A jump in oil stocks following the shock ending of the Iran oil waiver program by the U.S. government could not save Wall Street from a mediocre day. Except for oil prices, trading in major markets definitely had a holiday feel about it, with much of the world still closed for Easter/Passover. Wall Street limped over the line with the S&P rising 0.1%, the NASDAQ up 0.2% and the Dow down 0.2%.
Earlier in the day, China markets scared themselves as official government documents mentioned deleveraging the shadow banking sector. As a result, the CSI 300 composite index fell 2.3%. Coming on the back of the spike in oil prices earlier in the session, the country that has made opaque financing and leverage an art form, saw both the Shanghai and Shenzhen exchanges in full retreat. My interpretation is that officials have become concerned at the pace of the galactic rally in Chinese stock markets this year and have decided to put a few gentle “shots across the bow” to curb the enthusiasm.
One thing China, India, South Korea and Japan will not be enthusiastic about is the U.S. cessation of the Iran oil waiver program from May 2. All four regional heavyweights are large importers of Iranian crude under the waiver scheme and will now be scrambling to find alternative supplies. The U.S. may be playing with geopolitical fire here, with Iran threatening to close the Straits of Hormuz. Unlikely as that is, all four countries will probably be seething in private at perceived extra-judicial strong-arm tactics by Uncle Sam. It will be interesting to see if this affects the current U.S. trade negotiations with China and Japan.
A lull in Wall Street’s earnings season overnight will pick up steam tonight with a plethora of tech heavyweights due to report. Asia however, has a light data session ahead except for Hong Kong and Singapore’s inflation reports this afternoon. Singapore will be followed in particular, as the street searches for signs of Monetary Authority of Singapore’s policy stance, coming after previously reported poor export figures.
Currencies
Currency trading was very muted overnight as the FX markets continue to remain in hibernation, as has been the case for most of 2019. A lack of excitement in other markets – along with holiday-thinned trading overnight – likely implies a quiet day for Asia as we await Europe’s return this afternoon. London is, after all, the world’s largest FX market.
The Indonesian rupiah, Malaysian ringgit and Australian dollar still have the potential to outperform in today’s session as oil holds its gains from yesterday.
Equities
Australia’s resource-heavy market may receive a boost as it returns from holiday, following oil’s massive rally yesterday. Investors may take a dimmer view of other regional oil-importing heavyweights though as the street digests the implications of the end of the oil waiver scheme.
With a quiet night on Wall Street and with Europe returning to work this afternoon, regional markets will probably adopt a wait-and-see attitude, following Wall Street’s lead.
Oil
What a day that was, with Brent Crude rocketing 3% higher to USD74.20 a barrel. WTI also climbed 2.5% to USD65.70 a barrel following the Iran waiver news. Major importing economies in the region will be scrambling to find alternative supplies from May in what was an already tight market. China and co. may find the assurances from the U.S. that Saudi Arabia and the U.A.E will “take up the slack” somewhat empty.
With refineries in Asia optimized for Brent Crude rather than the lighter U.S. shale-derived oil, nervousness in the region will ratchet higher about supply disruptions. This should ensure that Brent continues to outperform relative to WTI and any pullbacks will meet plenty of buyers in the near term.
Gold
Gold held steady overnight around the USD1,275.00 an ounce region, supported by geopolitical ructions in the oil markets. However, that alone is not enough to cause a structural turn in sentiment for now with the rally from last Thursday’s low looking like a dead cat bounce.
A retest of USD1,270.00 looks to be on the cards unless either stocks or the greenback head south first – an unlikely outcome at this stage.