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Asia Session: Market Noise Is Becoming Messy. Big Move Coming?

By MarketPulse (Jeffrey Halley)Market OverviewOct 28, 2021 01:37AM ET
Asia Session: Market Noise Is Becoming Messy. Big Move Coming?
By MarketPulse (Jeffrey Halley)   |  Oct 28, 2021 01:37AM ET
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One thing we are probably not going to have to worry about in markets in the coming weeks is volatility. The amount of noise assailing my eardrums from multiple directions is becoming very loud and conflicted. Chief amongst though is that old chestnut, inflation. Is it transitory or sticky?

Well, that depends on who you are talking to. Overnight, the Bank of Canada abruptly ended its QE program and signalled rate hikes are on the way. Similarly, the Brazil central bank surprised markets by hiking 1.50% to 7.75% to combat inflation and some anticipated pre-election fiscal largesse by President Fire-Starter. They also indicated that they would hike by as much again at their next policy meeting.

Turkey’s dictator, meanwhile, has forced his central bank to cut rates despite rampant inflation. Long BRL/TRL anyone? Russia beat them all to the punch, hiking last week and the markets are locked and loaded for the RBNZ in November.

In contrast, the UK budget yesterday saw gilt yields sink as growth forecasts were upgraded for 2022, reducing the government's projected borrowing requirement. The Bank of England hiking trade is suddenly looking very crowded.

In the US, the inflation story is playing out mostly in the short end of the yield curve with yields rising there even as long-dated yields sink, leaving the US dollar stubbornly firm near the top of the week's range. The Bank of Japan will, by contrast, remain unchanged at lower forever and later today the ECB policy meeting will more than likely feature the European Central Bank of Japan dampening longer-term inflation expectations even as they leave policy rates unchanged in negative territory.

Europe is no closer to removing the monetary punch bowl to keep the lights on than they were a decade ago. It's great if you are German though, markets pay Germany to borrow from them. Even Australia, where the RBA has let more doves fly than Prince, seems to be on the cusp of changing tack, declining to intervene today to cap 3-year yields at their 0.10% target.

That mixed bag will receive another member next week in the form of the latest US Federal Reserve FOMC policy decision. The FOMC should announce the start of their tapering of QE, and this is a trade that has either been ignored by markets because it didn’t suit their buy everything narrative or has been woefully under-priced. Interest rates will still be near zero per cent even after QE is tapered, but in a world addicted to, and expecting the Federal Reserve to backstop the speculative excesses of the world, one shudders to think what a good dose of reality will bring to financial markets.

One sweetener for the Fed to stay dovish going forward appears to be coming from Washington DC. The Democrats spending and tax plans appear to be more disarrayed by the day and whatever emerges, if it does, will be a shadow of its former self. The Republicans won’t have to do any campaigning for next years mid-terms at this stage, the factions within the Democrat Party will do the job for them. Usually, that’s good for equities, American investors like government paralysis. Tomorrow’s US PCE Prices and Core Prices data may present a more near-term threat though if prices jump above forecast, with a lower GDP print already priced into markets.

The equity space is just as confused. China’s Evergrande Group (HK:3333) faces another offshore coupon payment deadline tomorrow, with China’s government still relatively silent on the issue other than to tell the founder to use his own money to pay debtors first.

The Communist Party Central Committee meeting looms between the 8th and 11th of November. President Xi’s shared prosperity policy hasn’t suddenly gone away and nor have the travails of the property sector. The delta variant is also girding itself to challenge the country’s COVID-19 zero policy and that’s on top of China’s energy crunch and supply-chain issues. Yet some notable commentators are urging investors to fill their boots and buy the dip in Chinese equities. On the regulatory challenge front alone, I’m not sure the repricing of risk into equity prices is complete; let’s hope they’re right. If anyone needs evidence to this fact, Reuters is reporting China’s state planner has met with representatives of China’s coal sector to help better identify those “profiteering” from soaring coal prices. China Coal futures are limit-down this morning.

I must apologise to readers yesterday as I had the Apple (NASDAQ:AAPL) results out by a day. Today is Apple day in fact and Amazon (NASDAQ:AMZN) also releases its quarterly earnings as well.

Although tech giants outperformed yesterday, it wasn’t enough to hold the NASDAQ in positive territory. Other indices sunk despite excellent results from the likes of Ford (NYSE:F), and it seems that the US earnings story is running out of momentum. I expect both Apple and Amazon to deliver crowd-pleaser results today, but if Wall Street can’t rally on that, it may be time to batten down the hatches ahead of the FOMC next week which I continue to believe, is the one ring to rule them all.

I note that Asia has steadfastly refused to buy into the American dream this week, with equity markets trading on the heavy side. China nerves will be part of that story, but so will the contradictory noise coming from the energy, commodity, fixed interest, and virus spaces amongst others. Samsung's (KS:005930) results are a classic case in point today. Excellent earnings but sounding warnings of memory chip prices and demand next year and supply chain disruptions while forecasting a recovery in corporate IT demand. A bit of a head-scratcher that one, especially as it is on both sides of that trade as a manufacturer and consumer.

Currency markets and precious metals are by contrast an ocean of calm, even as equity and bond markets are chasing their tails. Base metals have started to roll over and even energy prices look like they are on the cusp of a temporary correction lower. The China energy crunch and the prospect of lower refined metal and factory production could explain the base metal space. The prospect of Iranian oil returning to international markets, the energy space.

Markets tend to get very noisy with confusing movements before a large directional move. Nowhere is that more apparent than the crypto-verse. Bitcoin and Ethereum have fallen this week as the post-ETF nonsense wears off and both are potentially on the cusp of a large correction lower.

Meanwhile, another coin with a picture of a dog, Shiba Inu, has rallied by over 200% this week, making it a crypto-meme I suppose. I note it is not even built on its own code; it uses Ethereum’s. Anyway, the price is super cheap, as opposed to the big two, and the retail space has piled into it in a meme-orgy. I received a TikTok today in which had a bloke in a football shirt was exhorting viewers to “hold on and not sell” their cute doggy picture coins. He says hold on, I say pump and dump. And don’t get me started on (un)stable coins, supposedly back one-for-one with US dollars but whose issuers are incredibly elusive at proving just that.

The noise continues in Asia where the Bank of Japan, which has just left policy rates unchanged at -0.10% while downgrading CPI and GDP projections for 21/22, whilst slightly upgrading both for 2022/23. In Australia this morning, export prices rose by 6.20% in Q3 QoQ, but import prices rocketed higher to 5.40% from 1.90% previously as imported inflation rears its head. Australian 3-year CGB’s are trading at 0.50% this morning in response after the RBA did not intervene to cap rates at its 0.10% target. Yes, you read that correct, 0.10% target.

The Caligulas of volatility will be loving life now, but like any one of his orgies, you get unlimited wine, but you risk getting chopped up as well. The contradictory noise across asset classes is signalling a big move is coming and I believe next week’s FOMC could be the catalyst if the FOMC holds its nerve. I am erring to a higher US dollar, higher US yields, lower equities, and a bit of a reckoning in the crypto-space. In the meantime, I’m going to fetch my earplugs.

Asian equities do not pass go

Wall Street endured a soft session as the US earnings outperformance hit a wall of declining marginal utility. I suspect that that rise in short-dated yields in the US, the circus on Capitol Hill, and the impending FOMC meeting are sapping the momentum of the earnings trade. The S&P 500 fell by 0.51% while the NASDAQ held unchanged, and the Dow Jones slipped by 0.74%. In Asia, futures on all three are around 0.15% higher on fast-money short-covering.

Asian equity markets are ignoring the tiny bounce in US index futures though and have headed directly south. The Nikkei 225 has fallen by 0.95% in sympathy with Wall Street, with downgrade BOJ projections weighing on sentiment, along with this weekend’s election. The KOSPI is barely treading water at unchanged, thanks to the impressive Samsung result. Mainland China was likely to open lower anyway, but the noise over coal and profiteering from the state planner has eroded sentiment further. The Shanghai Composite is 0.95% lower while the CSI 300 has fallen 0.40%. In Hong Kong, the Hang Seng is 0.25% lower thanks to several buy recommendations on Mainland tech heavyweights overnight.

Singapore has eased by 0.35% as COVID-19 cases hit new daily highs, while Kuala Lumpur has fallen 0.55% as oil takes a bath this morning. Taipei is unchanged as tech-centric markets appear to be weathering the storm slightly better, while Jakarta is down by 0.70%, Manila by 0.90%, and Bangkok by 0.20%.

Australian markets have taken fright at the jump in 3-year CGB yields, as well as the China ambassador apparently leaving Australia. The retreat in resource prices will also be jarring nerves down under. The All Ordinaries and ASX 200 have fallen by 0.45% today.

European stocks are unlikely to find solace in the price action on Wall Street and Asia and will adopt a defensive posture ahead of today's ECB meeting. With inflation nerves seemingly overcoming the US earnings trade, at last, Wall Street will be on tenterhooks for PCE Prices, Advance GDP, and Jobless Claims. I doubt that even outstanding results from Apple and Amazon will be enough to lift the cautionary mood other than temporarily.

The US dollar remains a bastion of calm

Currency markets remain a relative bastion of calm compared to other asset classes at the moment, with the US dollar once again, holding steady overnight. The Dollar Index fell just 0.11% to 93.86 where it remains this morning. The 93.50 to 94.00 range continues to hold nicely, and the US dollar's next directional move awaits a break either way. As the FOMC approaches, I am erring to US dollar strength, especially if short-dated yields keep rising on inflation looking less transitory, and more sticky.

EUR/USD is steady at 1.1605 ahead of today’s ECB meeting with 1.1670 and 1.1520 the levels to watch. A dovish ECB should set the single currency up for a test of 1.1500. Lower borrowing requirements forecast next year in the overnight budget has seen GBP/USD edge back to 1.3740, with a break of 1.3700 likely triggering a washout of the BOE hiking longs. USD/JPY has fallen 20 points to 113.60 post-BOJ, but I suspect a narrowing of the 10-year US/Japan differential, and exporter selling above 114.00, mostly explain the fall.  114.50 is unlikely to be retested before the FOMC next week.

Elsewhere, the commodity currencies continue to maintain gains but appear to be running out of steam for now as risk sentiment turns down. Rather surprisingly, USD/CAD finished almost unchanged at 1.2470 overnight, despite the BOC abruptly ending its QE program and signalling rate hikes. That is probably as good a warning of slowing momentum in the commodity currency space as any, especially with base metals and energy prices under temporary pressure. The rise in Australian rates is supporting AUD/USD for now as it trades near unchanged at 0.7505. A break of 0.7450 or 0.7550 will signal its next directional move. NZD/USD is holding mid-range at 0.7175. With the RBNZ priced in and delta cases appearing in two South Island cities, NZD/USD is now the most vulnerable of the three, with a break of 0.7120 confirming the start of a downside correction.

Asian currencies remain steady after another neutral PBOC fixing. But with investor sentiment ebbing internationally, and a poor week for local stock markets and increasing China concerns, Asian FX may have seen the best of its recent rally. USD/KRW, having fallen the most recently, is vulnerable to a short-squeeze now. Similarly, the Indonesian rupiah and Malaysian ringgit, with their high beta to commodity prices, could see a return of selling pressure.

Oil prices tank in Asia

Oil prices are in full retreat in Asia after a very soft overnight session, and it looks as if the long-awaited downside correction is now in progress. Overnight, official US Crude Inventories unexpectedly rose by 4.27 million barrels sending shivers through the speculative long community. Markets ignored the huge drops in gasoline stocks, and the very concerning 3.90 million-barrel fall in Cushing Hub stocks to concentrate on the headline number. That again is an indication of a market heavily long and losing momentum.

Probably the main reason oil has fallen, apart from the speculative long excess, is the news that Iran said it would resume nuclear talks with world powers by the end of November. The prospect of a full return of Iranian crude to world markets would be a bit of a game-changer and appears to be the main reason Asia is selling today, combing with a culling of speculative long open-interest.

Overnight, Brent crude fell 2.30% to $84.15 barrel. WTI slumped by 2.60% to $84.15 a barrel. Notably, Brent crude has smashed through trendline support at $84.05 this morning, with WTI testing its multi-month trendline support in Asia today. Both represent a bearish development. Brent crude has fallen by 1.60% to $82.80 in Asia, with WTI retreating by 1.25% to $81.10 this morning so far. A close-by Brent crude below the $84.05 trendline would be a bearish technical development. It has support at $82.00 and $80.00 a barrel. WTI is hovering just above its $81.05 trendline at $81.15, with its next support at $79.50. Resistance is at $82.00 a barrel.

I have been waiting for this correction to occur for a while now and losses for Brent crude and WTI could easily extend to $81.00 and $79.50, with WTI potentially playing catchup to Brent. The Iran news, if it is indeed true, could keep both contracts lower over the session. However, I expect physical market short-term fundamentals to reassert themselves by early next week at the latest, if not by tomorrow, and for oil prices to start rising once again. Notably, the relative strength indexes (RSIs) on both contracts have plunged back to neutral territory, further improving the buy-the-dip picture for the brave.

Gold rises as global nerves increase

Gold prices rose overnight as US 10-year yields slipped and risk sentiment faltered generally. Gold rose 0.23% to $1797.00, before climbing another 0.20% to $1800.00 an ounce in Asia as investors' nerves become frayed. Notably, gold held its multi-week trendline support at $1782.50 an ounce exactly overnight, a bullish technical development.

In the near-term, gold looks set to benefit from more haven flows and if the trendline at $1782.50, and $1780.00 an ounce hold, golds price action remains constructive. That said, investors’ attention seems to be turning towards next week’s FOMC. The expectation of the announcing of the Fed taper will probably limit gains. Gold is likely to trade in a $1780.00 to $1820.00 an ounce range ahead of the FOMC meeting. A move above $1835.00 would be a powerful bullish technical signal though, but my base case is that golds retreat resumes into next week after the FOMC.

Failure of $1780.00 therefore, likely signals deeper losses targeting $1750.00 in the first instance. Conversely, if gold overcomes formidable resistance into $1835.00, it will signal further gains to $1900.00 and possibly $2000.00 in the coming weeks, as the break would trigger an inverse head-and-shoulders formation.

Asia Session: Market Noise Is Becoming Messy. Big Move Coming?

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Asia Session: Market Noise Is Becoming Messy. Big Move Coming?

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Comments (2)
Bill Philbin
Bill Philbin Oct 28, 2021 3:04AM ET
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Very entertaining and spot on.
Victor ifeany
Victor ifeany Oct 28, 2021 2:35AM ET
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