A sense of calm returned to Asia this morning, thanks to the news headline tickers staying quiet about anything Ukraine, energy or otherwise commodity-related. Overnight, US markets played catchup to yesterday morning's carnage in Asia, but although Wall Street had an ugly day, they didn’t add anything new to the story.
That state of affairs was unlikely to last though and one sensed we were in the eye of the hurricane, a period of calm before the winds returned once again. Price action in the nickel market overnight, suggested a sense of panic and the squeeze on commodity supplies was going nowhere soon.
I qualify the word "calm," though. Brent crude was 2.40% higher in Asian trading today, but when set in context versus yesterday’s volatility, that was practically comatose.
Assisting the sense of calm was a very quiet data calendar in Asia today. In Australia, NAB Business Confidence for February rose sharply to 14 from 4 previously, showing no geopolitical nerves. The Lucky Country, of course, was better placed than most in the current climate, being a major exporter of just about every commodity that the world desperately wants.
Japan’s average earnings rose by 0.90% in January YoY, higher than expected. The number was flattered by a new basing year and annual salary increments.
Looking ahead, Eurozone Employment would be unlikely to move the needle, European markets being completely at the mercy of geopolitical developments. China Inflation tomorrow will remain benign while US Jolts Job Openings, and US Inflation on Thursday, will reinforce a Fed hike next week.
The real focus will be on how many Fed hikes we would get this year and whether the Ukraine situation and its knock-on effects would cause the Fed to blink on hikes. Ukraine derived volatility aside, markets were looking like they were moving into a holding pattern ahead of next week’s FOMC meeting from a data perspective.
Asian equities remain fragile as oil rises today
Overnight, Wall Street endured a torrid session as it played catch-up to the sell-off seen in Asia earlier in the day. Fears over the surge in commodity prices torpedoing world growth, and profits, continued to way on equity markets, which came into 2022 at juicy valuations, thanks to two years of central bank largesse. Not helping the situation was the fact that US yields reversed some of their Friday losses, rising in New York.
The S&P 500 finished 2.95% lower, the NASDAQ tumbled by 3.62%, and the Dow Jones retreated by 2.37%. In Asia, futures on all three staged a mini relief rally, but momentum waned, leaving them unchanged. Asian markets were lower once again today, with oil prices rising once again this morning, and the rallies in base metal prices overnight fraying nerves in the region; it being a huge net importer of both.
Reports of a Russian general being killed and threats by Russia to cut off European gas supplies were also weighing on sentiment.
Unsurprisingly, given the rise in industrial metal prices overnight, China markets bore the brunt of the selling today. The Shanghai Composite was down 2.0%, with the CSI 300 falling by 1.70%. By contrast, Hong Kong was lower by just 0.30%, reflecting the price action in Asia ex-China today.
In Japan, the Nikkei 225 was 0.95% lower, with South Korea’s KOSPI down 0.50%. Taipei was sharply lower, losing 2.0% today ahead of trade and inflation data later in the session. Singapore fell by 0.80%, with Kuala Lumpur losing 1.20%, Manilla falling 2.0%, and Bangkok 0.40% in the red. Jakarta was bucking the trend, rising 0.35% today. Australian markets were also slightly lower, comparatively, the AS 200 and All Ordinaries falling by 0.60%.
Europe was likely to open in the red once again, although a clear signal from the Bloc that they have no intention of banning Russian energy exports may provide some temporary relief. That said, if Russia goes through with its threats to cut gas exports, we will be back to square one. European markets remain entirely at the mercy of Ukraine-related headlines.
US dollar holds onto overnight gains
The US dollar held onto most of yesterday’s early-session gains overnight, boosted by a rise in US yields in New York, as investors continued to pour haven flows into the greenback.
The huge rallies in commodity prices were also supportive, with a large portion of that international trade priced in US dollars.
The dollar index finished 0.74% higher at 99.24 overnight, with some profit-taking pushing it slightly lower to 99.16 in Asia as the news tickers remained relatively quiet.
The technical indicators were showing the index as grossly overbought right now, and a deeper correction if things stayed relatively quiet in Eastern Europe, or commodities correct, was possible. Any retreat was likely to be only temporary, however.
EUR/USD remained under pressure, closing at 1.0855 having tested multi-year support at 1.0800 earlier in the session. EUR/USD had room to correct higher from a technical perspective but will likely find plenty of sellers into 1.1000.
Similarly, GBP/USD recovered to 1.3125, but the price action looked corrective. USD/JPY rose to 115.40 as US yields firmed overnight.
The rally by AUD and NZD ran out of steam overnight, with the commodity-based support replaced by risk-aversion flows as the day wore on. AUD/USD finished 0.80% lower at 0.7315, and NZD/USD fell 0.55% to 0.6825.
Having booked strong gains over the past weeks as commodities rallied, the antipodeans were looking more vulnerable to risk-aversion flows now. A daily close below 0.7300 and 0.6800 signals a deeper correction in the short term.
The PBOC set a surprisingly strong yuan fixing today at 6.3185, which pushed onshore USD/CNY lower to 6.3125, and offshore USD/CNH lower to 6.3170. USD/yuan remained anchored below 6.3300, with haven inflows capping any yuan weakness.
Notably, on a trade-weighted basis, the CFETS basket had the yuan trading at record highs on a trade-weighted basis, a situation that didn't seem to be concerning authorities at the moment, probably with one eye on their imported commodities bill.
Regional Asian currencies were still trading on the weaker side, however, and as large energy importers, it was hard to construct a bullish case in this environment. USD/KRW rose 0.30% today to 1235.70, with the TWD and THB also weaker. USD/PHP broke higher through 52.00 yesterday and settled at 52.12 this morning, more gains perhaps limited by the threat of central bank intervention.
USD/INR fell 0.25% in early trade to 76.90, having traded to 77.20 yesterday, boosted by a ruling party win in a key state election overnight. The lull was likely only temporary, and USD/INR remained on track to retest 77.40.
Oil prices - I don’t know what to say……
Reports that a Russian general was killed in Ukraine seemed to have been the excuse for Asia to lift prices once again this morning after the breathtaking price action overnight. Although some sense finally prevailed in Northern Hemisphere markets, Brent crude still finished 5.20% higher at $124.10 a barrel, and WTI 4.70% higher at $120.35 a barrel.
Russian scaremongering around $300 a barrel of oil may have also spooked Asian markets, but oil has given back some of its gains after Venezuela said the American visit was "cordial," and talk was coming out of Europe that they will not unilaterally ban Russian energy imports.
The latter made complete sense as the reality is that 7.50 million bpd of Russian exports, or even part of it, cannot be replaced in an already tight international market.
The US probably had more wiggle room in this respect. Its politicians could stop being NIMBYs and get real on shale and other extraction methods, even if it was for a few years. It could also kiss and make up with Saudi Arabia and/or Venezuela.
Sometimes being a politician means choosing the least ugly horse in the glue factory, and I suspect a November wipe-out in the mid-terms will eventually trigger a survival instinct among the Democrats.
For this reason, after an avalanche of $200 a barrel prediction I saw hit the wires yesterday, I don’t believe that this will happen. That said, I don’t think oil prices were falling much from here either.
My guestimates for the day’s trading range remained wide but real. Brent crude will potentially trade in a $120.00 to $130.00 a barrel range, and WTI between $116.00 and $126.00 a barrel.
Gold is still loving stagflation
Gold consolidated its gains overnight, finishing the session 1.35% higher at $1997.50 an ounce. The inability to take out $2000.00 overnight, despite several attempts, prompted some fast-money positioning to head to the sidelines in Asia, as the newsreel remained relatively quiet. Gold fell 0.40% to $1989.50 an ounce in Asia, at time of writing.
There is likely to be plenty of barrier option-related selling around the $2000.00 region initially, making gains challenging. Additionally, gold appeared to be following oil prices today, so if oil corrects lower again, the fast-money longs were likely to quickly retreat. A fall through $1980.00 an ounce could prompt a sharp, but temporary retreat.
The stagflationary factors that were so supportive of gold were persisting and will remain so. Once $2000.00 an ounce has been cleared, the path to $2100.00 will be laid open. Intraday support lay at $1970.00 and $1940.00 an ounce.