For those of you who have never seen the original Leonardo DiCaprio film "Inception," firstly you should. The film itself is a sci-fi thriller involving Mr DiCaprio sneaking into people’s minds to steal commercial secrets. Not in itself relevant to anyone except law enforcement authorities on the hill. The challenge for viewers is the multiple levels of reality that poor Leo must navigate inside the consciousness. Stunning visual effects aside, viewers, along with the cast, are left wondering what is real and what is not, with only a spinning top to guide them.
No matter how many times you spin a top now, the risk-on price action of the world’s financial markets, led by the perpetual v-shaped optimists of Wall Street, has left many of us wondering which reality we might actually be in? That is a fair question, and one that I ask myself, and am being asked many times each day by others. Wall Street posted another outsized performance on equities and oil overnight, but it was the US dollar that commanded attention.
After being laggards to the global recovery rally seen elsewhere, currency markets appear to be accelerating their participation. The rotation out of haven US dollar long positioning gained more momentum overnight, with trade-centric currencies such as the Australian dollar again, notable outperformers. I note that one of the favorite ways for markets to express a bullish sentiment, AUD/JPY, also rose by more than 2.0% overnight. That implies that plenty of momentum remains with the global recovery trade, even if it is a reality that is counterintuitive to most of us. But then, I have needed to use tear gas to go to church, yet here we are.
The two critical drivers of the global markets buy everything rally are the volume of monetary policy easing by the world’s central banks, and the relaxation of nationwide COVID-19 lockdowns across the globe. Interest rates are now zero or less in most of the developed world, meaning the search for yield, any yield, will continue. That is unlikely to change anytime soon. The ending of COVID-19 lockdown across the globe has bought hope that economic activity will sharply rebound. This thesis is full of holes; not least the chance that secondary outbreaks reverse the process hoped for vaccines not appearing, and that international travel, the lifeblood of multiple sectors, is not returning anytime soon.
Until one or both changes, and realistically it will be firmly with the COVID-19 side of the equation, momentum is unlikely to wane as global markets look for yield and recovery opportunities. That reality is rather like arguing having a discussion with Mrs Halley. Somehow your point of view is always heard, but in the end, subsumed by the other side. It may not be a reality you agree or understand with, but it is what it is.
Circling back to economic recoveries though, China appears to be turning a corner, having brought COVID-19 under control some time ago. China’s Caixin Services PMI posted a much larger than expected jump into expansionary territory, printing an impressive 55.0. Even Hong Kong’s May PMI lifted itself off the floor, climbing to 43.9 from 36.9 previously, continuing the trend of higher lows seen from global releases on Monday across Asia. China’s numbers are particularly pleasing, following a move into expansionary territory earlier this week by the manufacturing number. Taken as a whole, it suggests that China, and Asia, are continuing to recover slowly from the pandemic shutdown. That should give Asian equity markets an extra boost today.
Asia equities power higher
Wall Street’s positive session overnight has overflowed into Asia this morning, as the global recovery trade continues to gather steam. An excellent Caixin Services PMI from China has reinforced the view regionally, that a modest recovery is underway, further boosting regional stocks.
The Nikkei 225 has risen 1.60% today. The South Korean KOSPI, with its high beta to China and the global recovery, powering higher by 2.60%. Mainland markets are also rising with the Shanghai Composite up 0.40% and the CSI 300 up 0.65%. The Hang Seng has jumped 1.50% with security concerns temporarily pushed from the front pages. The Straits Times is also 1.50% higher. A similar story is being told across Australasian and South-East Asian markets.
With no data of note likely to affect sentiment, the bullish mode is set to continue in Asia, with only unexpected negative headlines likely to upset the apple cart, and then only temporarily. For now, US-China trade fears have been collectively vanquished from the street’s thoughts.
The US Dollar’s tumble continues
The momentum of the rotation out of haven US dollars and into more risk-seeking recovery positioning shows no signs of abating. Overnight the greenback suffered a series of setbacks, notably again against the commodity currencies, but also versus developed markets.
The only notable exception was against the Japanese yen. USD/JPY powered 1.0% higher to 108.65, smashing through its 100 and 200-day moving averages (DMA) at 108.30. The rally though was a function of healthy buying in yen cross positions such as AUD/JPY, CAD/JPY and NZD/JPY, and not a function of the yen falling out of favour versus the dollar. Nevertheless, the USD/JPY, after slumbering between 107.00 and 108.00 for a month, now looks set to test 109.50 initially, possibly as high as 111.50.
The Australian dollar continued its strong rally versus the greenback, jumping by 1.50% again overnight to 0.6900. AUD/JPY buying has seen another 0.60% gain to 0.6940 this morning. AUD/USD looks likely to test 0.7000 and 0.7100 sooner rather than later. The strong performance by commodity currencies such as AUD and CAD appear to be undiminished for now.
Across regional Asia, local currencies have made further gains versus the dollar. The Singapore dollar has rallied nearly 1.0% in the last 24 hours, with USD/SGD falling through its 100 DMA at 1.4050 overnight, on the way to 1.3970 this morning. USD/SGD now targets a return to 1.3800 initially assuming the rally in developed market currencies and the CNY continues elsewhere.
The Indonesian rupiah continues its remarkable comeback this morning, after the extended Eid holidays. The IDR has been a quiet, yet steady global recovery proxy for some weeks now, following the carnage of March. USD/IDR has fallen from 14,750 yesterday, to 14,200 today with government COVID-19 lockdowns set to end tomorrow night. In the process falling through the USD/IDR 200-DMA at 14,420, a bullish technical development.
Most importantly, for Asia, the rally strengthening of local currencies will give the central banks in the region breathing room to further ease monetary policy if needed.
Oil continues to recover losses
Oil’s rally shows no signs of slowing down, as it rides the coattails of the global recovery trade by equity and currency markets, with OPEC+ likely to extend the 10 million barrel a day cuts for at least another month. Brent crude rose 3.50% to $39.50 a barrel, and WTI rose 4.0% to $36.80 a barrel.
Asia has continued probing higher following the positive Caixin PMI data this morning, with Brent crude rising 1.30% to $40.00 a barrel, and WTI rallying 2.0% to $37.60 a barrel. A close above $40.00 a barrel on Brent crude is a particularly bullish technical development. That sets up further gains to $45.00 a barrel to close the $5.0 gap in prices on the daily charts.
The first US crude inventory number for the week is released tonight, with EIA Crude Inventories expected to fall to 3 million barrels from 7 million last week. In the present climate though, even an unexpectedly high number will probably only see a pause in the rally. Only a severe disagreement emerging from OPEC+ this week is likely to sap oil’s strength.
Gold falls on surging recovery sentiment
Gold gave up all its recent gains overnight, as the surging recovery sentiment elsewhere, and no new trade US-China trade developments saw investors reduce haven positions. Even a much lower US dollar gave gold no solace, it fell by 0.80% to $1725.00 an ounce, where it remains unchanged in directionless Asian trade.
Gold failed at its ascending trend-line resistance, located at $1741.00 an ounce overnight, its second failure in as many days. That line is at $1743.00 an ounce today, and with multiple failures above $1755.00 an ounce in May, resistance is increasingly formidable.
Assuming the global recovery rally maintains its strength in other markets, gold looks increasingly likely to return to the lower end of its recent $1695.00 to $1645.00 range. Beleaguered bullish gold traders can take some comfort in the fact that momentum remains weak in either direction. Thus, a large downside breakout is as unlikely as a large topside one now.