow futures added 0.25%.
Hopes that the Shanghai lockdowns will ease, along with the ensuing supply chain disruptions were enough to lift Asian equities as well, which were staging a modest bounce in an otherwise quiet day. Japan’s Nikkei 225 rose by 0.25%, with South Korea’s KOSPI rallied by 0.84%. Taipei also tracked the bounce by NASDAQ futures, climbing by 1.03%.
In China, the Shanghai Composite added 0.30%, with the narrower Shanghai 50 rising by 1.07%, and the CSI 300 climbing by 0.88%. The speculative casino of the Hang Seng leapt 2.03% higher, gaining an additional tailwind from China developers today.
In regional markets, Singapore rose by 0.40%, Kuala Lumpur by 0.45%, and Jakarta by 0.75%. Bangkok jumped 1.10% higher, with Manila adding 0.40%.
Australian markets gains have been limited by the RBA Minutes, which showed the policy committee considered a 0.40% increase before finally going with 0.25%.
Nerves around more rate hikes have dampened enthusiasm to follow US futures higher today. The All Ordinaries rose by 0.25%, with the ASX 200 added 0.20%.
With Hungary still stalling an EU ban on Russian oil imports, European markets should have an excuse to open cautiously higher today. Robust Eurozone and Employment data this evening could dampen any rally as it brings the prospect of ECB rate hikes back into view, possibly as soon as June.
Modest US dollar strength in range-trading Asian session
The dollar index fell again overnight, as recessionary concerns appear to be prompting the start of a long-overdue short-term correction to US dollar strength.
Resistance at 105.00 held fast on Friday and overnight, the index continued its modest descent, falling 0.27% to 104.19, where it remained in Asia. A daily close below 104.00 could signal a deeper correction towards more important support at 102.50, relieving the overbought technical picture.
Having based at 1.0350 on Friday, EUR/USD ground higher to 1.0445 today. EUR/USD has resistance at 1.0500, with a rally through it extending gains to 1.0650 and possibly even the 1.0800 37-year breakout line.
In a similar vein, GBP/USD traced out a low at 1.2155 last week. It rose 0.15% to 1.2340 today. Again, it too has the potential for a material correction higher with a close above 1.2400 opening the door for further gains to potentially 1.2650. However, like Europe, the United Kingdoms' structural headwinds leave the longer-term picture still bearish.
USD/JPY fell modestly overnight before a rise in US yields in Asian trading pushed it higher by 0.20% to 129.35 today. USD/JPY was displaying corrective potential as well which could extend to 127.00 initially, and possibly 125.00, especially if recession fears continue pushing US yields lower. In the bigger picture, USD/JPY remains at the mercy of the US/Japan rate differential.
The rally in global sentiment has allowed AUD/USD and NZD/USD to recapture 0.7000 and 0.6300 today and both could potentially have another 200-300 points of gains ahead if the US dollar correction lower accelerates. In the shorter term, both will continue to be buffeted by swings in investor sentiment, especially around China.
Asian currencies were slightly stronger today as investor sentiment swung to pricing in peak-Shanghai-lockdowns. That will only last if new cases remained at zero of course.
If USD/CNY remains below 6.8000, Asia FX could potentially stage recoveries versus the US dollar, although most remain near their lows versus the greenback. Oil prices remain at multi-week highs, which will be another headwind to an Asia FX recovery.
Oil prices remain firm
Oil prices have remained near multi-week highs this week, supported by surging gasoline and distillate prices in the US, and fears around an EU ban on Russian oil imports remaining in play. If markets start pricing in peak-Shanghai-lockdowns, that will be an additional supportive tailwind for oil prices.
Brent crude rose by 2.45% to 113.85 a barrel overnight, where it remains in subdued Asian trading. WTI rose by 3.30% to 113.65 a barrel, where it remains in Asian trading. The gap between Brent and WTI has closed to zero over the past two sessions, highlighting the squeeze on refined supplies in parts of the US. This is a significant development in my opinion and suggests that the risks are starting to swing to the topside once again for oil after months of range trading.
Resistance at $115.00 a barrel for Brent crude has capped gains once again. Failure signals a retest of $120.00 in the sessions ahead. Support lies at $108.80 a barrel. WTI has taken out resistance at $111.50 a barrel, which now becomes support. It is now threatening the top of my longer-term range call at $115.00.
Gold stages relief rally
Having wilted over the past two sessions, gold staged a corrective 0.72% rally to $1825.50 an ounce overnight, edging 0.16% higher to $1827.75 in Asian trading.
A softer US dollar and softer US yields overnight saved gold from further losses, but it remains completely at the mercy of US dollar weakness for support.
The overnight lows around $1789.00 forms initial support, followed by $1780.00 an ounce. Failure of the latter suggests a deeper correction to $1700.00.
Gold has resistance just above $1830.00, followed by the 200-DMA at $1836.50, and then $1850.00 an ounce. Only a sudden US dollar sell-off is likely to change the bearish technical outlook.