Asia is off to a rollicking start to the week with equities performing strongly and currency markets rotating out of haven US dollars. The turbocharging of bullish sentiment this morning has multiple drivers starting with President Donald Trump. Although scenes showing numerous riots across the USA dominated headlines this weekend, it is what President Trump announced on Hong Kong on Friday that really matters to financial markets: or more correctly, what he didn’t say.
As expected, the President withdrew Hong Kong’s special status over the new China imposed security law. What he did not do, however, was withdraw from the US-China phase one trade agreement signed in January. Nor did he impose sanctions on Chinese officials or persons connected to the regime. The collective sigh of relief in Asia is palpable this morning.
Being the first day of the month, we will receive the usual avalanche of PMIs this today. This morning, the pan-Asia Manufacturing PMIs have uniformly put-performed across the region except for Japan. That hints that the global recovery trade and a rebound in post-COVID-19 economic activity in the region remain intact.
Yesterday China released its official Manufacturing and Non-Manufacturing PMIs. Manufacturing slightly underperformed at 50.6 but remained expansionary. Non-Manufacturing outperformed to print at 53.6, suggesting that domestic economic activity continues to increase after the COVID-19 shutdown. Today, the broader China Caixin Manufacturing PMI has posted an impressive jump back into expansionary territory, at 50.7.
Having negotiated some potentially deep political potholes, and with a slew of data suggesting that, for now, the COVID-19 recovery is on track, momentum is clearly lying with the peak-virus trade as the week starts. The trade-centric Australian dollar and the Hang Seng Index are notable outperformers this morning. Asia seems to content to ignore the US riots as a passing story, with Hong Kong protests seemingly muted over the weekend as well.
The Manufacturing PMI storm continues into Europe today, although Benelux, Scandinavia, France and German markets are all closed for Whit Monday. Given the low base they have previously achieved, prints to the upside by the PMIs will be oil onto the fire of the global recovery trade.
Asian equities trade move sharply higher
Hong Kong’s Hang Seng is the star of the show today, as a less belligerent than expected US President sparks an impressive relief rally. The Hang Seng is up 3.20% thus far. The rest of the region is also moving powerfully higher. The Nikkei 225 has risen 1.25% while Mainland China stocks have breathed a collective sigh of relief. The Shanghai Composite has jumped 1.40%, while the CSI 300 has climbed by 1.90%.
South Korea’s KOSPI is 1.40% along with the Straits Times. After an impressive performance last week, the reaction in Australia is somewhat more muted. Still, both the ASX 200 and All Ordinaries are 0.80% higher today.
In the near-term, the US riots are being dismissed as irrelevant by Asia’s financial markets. Only a surprise tweet from the US President, or a severe drop in Europe’s PMIs this afternoon, is likely to take the wind out of the global recovery stories sails today.
Currency markets perform strongly versus the US dollar
As stated above, the procession of good news, or less bad news, is weighing on the haven US dollar this morning. Major currencies and regional currencies are both performing strongly, as hopes are boosted that the worst of COVID-19’s economic slowdown is behind Asia and the developed world.
The trade-centric, China-proxy Australian dollar is a notable outperformer. The AUD/USD has risen by 0.90% to 0.6720 today. Having closed above, it’s 200-day moving average (DMA) at 0.6655 on Friday, the technical picture, geopolitics and economic data all point to higher levels in the near-term. AUD/USD’s next upside target is 0.6770 and then 0.6850.
A similar story has been seen in other commodity currencies such as USD/MXN and USD/CAD. The USD/MXN is 0.50% lower at 22.0670, and the USD/CAD has fallen 0.25% to 1.3720, and the NZD/USD is 0.55% higher at 0.6240. Indonesian markets remain closed today, but the expectation is that both it and the Malaysian ringgit should outperform this week, assuming no headline bombs upset the applecart.
The USD/CNY fix was almost unchanged at 7.1315 today, and USD/CNY itself has hardly moved from there, currently trading at 7.1280. Lingering political concerns are muting a more substantial rally by the CNY. Still, assuming the White House stays quiet, it should resume its rally against the US dollar as the session progresses.
Amongst the majors, the euro stands out, with EUR/USD climbing 0.30% today to 1.1135. Resistance is nearby at 1.1150 as the single currency continues to ride the euro 750 billion stimulus wave. A move through that level signals more gains to 1.1250 initially, are forthcoming.
Overall the US dollar will underperform as the peak-virus recovery trades maintains its power.
Oil recovers to post record gains in May
Oil bounced sharply on Friday with both Brent crude and WTI posting near 90% gains in May. Brent crude rose nearly 6.50% to $36.50 a barrel, and WTI rose 4.40% to $35.20 a barrel as President Trump left the US-China trade deal intact on Friday.
This morning, both contracts have edged higher again following impressive manufacturing PMI’s from China and the rest of the Asian region. That has seen a renewed wave of buyer’s pile into the economic recovery trade across the markets. Brent crude is trading at $37.70, and WTI is trading 535.50 a barrel.
Assuming no surprise headlines emerge to derail the rally, Brent crude looks set to advance on the $40.00 a barrel region. That is the bottom of the five-dollar gap on the charts between $40.00 and $45.00 a barrel. And also, home to the 100-DMA, residing at $40.70 a barrel. A close above the latter implies that there is a strong chance of the gap higher being closed entirely.
WTI’s 100-DMA is just above current levels at $35.80 a barrel. A daily close above there suggests further gains are possible, with an initial target of $40.00 a barrel.
With PMI data suggesting a manufacturing recovery, and lockdowns ending across the world, oil consumption seems set to increase in the near-term, maintaining the upward momentum in prices. The potential dark cloud is the next OPEC+ meeting, set to be brought forward to June 4th this week. If group production discipline is maintained, then oil should negotiate this without incident. However, if disagreements break out between Saudi Arabia and Russia over production targets, the oil rally could grind to a halt.
Gold moves back into no man’s land, but further gains are possible
Trade fears leant support to gold on Friday, and it duly rose through its descending trend-line resistance at $1722.00 an ounce, to post a 0.65% gain to $1729.00 an ounce. Despite the steady rotation into growth facing assets and currencies this morning, gold has climbed by another 0.50% to $1738.50 today. That suggests that concerns are still lingering over further confrontations between the US and China.
Although the technical picture is bullish in the near-term, gold itself has just moved back into no man’s land between $1700.00 and $1760.00 an ounce. Gold may drift towards the higher end of that range, but at this stage is showing no signs of the momentum needed to challenge the $1800.00 long-term resistance zone seriously. Gold has shown a few false dawns at the top of its monthly range in recent times, only to disappoint bullish positioning severely. Investors should be careful not to get suckered into repeating the same mistake once again.