Despite US bond markets being closed for Columbus Day, inflation nerves continued to rattle market nerves driven by energy prices, which surged once again overnight. Equity markets retreated and the US dollar resumed its climb as inflation looks less transitory and more embedded by the day.
Goldman Sachs downgraded its US growth forecasts overnight, and the quarterly earnings season, which started this week, has equity markets on edge over whether profit forecasts will be tempered for 2022 given the rich valuations prevalent in stocks everywhere. Add in the creeping—but relentless—implications of the Fed taper and it is no surprise that equity markets remain on edge.
Emerging market currencies, especially those that are huge energy importers, remained vulnerable. The Turkish lira took a dive last night, USD/TRY rising through 9.0000. The added complications of Erdogan-omics mean USD/TRY could well start with a 10.0000 handle soon. USD/Asia is not immune either as regional currencies retreated overnight. The reality of the end of the Fed QE program has yet to be priced into the region, complicated by surging energy prices that are priced and transacted in US dollars.
Notably, the street’s favorite yield differential play, USD/JPY, rallied strongly again overnight, powering to 113.25 as of this morning in Asia. The disconnecting of the trajectory of US and Asian monetary policy will be one of the thematic trades of Q4. That won’t be just an Asia issue though. From a currency point of view, if you’re not tapering, you’re getting trampled.
The Bank of Korea blinked and held rates unchanged at 0.70% this morning. To their credit, they at least had started hiking in August and have the excuse of waiting to see that move’s effect before going again. The MAS in Singapore will likely remain unchanged on Thursday as well.
Elsewhere in Asia, such as India, Thailand, the Philippines and Malaysia, central banks will have to either start selling foreign currency reserves or let their currencies tank. The latter will cause an imported inflation spike and make energy imports more expensive. Indonesia will probably be spared the blushes thanks to its still high (from a global perspective) yields, and booming commodity exports.
Still, the news isn’t all bad. ASEAN reopening of international borders is accelerating with a slew of announcements over the past few days. You’ll need to be vaccinated of course, but it is clear that reopening tourism in the region has become an urgent priority ahead of the Northern hemisphere winter. Given that Europe faces its own challenges regarding energy and heating this winter, it is an inspired move. Assuming that it doesn’t create a new wave of virus infections and gets rolled back, that could go some way to easing the impact of what will inevitably be a taper-inflated US dollar in Q4.
In other data, Australia’s NAB Business Confidence rebounded to 13 for September on the back of reopening expectations and booming commodity prices. The employment data later this week will have more impact, however. The Philippines trade balance held steady at $-3.577 billion with imports still surging by nearly 31.0% YoY as virus restrictions ease. That is probably a cause for unease for the BSP, which has interest rates set well below inflation like India. Capping the rise of USD/PHP at 51.000 is going to get a lot more challenging going forward.
Malaysian Industrial Production should show a restriction-easing rebound today while UK Employment and Average Earnings will be closely watched with markets in hike alert after some hawkish statements from Bank of England officials. Assuming that Britain can negotiate its impending energy and lorry driver driven winter of discontent, sterling may be one of a select group of currencies that won’t suffer a US taper-trample in Q4.
India’s Inflation Rate and Industrial Production will take on more poignancy this evening, especially if inflation doesn’t fall back to 4.50% as hoped and remains above 5.0%. That will increase the noise for an RBI hike if only to keep the rupee above water. With reports of energy blackouts in Northern India, and low coal stocks, India’s energy import bill is likely to skyrocket, and a weaker currency is the last thing it needs.
US markets return fully to work today, and we have three Fed officials speaking this evening. Watch out for more tapering noise. Most importantly, watch for the JOLTS Job Openings which are expected to remain at 10.9 million open positions. It would take a massive slump to change the taper outlook in my opinion, and 11 million job openings is inconsistent with a US Non-Farm Payrolls at 194,000 jobs added. Something must give; it won’t be immigration, so perhaps it will be higher wages. Transitory inflation anyone?
Oil-induced equity slumps spreads to Asia
WTI's rise to 7-year highs spooked US equity markets overnight, with nerves increasing that the Q3 earnings season will contain tempered expectations for 2022. With equity valuations so pimped up, thanks to the world’s central banks, any changed to the assumed post-pandemic boom growth story could have an outsized negative effect.
Of course, even after the Fed taper, the interest rate will still be near zero, as they will be in most of the developed world. That is underlyingly supportive of equities, but markets are FOMO herd-like, I mean “forward-looking.” A wobbly earnings season could have the street looking for the exit door. If US bond yields resume their rise this week, that noise will increase.
Overnight, the S&P 500 retreated by 0.69%, with the NASDAQ losing 0.64% and the Dow Jones falling by 0.74%. Notably, the futures on all three have continued south in Asia, all three indexes slumping by around 0.50%. Although volumes were lighter overnight due to the partial US holiday, there does seem to be less buy-the-dip mania than in times past. Everything likely hinges on the open of the US bond market today.
Asia rose yesterday on an individual series of positive news at a national level. That has evaporated today after the surge in oil prices overnight. The Nikkei 225 has fallen by 1.0% with the KOSPI slumping by 1.45%. Mainland China’s Shanghai Composite has retreated by 1.0% as well with the CSI 300 falling by 0.45% with the Hang Seng tumbling by 1.20%.
In regional markets, Singapore was down by 0.55% with Taipei retreating by 1.15%. The energy and commodity price squeeze left Indonesia and Malaysia as bright spots in Asia today. Jakarta was 0.60% higher, while Kuala Lumpur climbed 0.45%. An aggressive reopening announced yesterday by Thailand sent the SET 50 0.75% higher today. With their high beta to US markets, Australian markets headed south in sympathy today. The ASX 200 and All Ordinaries falling by 0.45%.
European markets are unlikely to take solace from the performance of Asia today, especially as Europe and the UK have a particularly soft underbelly when it comes to energy prices. Continental markets are likely to open lower once again. US markets have the JOLTS and three Fed speakers to negotiate, but most importantly, any recovery will be dependent on US bond yields not rising as they return to work today.
The US dollar rally resumes, boosted by energy
New York spent the overnight session in risk aversion mode, and you can take your pick from a menu of reasons why. The Fed taper and higher US bond yields, legislative fixture congestion, and the debt ceiling now that the Senate is in recess, fears that US and global growth are slowing, the list goes on. The fact that energy prices are surging, and that internationally, most is priced and transacted in US dollars seems to have been overlooked, but logically, higher energy prices mean more US dollars need to be bought.
Uncertainty and the underlying current that the Fed backstop is drawing to a close saw the US dollar rise overnight, the dollar index rose 0.27% to 94.36 where it remained in Asia. The index has well-denoted resistance between 94.45 and 94.50, just above, which has capped rallies over the past 10 days. A daily close above 94.50 will signal the next leg of the US dollar rally is in play. Only a fall through 93.50 changes the bullish outlook temporarily.
The EUR/USD recovery was capped at 1.1600 and the single currency eased back to 1.1555 in Asia. A combination of high energy prices and a rising yield differential will crimp the euro from here and a fall trough 1.1500 signals the next stage of its retreat. Likewise, sterling failed ahead of 1.3650 and had fallen to 1.3595 in Asia. The possibility of a Bank of England hike in November appears to be priced into sterling for now and more pressing domestic issues will now drive price action. A fall through 1.3550 signals a retest of 1.3400 but a BOE hike will at least provide some support, especially versus the EUR.
The yield differential play was there for all to see in USD/JPY overnight, as was the impact of higher US dollar-priced energy on Asia. USD/JPY leapt 1.0% higher to 113.35 overnight where it remained in Asia today. USD/JPY has now risen nearly 200 points in just two days. The rally will depend on US bond yields today in New York, but a test of 114.00 appeared imminent.
Both the Australian and New Zealand dollars remained steady overnight, in no small part due to the upside breakouts in AUD/JPY and NZD/JPY. That will provide a modicum of support going forward to both Antipodeans even if the risk-sentiment atmosphere globally continues souring leading to US dollar buying.
China continued to hold the USD/CNY steady around 6.4500, with one eye on its imported energy bill. Elsewhere though, regional currencies were in retreat. USD/KRW rose 0.30% to 1199.00 today despite the BOK threatening intervention. We will hear many such statements from across the region going forward.
USD/IDR, and USD/MYR rose modestly in Asia and were regional outperformers thanks to booming energy and commodity prices. That should continue shielding them from the worst of the upcoming US dollar rampage. The baht rose by 0.45% today on the tourism reopening news, but I expect its day in the sun to be fleeting.
The Indian rupee sank again overnight, USD/INR rising of 75.40 as of this morning. India remained amongst the most vulnerable to the coal and oil squeeze, and if inflation prints above 5.0% tonight, the RBI's stagflationary policy settings will sink the currency once again.
Oil holds its Monday gains
Oil prices powered higher overnight with Brent crude nearing $85.00 and WTI $82.00 a barrel as the Asia rally continued into New York. Only a statement by a US official saying stocks could be released from the SPR capped the gains, leading to a small retreat into the close. Brent crude finished 1.33% higher at $83.65, and WTI rose 1.25% to $80.50 a barrel for the session.
In Asia prices were almost unchanged. Asia was not chasing prices higher today and part of that reason could have been because the short-term technical indicators entered overbought territory. Combined with reports of huge, long speculative positioning in the futures markets, it would not surprise me in the least, if we saw a sharp sell-off of $5 to $8 a barrel at some stage this week. As I have stated previously though, given the state of play in the physical market, a speculative long culling will be a dip to buy and is likely to be very short-lived in duration.
Brent crude has resistance at $85.00 and $87.00 a barrel, with support at $82.00 a barrel. WTI has resistance at $82.00, with support at $78.70 a barrel. Once again, watch the relative strength indexes (RSIs) this week. The higher into overbought territory they go, the deeper the short-term correction lower will be.
Gold nervously poised above support
Gold prices edged lower overnight in a dull session, finishing just 0.14% lower at $1753.50 an ounce before reversing those losses exactly to $1757.00 an ounce in listless Asian trading today. Having failed at $1780.00 an ounce on Friday, gold was ominously consolidating at the bottom of its week's range near $1750.00 an ounce.
The US dollar did not continue correcting lower as I expected, and gold can probably thank the US bond market’s closure overnight for not finishing the day much lower. Gold is now in danger of testing support and its fate is entirely in the hands of US yields today.
If US yields trade sideways this week, gold should trade in a $1740.00 to $1780.00 an ounce range with an upside bias. Critical support lies at $1720.00 an ounce, and if US yields rise, it could be tested. The $1800.00 region, with the 100 and 200-day moving averages (DMAs) on each side of it, remains a formidable barrier.