The PBoC has recently been very cautious over its liquidity operations. The Financial Times reports [paywall] that the Chinese central bank has asked banks to rein in credit supply on concerns that the surge in loans may fuel asset bubbles.
According to the report, the PBoC in February directed Chinese lenders to keep new loans in Q1 around the same level as last year, if not lower. This indicates that policymakers are shifting their attention back to curbing financial risks, after easing monetary measures last year to help the economy recover from the covid-19 pandemic.
This is not great news as the commodities cycle grows longer in the tooth and Oil prices could be reacting adversely to this impulse this morning in Asia
I'm not sure how much the Iran-US meeting that is set to take place this week is impacting prices but I suspect that is not encouraging risk-taking in a very thin market today.
Gold May Struggle To Extend Gains
Gold has formed a short-term double bottom but needs to break above $1750 before it can head higher. The metal could struggle to extend last week’s recovery with the positive US NFP underpinning risk-on sentiment. It needs a daily close above the falling trendline resistance to confirm an upside break.
If yields start to spike again and there is a greater reason for them to move higher rather than lower, however, XAU/USD could go lower. While bullion found strong hands in the $1680s, the March lows, and has been rather bullish, it is still far too early to determine that the trend has reversed.
Elsewhere, Ether gained 6% to a record high above $2100 on Friday as the cryptocurrency rally broadened beyond Bitcoin. The latest backing from Visa (NYSE:V) is giving the bulls a reason to persist on. It has nearly tripled YTD, has a market value of about $230 bn vs. $1.1 trn for Bitcoin.
Markets
The US infrastructure and tax plan will continue to take center stage. Even though some initial market anguish was evident, with some areas of the market expecting an even more enormous handout, overall, the positively fluid close into weeks end suggests, on first blush, investors are content nonetheless.
Indeed, the infrastructure package could have an enormous impact on a veritable smorgasbord of areas in the real economy, including traditional infrastructure, construction, repairs of roads, bridges, transport infrastructure and utility lines. As such, investors felt like kids in a candy store last week lifting all sorts of new on the old go-to stock names off the shelf, so I guess the question is how quickly that sugar rush fades.
There is still potentially a long catalyst runway courtesy of the reopening and vaccine narrative. Not to mention the arrival of those stimulus checks should feed directly into corporate profits, which is not necessarily reflected in earnings yet. But the taxman looms.
The nonfarm payrolls release was a bit of a non-event not because the number wasn't stellar, it was, but the market reaction to the recent string of US economic data beats hints that investors are seemingly becoming less sensitive to the steady stream of positive news.
Markets are at a critical stepping stone phase of the reflation trade where the data needs to confirm what markets have been pricing up until now. And while NFP did check all the boxes, it's only the first step in a long stairway climbing adventure that is bound to have a misstep or two.
Oil
The oil market has opened up on a "risk-on" catch up bounce after markets were closed for Good Friday. And the opening move was likely spurred on by the stronger than expected US payroll data.
In the wake of the OPEC+ agreement for the 3-month output easing schedule for May through, oil prices are reacting sensibly, focusing on the big picture macro view and direction of travel for oil demand, rather than on the surprise decision of OPEC.
It is still a very cautious and orderly ramp-up from OPEC+ but still allows for a tight oil market as US summer driving season arrives on cue. But significantly, as I alluded to last week, drip-feeding oil back to the market should reduce the wide distribution of opinion reflected future prices and baked into the current elevated levels of Brent implied volatility (especially puts). The drop in vols should bring more investors back to the playing field.
The drip-feed seems sufficient to have assuaged oil traders concerns that were worried about the power of spare capacity in the context that a lot more barrels could have come back to markets. In a sense, excess capacity concerns have shifted from a major to a minor headwind. But ultimately, with OPEC+ showing the nerve to increase barrels into peak US driving season, it signalled a decisive vote of confidence to the US vaccine rollout and the catch-up expectations in some of the harder hit pockets of the world.
OPEC+ will continue to monitor macro conditions closely via monthly meetings, and there should be little doubt the group will step in to put a floor on the oil price if macro conditions deteriorate.
FOREX
Forex remains the most negligible consensus trade as the Street is very indecisive about trading the US dollar.
The macro focus remains the US, the infrastructure plan and optimism around reopening and its impact on inflation and Treasuries. At the same time, pressure remains on Europe amid other lockdowns in France—but for now, European asset markets are happy to look through this. There is a lack of conviction in the FX market.
EURO
Firm US growth and rising bond yields may keep the greenback supported over the short term. Beyond the next few weeks, I still think the foremost opportunity in G10 FX markets will be positioning for European activity's likely recovery. Vaccinations are set to accelerate significantly in April and May, and experience suggests current lockdowns will lower covid case numbers relatively soon. Indeed, this should be positive for the euro.
Markets are becoming less sensitive to the steady stream of positive US news, suggesting that a robust economic outlook is now primarily priced. In Europe, in contrast, the impact of further negative news has declined. Markets may now start to react asymmetrically to news flow: US yields and the dollar might not move much on other good news. In contrast, European yields and the euro could become very sensitive to any upside surprises on vaccinations, case counts and broad economic data.
Asia FX
There is a pronounced seasonality in the performance of Asian currencies, with May and August typically the most inferior months of the year. With firmer US growth and rising bond yields, all but sure to keep USD/Asia on the defensive over the next few weeks.
Malaysian Ringgit
I suspect the ringgit will also remain defensive; however, it could still pick up support from the seasonal demand bounce on oil demand.
Bonds have recovered sharply this week on the FTSE news. Malaysia will remain in the WGBI, removing a vital overhang of the past two years. Stretched absolute yields and low liquidity have likely contributed to the rally.
Still, I suspect foreign investors will be slow to re-engage long duration as the market begins pricing in central bank policy normalization. And in the BNM case, the easing cycle is over.
Gold
Oil is starting to move up, which could nudge inflation pressure higher. And while inflation is good for gold, the Fed response is more important than inflation alone, with higher real yields likely to result and negative for gold.
We are still yielding but not turning lower. However, as Central Banks start preparing for normalization, gold should get pressured. Green shoots have started re-emerging in the Fed speak, while the rest of the status quo narrative (still a long ways away from achieving their goals etc.) is already fully baked into the price. And while Powell has done his best to drive the narrative unilaterally, the FOMC Minutes will help give a voice to the many—most notably to the three new dots now calling for hikes by end-2022.