Hong Kong headlines and US Presidential Twitter tantrums appear to be enough uncertainty for equity markets to book some profits and take some cash off the table ahead of the weekend. We do note though, that some divergence in other markets has appeared. Currency markets continue to rotate out of US Dollar haven positioning quietly, while geopolitical tensions appear to be lifting oil slightly, which shrugged off an increase in official crude inventories. All of the above lent some support to gold as well, which managed to eke out an unimpressive dead cat bounce overnight.
US GDP for Q1 came in worse than expected at -5.0%, and Initial Jobless Claims saw another 2.1 million Americans joining the jobless queue. But in a peak-virus world, with markets intently focused on the future global recovery, these were mostly ignored. Wall Street choose instead to note that Continuing Jobless Claims fell unexpectedly to a mere 21.05 million. So that’s all OK then.
Hong Kong nervousness and its possible fallout will be Asia’s focus today, with the US special trading status withdrawn and the US President due to hold a press conference on the issue today. The US, Canada, United Kingdom and Australia issued a joint statement expressing their disagreement with China’s action overnight, further muddying the political waters. Notably, though, the European Union was absent from the statement, although, in fairness, it would probably have taken the block 6-months of debates to decide whether to put their name on it.
Data from the Asian region has been mixed this morning, with Japan and South Korean Industrial Production disappointing. Japan Retail Sales slumped to -13.7-% in April, likely the result of belated domestic lockdowns. South Korea’s, though, recovered from last month, down only 2.20%, reflecting being further down the COVID-19 recovery road.
German Retail Sales are expected to have slumped by 12.0% in April. Still, an outperformance may give more late-week tailwinds to the recent Euro outperformance, as the EU basks in the afterglow of recovery package progress, glacial that it may be. US data will be focused on US personal income and spending releases. Personal Spending is expected to have slumped by 12.60% in April, and a less bad than expected number could give markets an end of week boost.
Flying under the radar, China releases official Manufacturing and Non-Manufacturing PMI’s on Sunday. Manufacturing PMI is expected to remain slightly expansionary, at 51.0, while Non-Manufacturing PMI is expected to print around 52.0. A big miss in either direction will likely dictate Asia’s initial direction on Monday, assuming all is quiet on the Hong Kong front and the Presidential social media account…
Asian equities track Wall Street lower.
With little new developments on the Hong Kong front this morning, Asian equities have been content to follow Wall Street and ease across the region. The falls, though, are modest, reflecting some trimming of long positioning ahead of the weekend, rather than a turn in structural sentiment.
The Nikkei 225 is lower by 0.20% with the Korean KOSPI down 0.05%. Mainland China exchanges are unchanged with the Hang Seng lower by only 0.50%. Singapore’s SPDR Straits Times (SI:STTF) has eased by 0.40%.
After a joint statement on Hong Kong that included Australia overnight, the trade-sensitive equity markets there are the day’s underperformers. Worries about China retaliation on trade have seen the ASX 200 sink 1.55%, and the All Ordinaries fall by 1.10%. With its high beta to China, Australian markets were always more vulnerable than most to US-China geopolitics. But in the context of the scale of the recent rallies in Australia, today’s fall reflects a long overdue profit-taking correction.
Equities are likely to continue trading from the weaker side as investors use political worries as an excuse to book profits and lighten exposures ahead of the weekend.
Currency markets mostly ignore Hong Kong ructions.
Currency markets tend to be a less emotional beast than equity markets, and that was apparent overnight. Having been slow to the peak-virus trade initially, the rotation out of haven US Dollars paused overnight but did not reverse. Notably, the EUR/USD continued to grind higher, boosted by fiscal stimulus hopes, rising 0.60% to 1.1075 overnight. The single currency has now well and truly cleared immediate technical resistance, with its next target at 1.1150.
Another outperformer though, the Australian Dollar, appears to be pausing for breath after an impressive two-week rally. The US-China concerns appear to have been enough for the AUD/USD to stall just below its 200.0-day moving average at 0.6655 this morning. AUD/USD has failed to close above it over the past three days, and that implies a correction lower could be imminent before it rises again on the peak-virus tailwind. Much will depend on the outcome of the Trump press conference today, and any response from China.
The PBOC again allowed the CNY to weaken at this morning’s fix. The USD/CNY fixed higher at 7.1316, CNY’s lowest level versus the greenback since February 2008. USD/CNY, and it’s offshore equivalent, the USD/CNH, are now in a well-established uptrend, that implies more weakness for the CNY lies ahead. However, a move above 7.2000 is likely to provoke protests of deliberately weakening their currency from Washington DC, further muddying the waters of their international relations.
Geopolitical tensions lend support to oil as rising inventories ignored.
Somewhat surprisingly, both Brent crude and WTI traced out modest gains overnight, despite trade concerns and an unexpected rise in official US crude inventories. In other times, those factors would have seen oil prices heading for the exit door. The fact that they didn’t, highlights perhaps, that production cuts and economic recoveries are now providing structural support to oil prices. Overnight, Brent crude rose 1.90% to $35.35 a barrel, and WTI rose 2.70% to $ 33.30 a barrel.
Profit-taking is again in evidence in Asia today, both contracts easing this morning as traders book profits, and reduce risk profiles ahead of the weekend. Brent crude has fallen 30 cents to $35.05 a barrel, and WTI has fallen by 25 cents to $33.05 a barrel.
Overall, oils price action this week appears to be consolidative after strong rallies since mid-April. Only a move down through $33.00 a barrel for Brent crude, and a drop through $30.00 a barrel for WTI, would suggest that deeper corrections are on the cards.
Political tensions generate a dead cat bounce for gold.
Political tensions over Hong Kong between the US and China saw gold stage a modest recovery overnight. Gold rose 0.55% to $1718.00 an ounce and has climbed another dollar to $1719.00 an ounce in quiet Asian trading.
Having traded as low as $1694.00 an ounce this week as recent long positioning capitulated, gold has staged a $25 comeback over the past two days. Gold now faces technical resistance from a descending line at $1722.00 an ounce. Only a daily close above this region will suggest that further gains are possible to $1740.00 an ounce.
Gold lacks momentum; however, despite the external environment being supportive. A failure to regain $1722.00 today would imply that a retest of the weeks low at $1694.00 an ounce is in play early next week.