Equities rally in Asia
Equities were rallying across Asia today after a strong overnight performance by Wall Street and a weaker US dollar in Asia, relieving some Fed-taper pressures. With only Bank Indonesia’s policy-setting on the Asia calendar today, markets were being left to trade on sentiment, which seemed universally positive this morning.
Overnight, US markets shrugged off weaker US Industrial Production data and a flattening US yield curve, indicating shorter-term inflationary pressures will continue rising. The fact that the flattening was occurring at the shorter end i.e., sub-10-years, and markets were not seeing the 10 to 30-tenors rising, has markets assuming that the Fed has the longer-term inflation outlook under control. Famous last words if any. Nevertheless, it's as good a reason to be positive on stocks as any now, while we wait for further Q3 US earning’s releases.
Wall Street closed in the green with the S&P 500 rising by 0.35%, the NASDAQ jumping by 0.85%, and the Dow Jones climbing by 0.10% with these more muted inflation expectations playing more powerfully with rate-sensitive technology stocks. In Asia, futures on all three were unchanged but that has not stopped Asia powering higher, ignoring yet another North Korea missile test.
The Nikkei 225 was up 0.70% with the South Korean KOSPI rising by 0.65%. In Mainland China, the Shanghai Composite was 0.70% higher, with the more tech-centric CSI 300 rallying by 1.0%. That also saw the Hang Seng 1.10% higher helped by Alibaba's (HK:9988) (NYSE:BABA) cloud computing chip announcements.
Regionally, Singapore was 0.55% higher while Kuala Lumpur was closed today. Taipei rallied 1.10% higher while Jakarta and Bangkok eased by 0.50%, possibly due to the currency appreciation or a rotation back into the North Asia heavyweights. Australian markets remained in the green, although rising expectations of a change to RBA guidance seemed to be limiting gains. The All Ordinaries rose by 0.25%, while the ASX 200 recorded a 0.15% gain.
After a tough day yesterday, European stock markets should open higher this afternoon following the US lead. It will be interesting to see if the change in British and European rate expectations starts to weigh on equity valuations there eventually. It certainly is untrodden ground, especially for Europe. The intra-day direction in the US will be driven by Fed speakers and US earnings releases, with the data calendar second-tier today.
The US Dollar falls in Asia
The US dollar was in retreat in Asia versus both developed market and regional currencies. That followed a sideways overnight session where the dollar index closed almost unchanged at 93.95. The index headed south today, tumbling by 0.28% to 94.68, taking out support at 93.70. It could now target its key pivot point at 93.50.
News was thin on the ground to explain the US dollar’s broad fall in Asia today. But a series of reports lifting and bringing forward hiking expectations in the UK, Europe, Australia, and New Zealand could have been taking the wind out of the Fed taper trade. The dollar fall appeared to have sparked some technical breakouts as well which were probably attracting algorithmic fast money.
EUR/USD jumped through resistance at 1.1625 to rise 0.32% to 1.1650 and could extend gains to 1.1700. GBP/USD was -/30% higher at 1.3765 and was testing resistance at these levels. A rise through 1,3780 would signal a retest of 1.3900 in the coming days. Notably, USD/JPY remained above 114.00 at 114.10 today, almost unchanged. The US yield curve flattened overnight, but that was led by a rise in short-dated tenors. USD/JPY remained entirely a US/Japan rate differential play although a fall through 114.00 could see a quick spike lower to 113.50.
As risk sentiment improved in Asia today, AUD/USD and NZD/USD leapt 0.55% higher—0 0.7450 and 0.7125. A lot of talk was circulating about changed RBA guidance to the tighter policy settings and a potential 0.50% hike by the RBNZ in November. There was also no doubt that sectors of both economies, notably New Zealand, were showing signs of serious overheating. AUD/USD could gain to 0.7600 this week, and NZD/USD to 0.7200 if the hawkish sentiment remains.
In Asia, USD/CNY slumped by 0.30% to 6.4100, the highest level for the yuan against the US dollar since June. The PBOC was showing no signal in its daily fixings that it wanted to halt yuan strength and given the probable size of its imported energy bill in the coming months, I don’t blame them.
The CNY strength, part of a general US sell-off today, saw regional currencies also rallying, notably the KRW, THB, INR, PHP, and SGD, i.e., the local currencies most under the hammer over last week. By contrast, the resource-facing IDR and MYR were almost unchanged although Malaysia had a national holiday today, muting trading, and Indonesia had a central bank policy decision this afternoon. The price action was suggestive that much of the gains were fast-money flows that will run for the exit at the first sign of trouble, China excepted.
As I mentioned yesterday, we were starting to see a pattern emerging in the developed market space of currency outperformance from those on a nearer-term hiking path. Great Britain, Europe, Australia, and New Zealand longer-dated yields have firmed this week, giving markets a temporary respite from US dollar strength.
The key remains the Fed taper and we have five Fed speakers this evening and hopefully, even more, taper clarity. Ever rising energy prices support the US dollar as most international energy is priced and transacted in US dollars. I am still expecting prolonged US dollar strength in Q4, although this week may see more sideways action as speculation long US dollar open interest is culled.
Coal lifts oil in Asia
Hong Kong coal futures leapt higher once again this morning at the open, before, once again, quickly retreating to almost unchanged. Unlike yesterday, oil refused to chase them higher with prices in Asia for Brent crude and WTI almost unchanged from the New York close. A higher US dollar and intra-day retreat by coal and natural gas prices saw Asia traders move back to their preferred buy-the-dips strategy, rather than chasing prices higher.
Overnight oil prices continued to grind higher, with Brent crude reaching $86.00 a barrel. However, oil could not sustain its rally and both contracts fell to close lower on the day. Brent crude finished 0.90% lower at $84.10, and WTI finished 0.20% lower at $82.30 a barrel.
Oil’s rally ran out of steam for a few reasons. European natural gas prices eased, the US EIA forecast higher US shale production, notably from the Permian Basin. Finally, the Commodity Weather Group forecast warmer than expected weather for the rest of October for the US.
The latter was significant, as it induced some temporary bearish price action and hinted that a mild Northern Hemisphere winter would reduce a major pain point in the higher energy price mix. That is a big “if” to base policy on though. Reuters was reporting that OPEC+ compliance was running at 115%. That implied that even if OPEC+ was to blink and raise production targets, some members will struggle to pump more crude anyway.
Circling back to last week’s warnings about the overbought technical picture for oil, I note that the relative strength indexes (RSIs) on both contracts remained in very overbought territory. Given the weight of speculative longs out there, I still do not discount a sharp $5+ price correction, but I expect physical buyers to be lining up to buy a material dip in prices, and any dip will be short lived.
Brent crude has resistance at $86.00 and the October 2019 high at $86.80, with support at $84.00 and 82.00 a barrel. WTI has resistance at the overnight highs around $84.00 and 86.00 a barrel. Only a fall through $79.50 a barrel changes the bullish outlook.
Gold rises in Asia on weaker US dollar
Gold traded sideways overnight, as the US dollar went nowhere, with higher yields at the shorter end of the US curve weighing on gold prices. Gold finished the overnight session just 0.15% lower at $1765.00 an ounce. General US dollar weakness in Asia saw gold manage to stage a modest rally, rising 0.53% to $1774.20 an ounce. If nothing else, it showed that gold continued to trade inversely to the nuances of the US dollar and US yields. Higher dollar/yields equal lower gold and vice versa.
Firmer US yields will be a headwind for gold rallies, especially if it leads to US dollar strength. Gold is a wonderful head to very high inflation, but it was proving time and time again, to be a poor hedge to rising inflation. Gold has nearby support at $1760.00 followed by $1745.00 with failure signaling a retest of $1720.00 an ounce. Gold has resistance at $1780.00 an ounce, followed by the 100 and 200-day moving averages (DMAs), today at $1795.00 and $1795.25, formidable resistance.
In the bigger picture, only a rise through $1835.00 an ounce, would trigger a multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive. The risks remain firmly to the downside.