The US Nonfarm Payrolls data on Friday completely wrong-footed financial markets on Friday, including the author, posting a blockbuster rise of 2.5 million jobs versus an expected drop of 8.0 million jobs. The unemployment rate also plunged to 13.30% as a result. I greeted the headline figures with a healthy degree of skepticism, reinforced by the US Department of Labor, highlighting issues with data collection and classification. Lost in the noise of the US data though, Canada quietly posted its own impressive rebound in jobs. Canada added 220,000 full-time positions when markets were forecasting a loss 0f 500,000 jobs.
Taken in isolation, one could reasonably argue that the outperformance could be due to flaws in data collection and were one-offs. However, taken together, there is no denying that North America’s two largest economies, have simultaneously shown massive rebounds in their respective labor markets. If both dodge the secondary infection COVID-19 bullet, a meaningful, and much quicker than expected economic recovery in North America may well be underway. I, for one, certainly hope this is correct. The COVID-19 data from the United States this weekend suggests that it is indeed dodging that bullet.
The US data was enough to boost the already strong global recovery trade into COVID-19 escape velocity. US equity markets powered higher, oil rallied impressively, gold tanked, and the US dollar finally rallied as US Treasury yields jumped higher. The NASDAQ, in fact, touched record highs intra-day, before falling to just below them at the close. That highlights the stunning comeback by equity markets since the mid-March pandemic capitulation.
The weekend headlines were dominated by OPEC+ and China’s Trade Balance data, that was released yesterday. Saudi Arabia and Russia had a very successful outcome, pushing through a one-month extension of the headline production cuts until the end of July. Not only that, the serial offenders in compliance, Iraq and Nigeria, were called out and have agreed to make up their missed reduction quotas in the months to come. OPEC+ will also increase the frequency of meetings in various forms to monitor compliance. Apart from shoring up the credibility of the grouping, the show of discipline over the children by the adults will give yet another boost to the oil rally.
China’s Balance of Trade (BOT) was altogether more concerning. The BOT climbed to $62.93 billion, a record. The outperformance, though, was driven by a collapse in imports by 16.70% in May. Although exports fell by a less than expected 3.30%, as international demand suffered further COVID-19 shrinkage, the imports were the real concern. Either the China domestic recovery is slower than expected, or China’s purchasing managers are anticipating tepid demand for Chinese exports going forward. Either way one cuts it, the import drop will be worrying to regional Asia and commodity exporters such as Australia.
It is fortunate, therefore, that the China release has come amidst other heavyweight economic news that was extremely positive. Although the Wall Street rally on Friday, and the weekend’s OPEC+ outcome inevitably set Asian markets up to rally today, the China BOT data is likely to temper the exuberance.
Japan’s Q1 GDP data has passed without incident this morning with the annualized number showing a -2.1% drop, as expected. The markets are unlikely to pay much attention to a backwards-looking number in the present climate, with all eyes on a post-CIVID-19 world.
The FOMC releases their latest Fed Funds rate decision on Thursday. The committee will leave rates unchanged at 0.25% and most likely reaffirm their commitment to using all monetary tools at their disposal until US unemployment hits their 4.1% target. Most interest this time will be focused on whether the Fed will announce a Japan-like yield curve control program, likely to be bullish for markets. Nothing about this meeting suggests that they will upset the applecart with regards to the global recovery rally.
Equities open higher but gains tempered by China
Wall Street enjoyed a mighty rally after the blockbuster US Nonfarm Payroll release. The S&P 500 rose 2.62%, the NASDAQ rose 2.06%, and the Dow Jones jumped 3.15% following the unexpected rise in jobs.
Although the global recovery trade remains in full flight, the collapse in China imports last month has seen Asia trade more cautiously today. The Nikkei 225 is up 0.90%, with the KOSPI flat in early trading. The Straits Times has risen 0.80%, but the Australian All Ordinaries and ASX 200 only managing a modest 0.20% gain in trading thus far.
That trend is likely to be followed as the Mainland China, Hong Kong and regional Asian markets all start the week. With the region’s economies so inextricably linked to China, the rest of Asia will be hoping that yesterday’s trade data was a temporary blip, and not the harbinger of deeper woes.
Overall though, the buy everything, ignore reality, peak virus global recovery trade remains on course. The upside momentum remains impressively strong on global equities, and fighting it remains a losing game.
The US dollar edges lower in Asia
The US dollar rally in New York on Friday, looks to have run its course already as the greenback falls across the board in early Asian trading. The dollar was boosted on Friday by the rise in US Treasury yields post the data. An element of profit-taking also around following consistent falls earlier in the week.
Today though, the rotation out of US dollars appears to have resumed, with the dollar easing against major and regional currencies in early trade. The Chinese yuan again fixed at a stronger rate today at 7.0882 versus 7.0965 on Friday. That should lend support to local Asia currencies as trading gets underway in earnest to start the week.
Currency markets, for their part, appear to be putting the uninspiring weekend data from China quickly behind it. We expect the rotation out of US dollars to continue uninterrupted this week, with no sign of a waning of momentum in the global recovery trade.
OPEC+ agreement supports oil in Asia
Over the weekend, OPEC+ agreed to extend its headline 9.8 million barrel a day production cut for another month until the end of July. Saudi Arabia and Russia also secured commitments from Iraq, Nigeria, Kazakhstan and Angola not only to increase compliance, but also make good their missed targets over the months ahead. Overall, the agreement was an excellent result for the OPEC+ grouping, not only from a headline reduction point of view, but also from discipline on compliance.
The US data and an expected positive outcome from OPEC+ on Friday had already seen both Brent crude and WTI leap higher into the week’s end. Brent crude jumped 5.0% to $42.00 a barrel, with WTI climbing 4.80% to $39.10 a barrel.
China’s data has tempered expectations today, but Brent crude and WTI continue to make gains in Asia. Both are around 1.0% higher at $42.40 and $39.50 respectively.
Brent crude closed above $40.00 a barrel on Friday, a notably bullish technical development. It is now poised to fill in the price gap caused by the initial breakdown between Saudi Arabia and Russia, and its target price should be $45.00 a barrel initially. WTI, meanwhile, has an initial price target of $40.00 a barrel.
Gold’s downward correction is now well underway
The robust US data and the resulting rise in US Treasury yields on Friday was a deadly one-two punch combination of long gold positioning. Gold finished the session down $30.0 an ounce at $1685.00, having touched $1670.00 an ounce in intra-day trading.
Although gold has edged higher to $1686.50 in early Asia, the technical picture remains very negative. Further downside pain for bullish positioning accumulated over the past two months looks almost certain.
Gold has resistance at $1695.00 and $1720.00 an ounce. Initial support lies at Fridays low of $1670.00 an ounce, followed by the 100-day moving average at $1640.00 an ounce. Further losses from there suggest the gold correction could extend to $1600.00 an ounce, and possibly as far as the 200-day moving average at $1570.00 an ounce.