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Sharks Circle In Holiday-Thinned Asia

By MarketPulse (Jeffrey Halley)Market OverviewSep 20, 2021 01:10AM ET
Sharks Circle In Holiday-Thinned Asia
By MarketPulse (Jeffrey Halley)   |  Sep 20, 2021 01:10AM ET
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Asia was off to a nervous start today with liquidity seriously thinned by holidays in Mainland China, Japan and South Korea. In fact, a heavy holiday schedule amongst the Northern Asia heavyweights will likely affect liquidity to some extent all week, potentially exacerbating market moves.

The list of circling sharks is long, starting with increasing noise from the US about the debt ceiling. Raising the debt ceiling used to be a rubber stamp exercise, but in a polarized United States, that is no longer the case. Mainland China markets were closed today but all eyes were on Evergrande Group (OTC:EGRNY), which is scheduled to make bond repayments on Thursday.

Their shares were already taking a beating in Hong Kong today along with property-related companies in general. Ever-Teflon actually has a grace period of 30 days before an official default is called so this story is likely to keep on giving.

Commodities were also being sold heavily this morning after China’s Premier Li over the weekend, said that China will use “market tools” to stabilize commodity prices. I am assuming that means releasing more commodities onto domestic markets from China’s strategic reserves.

As a price taker and not a price maker, there is only so much China can do to impact prices in the medium term. But coming on a day where liquidity was lower because of holidays, markets were nervous about a disorderly Evergrande collapse and US yields and the dollar have risen ahead of the FOMC, there is an outsized impact.

Copper fell by 1.45%, aluminum futures by 1.30%, with platinum down 2.55% and palladium down by 3.35%. Silver and gold were also lower. That came after iron ore tumbled by 20% last week. Thankfully, with Mainland China away today, iron ore trading was effectively closed, but one assumes, looking at its commodities brethren, that the news wouldn’t have been good.

With the highest correlation to risk sentiment and commodity prices in the region, Australia was having a bad day with the Australian dollar and Australian equity markets sharply lower.

The week features a heavy schedule of central bank policy decisions, 12 by my last count. The main act will be the Federal Reserve FOMC decision on Wednesday. We are finally seeing markets awakening to the possibility of a taper with US bond yields rising and the US dollar rallying powerfully on Friday once again.

I am not expecting any announcement of a taper this meeting, however, the FOMC dot plot update will be interesting, especially if rate hike expectations are brought forward. The FOMC will likely signal that a tapering decision will be live for the November meeting.

With growth concerns increasing in Asia and other regions, a more aggressive dot-plot or tapering indication will likely spark more US dollar strength. Nobody is pricing in a taper-tantrum for Q4, but I believe there is a rising likelihood it can happen, especially if US employment jumps over the next two months.

I believe it is naïve that having got the world addicted to bottomless amounts of zero percent money and a backstop to the dumbest of investment decisions over the past decade+, that the Fed can put that genie back in the bottle with no impact.

Norway will probably become the first DM central bank to raise rates this week, pipping New Zealand to the post. Elsewhere though, I expect Japan, Indonesia, the Philippines, and Taiwan to all remain unchanged. Sweden and Switzerland will similarly hold as will Turkey, but Brazil may surprise, once again.

All roads lead to the FOMC though, and their tapering talking, and dot plots should see some volatility in Asia on Thursday morning. China announces its latest one and five-year Loan Prime Rates this Wednesday. It would be a huge surprise if they cut and would spark a juicy equity rally on the Mainland. The PBOC is likely to prefer a RRR cut, possibly as soon as October if economic data doesn’t improve, or Evergrande folds.

Canada heads to the election booths today with the Canadian dollar getting a beating at the end of last week on softer commodities and political uncertainty. The election is too close to call. Results are likely to start coming in over the Asian session tomorrow and with liquidity holiday-reduced anyway, the USD/loonie may live up to its name.

Australian markets were under pressure from China/Evergrande fears, slumping commodity prices and the fallout from the French submarine fiasco. Already there were rumblings from Europe that the Eurozone/Australia free trade agreement talks were dead in the water.

The French, for their part, were not happy, recalling their ambassadors to the US and Australia, an unprecedented move. Australia’s Prime Minister, for his part, is justifying the cancellation in favor of US/UK nuke submarines by saying Australia had harbored concerns over the capabilities of the to be built French submarines for years. The obvious question being, if that were so, why did you agree to spend $40 billion buying them in the first place? Keep up the good work ScoMo.

Finally, keep an eye on New Zealand this week. It appeared that the Delta variant jumped the virus fence around Auckland. Auckland was in level 4 while the rest of the country was enjoying a relatively free level 2. If cases increase outside of Auckland, it doesn’t take a genius to guess what happens next—level 4 for the rest of the country immediately. That could spark a decent sell-off in the New Zealand dollar as the RBNZ’s October hike is postponed again, and New Zealand equities are likely to take a beating.

Hong Kong And Australian Equities Take A Beating

FOMC tapering nerves and increasing noise from Washington DC around the debt ceiling and tax hikes sent Wall Street lower on Friday. Friday also saw index futures and option and single-stock option expiries, which could have distorted an already nervously negative move.

Wall Street finished the week on a continuing negative tone with the S&P 500 falling 0.92%, the NASDAQ falling by 0.91%, and the Dow Jones losing 0.48%. All three indexes finished only slightly lower for the week though, which was dominated by large swings in daily sentiment thanks to a depleted tier-1 data calendar.

In Asia, the story was rather glummer. Commodity prices were tanking this morning over China growth concerns and the threat of Evergrande in China missing debt payments this week. With Mainland China, South Korea, Japan and Taiwan closed, Hong Kong has borne the brunt of the risk aversion flows. The Hang Seng collapsed by nearly 4.0% with property stocks under the hammer.

With its high beta to commodity prices, Australian markets were also suffering after the commodity sell-off today. Woes surrounding the French submarine order cancellation and its threat to an EU free-trade deal were also darkening the mood. The ASX 200 tumbled by 2.30%, while the All Ordinaries retreated by 1.90%.

Elsewhere, Singapore was down 0.35%, while Kuala Lumpur dropped by 0.65%. Bangkok was lower by 0.40% and Manilla by 0.15%. Jakarta fell by 0.55%. The fall-out on regional Asia has been limited thus far, with investors preferring negative sentiment in the more correlated, and more liquid, Hong Kong and Australian markets.

With tapering noise around the FOMC increasing, ASEAN markets will struggle to maintain material rallies this week, especially with the Northern Asia heavyweights taking holidays.

Given the negative finish on Wall Street, and the heavy selling in key Asia Pacific markets today, European markets will open slightly lower this afternoon. However, a lower euro, and much lower commodity prices are likely to be positives at the periphery for Europe, limiting negativity from tapering and China nerves.

The US Dollar Stages A Broad Rally

Although not many are predicting a Fed taper tantrum, currency markets appeared to be waking up to the possibility. The US dollar continued its rally on Friday and what was notable was that also included fellow havens such as the Swiss franc and Japanese yen.

The dollar index soared 0.41% to 93.25 as US yields firmed, climbing once again in Asia by 0.10% to 93.35. The dollar index was within sight of its August high at 93.72, and only a fall through 92.80 changes the technical bullish outlook. It will probably take huge bidding interest at the US long-dated bond auctions this week to slow the upward momentum.

Firming US yields sent EUR/USD 0.40% lower to 1.1725, before easing further to 1.1710 in Asia. A failure of 1.1600 will signal a new down leg for EUR/USD that could extend to 1.1200. GBP/USD fell 0.30% to 1.3710 today and failure of 1.3680 targets 1.3600. GBP/USD has traced out a major top around 1.3900. USD/JPY climbed nearly 90 points over the past two sessions to 109.90 today, as a US/Japan yield differential play at the moment, it remained stuck in a broader 109.00 to 111.00 range with a bias to the topside.

USD/CHF was also on the move, climbing above 0.9300 on Friday on its way to 0.9325 in Asia, breaking out of its three-month range. Given its haven status, the fact that the US dollar managed to rally so powerfully in the past two sessions (approximately 130 points), was to me, a firm signal that more US dollar strength generally was imminent. An FOMC signaling a year-end ostensibly dovish taper, or a more aggressive dot plot hinting at 2022 rate hikes, should do the trick.

AUD/USD and NZD/USD were on the back foot today, falling 0.50% and 0.25% respectively to 0.7235 and 0.7020. The slump in commodity prices and risk sentiment in a liquidity thinned day in Asia was to blame and both have potentially another 100+ points lower in them over the next few sessions. Watch NZD/USD for news on the Delta variant front, which escaped Auckland this weekend. Any signs that the government is going to pull the national lockdown trigger will be a major negative for the New Zealand dollar.

With Mainland China closed, all eyes were on the offshore USD/CNH this morning. It spiked to 4.4850 at the open but quickly retreated to 6.4810 later to be just 0.16% higher today. The PBOC added CNY 90 billion of liquidity via the repos on Saturday, a surprise move to calm nerves ahead of the holidays. Its impact was negligible on equities but seemed to have soothed nerves in currency markets.

USD/Asia as a result was only around 0.25% higher today. However, given the nerves over Evergrande in China and its potential fallout, and increasing taper nerves ahead of the FOMC, regional Asian currencies are likely to endure a tough week unless the FOMC is ultra-dovish come Thursday. Holiday-driven liquidity will exacerbate and headline-driven moves.

Oil Falls In Asia

With Mainland China, South Korea and Japan away today, oil trading volumes were thin. Oil eased slightly on Friday as Gulf of Mexico production returns, but otherwise remained immune to the risk aversion nerves seen elsewhere and US dollar strength. In Asia today, the broad commodity sell-off flowed into oil markets, which retreated modestly once again.

Brent crude fell 0.40% to $75.30 on Friday, retreating by 0.60% to $75.85 a barrel in Asia today. WTI fell 0.90% on Friday to $71.90, easing another 0.70% to $71.30 a barrel in Asia this morning. Both contracts are likely to continue trading heavily until New York hours as long as the broader commodity sell-off persists, although I do not anticipate an aggressive move lower.

Brent crude traced out a double top at $76.10 which was followed by $76.80 a barrel. Support was at $74.50 and then $73.80 a barrel. WTI had resistance at $72.00, followed by more formidable resistance at $73.00 a barrel. A fall through $71.00 could see a spike lower to $70.00 a barrel.

Gold Follows Other Metals Lower

Platinum and Palladium were pummeled today in a broad commodity sell-off, tumbling by 3.50% and 3.50%, respectively. That dragged silver 1.15% lower to $22.1460 an ounce, and an already fragile gold lower by 0.45% to $1746.60 an ounce after finishing unchanged at $1755.00 an ounce on Friday.

A lack of liquidity is amplifying moves in metals in Asia today thanks to Northern Asia being on holiday. However, gold’s price action is ominous, especially as US dollar strength persists and US yields continue firming. The next few days ahead of the FOMC could be long ones for bullish investors.

Gold now has resistance at $1755.00, having fallen through support at $1750.00 an ounce. That is followed by $1768.00 and the far more formidable $1780.00 an ounce region. Today’s low around $1742.50 was potentially a double bottom if gold closes above there this evening, forming a modicum of support. However, gold looks far more likely to continue trading heavily which will set up a test of $1720.00 an ounce. From a longer-term perspective, must hold support is at $1675.00 an ounce. Failure opens up uncharted territory for gold.

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Sharks Circle In Holiday-Thinned Asia

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Sharks Circle In Holiday-Thinned Asia

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