China disappointed markets that were looking for more comprehensive stimulus measures as it left both its one and five-year Loan Prime Rates (LPR) unchanged. Although the PBOC did announce some targeted support measures for homeowners and small businesses and set a much weaker CNY fix versus the US dollar today, equities in China have bucked the trend elsewhere, heading directly south.
China continues to stay wedded to deleveraging parts of the economy while attempting to add stimulus in a targeted sector manner. However, the Shanghai lockdown and fears its COVID-zero policy will crimp growth this year continue to weigh on markets that clearly want more of the usual cast-of-thousands stimulus measures from years past. The IMF overnight downgraded world growth citing both the Ukraine war and the China COVID-zero policy.
A weaker CNY fix today might hint at China’s attempt to offset the slowdown, weakening the yuan to boost exports. If supply chains remain constrained though, this may well be for naught. As US 10-year and 30-year yields approach 3.0%, eroding a 40-year downtrend line, it is notable that both USD/CNY and USD/CNH smashed through one-year resistance lines overnight. That points to more currency weakness ahead, something that will undoubtedly spill over to regional Asian currencies.
Another hint that Asia is putting growth ahead of inflation, and thus likely currency weakness, came from Indonesia yesterday. Bank Indonesia left policy rates unchanged and was surprisingly dovish in the post-meeting press conference. That is something of a U-turn, especially as Indonesia’s commodity complex is partially shielding it from the ravages of the global inflation wave. With core and headline inflation numbers still creeping up, and growth slowing, Southeast Asia’s biggest economy is likely showing the path for other regional central banks.
Nowhere is the US/Asia interest rate differential showing up more than in Japan. Japan trade data today showed exports slowing, but a blowout in imports thanks to soaring energy prices. That in itself is a yen negative as importers pay for energy in US dollars. The Bank of Japan has been forced to intervene once again in the JGB market today, capping 10-year yields at 0.25%. That has given temporary solace to the yen, which has rallied versus the US dollar in Asia today. However, no amount of BOJ/MOF-speak, or yield curve intervention can overcome the stark differences in monetary policy trajectory versus the Anglo-Saxon world. They will not be alone in Asia this year and Asian currency weakness will be one of the themes of 2022.
Some temporary relief came from Fed speakers overnight, who were markedly less hawkish than James Bullard on Friday, sticking to the 2.50% terminal Fed Funds story. That was an excuse for an increasingly desperate stock market to buy back equities even as US yields and the US dollar moved higher. Thankfully, US earnings season has been relatively trouble-free, Netflix (NASDAQ:NFLX) aside. There's another challenge later today though as Tesla (NASDAQ:TSLA) releases results. Netflix fell by more than 20% overnight on soft results and outlooks, continuing a trend that started with Facebook (NASDAQ:FB) of investors punishing technology-related darlings who don’t keep the perpetual mega growth story going. Tesla likely has a bit more leeway as an “energy-transition” stock, but weak results will likely stop any broader equity recovery in its tracks.
The data calendar is now quiet in Asia with the China LPRs out of the way. It is a similar look across Europe as well. In the US, Existing Home Sales have downside risk as 30-year mortgages hit multi-decade highs. The Fed releases its Beige Book, but more attention is likely to be on the bid-to-cover ratio of the 20-year US bond auction later today. A weak bid cover likely sees US yields move higher once again. We have Evans and Daly from the Federal Reserve speaking, introducing some more hawkish upside risk again.
The Russian invasion of Ukraine has fallen off the front pages with financial markets, but that complacency is dangerous. Russia’s new offensive has started and if it doesn’t go well, we can’t discount Russia lashing out in economic petulance. Certainly, the situation in Ukraine, now that part two of the war is unfolding, will kneecap any sustained recovery by European equities and add another headwind to a very wobbly looking euro. Gold may have fallen overnight, along with oil, but that is just the fast money being given the usual gold whipsaw. Gold’s price action of late, rising with both US yields and the US dollar, is telling us that serious and persistent risks abound in the world.
Asian equities, ex-China, follow New York higher
The perpetually bullish FOMO gnomes of Wall Street sent US equities sharply higher overnight as the day’s roster of Fed speakers refused to be as bullish as James Bullard. That allowed the fast money to pile back into a hope versus reality rally as equity markets clung to the belief that the Fed has it right. Although, from my point of view, the Fed getting it right over the past year is very much a fat-tail event. Although Netflix’s share price was cremated, the S&P 500 jumped 1.61% higher, the NASDAQ leapt 2.15% higher, and the Dow Jones added 1.51%. Backing up the fast money argument, US index futures have quickly turned down in Asia. S&P 500 futures falling 0.40%, NASDAQ futures retreating by 0.80%, and Dow futures edging 0.10% lower.
The impressive overnight performance of Wall Street had been enough to lift Asian stock markets today, ignoring, for now, the fall of the US futures in Asian trading. Japan’s Nikkei 225 is 0.60% lower as the BOJ intervenes to cap JGB yields. However, South Korea's KOSPI has fallen by 0.20% as China markets head south, while Taipei has managed a 0.30% gain.
China markets were disappointed as the PBOC left the LPRs unchanged and tinkered with support measures on the sidelines. That has sent the Shanghai Composite 0.20% lower today, with the CSI 300 losing 0.45%. Hong Kong has preferred to track the overnight NASDAQ rally, gaining 0.80% in its usual exuberant retail-dominated trading. I am not ruling out some “national team” “smoothing” this afternoon if mainland equities accelerate losses.
In regional markets, Singapore has risen by 0.75%, Jakarta by 0.35%, and Kuala Lumpur by 0.80% as markets reopen there. Manila is 0.75% higher, with Bangkok rising by 0.55%. Australian and regional Asian markets have had initial gains tempered by China and a retreat by US futures. Nevertheless, the ASX 200 and All Ordinaries have booked 0.35% gains today.
European markets fell overnight as the new Russian offensive in Ukraine commenced. With the overnight feel-good factor waning in Asian trading, the war on Europe’s eastern border will dominate trading. Sustained gains by European equities will be difficult in the coming week. That reality may also permeate other equity markets as the week goes on.
US dollar eases in Asia
The Japanese yen is once again driving the Dollar Index direction today. Having risen by 0.18% to resistance at 101.00 overnight, it has retreated by 0.28% to 100.71 this morning. The losses can be attributed to a yen rally as the BOJ intervenes to cap JGB yields and more currency watching-speak comes from Tokyo. The yen rally has had a spillover effect into the other major currencies, which has pushed the US dollar lower. The honeymoon is likely to be short, however. Support remains between 99.40 and 99.55, with initial resistance still at 101.00. The relative strength index (RSI) remains elevated, but not extreme now’ lessening the likelihood of a major downward correction.
Both the euro and sterling held steady overnight, despite probing the downside. EUR/USD fell to 1.0760 before rising to 1.0785. In Asia, EUR/USD and GBP/USD have piggybacked the rally of the Japanese yen, rising 0.30% to 1.820 and 1.3040. EUR/USD remains uncomfortably close to multi-year support at 1.0800, and GBP/USD is clinging to support at 1.3000. Material Russian military gains in Ukraine will set off alarm bells, and drive a sell-off once again and a weekly close below 1.0800 by EUR/USD will be an ominous technical development. It is hard to see how the single currency can ignore rising US yields versus perpetually dovish ECB for long either.
The Japanese yen selloff accelerated overnight, USD/JPY rising 1.50% to 128.90 as US yields rose once again, threatening a multi-decade breakout higher. That has pushed 10-year JGB yields to near the top of the BOJ’s 0.25% range, and it has intervened in the JGB market today. That, some currency rhetoric from Tokyo, and extended short-term long USD/JPY positioning, has allowed USD/JPY to fall 0.38% to 128.40 today. The RSI remains very overbought, and a deeper correction is possible to chop out the fast money. Its impact will be temporary though as the yen wilts in the face of a widening US/Japan rate differential. A weaker yuan also adds a headwind. Support remains at 127.00 and 126.00, with resistance at 129.50 and 130.00.
Both the Australian and New Zealand dollars are benefiting from the yen’s strength today as well somewhat counterintuitively, likely driven by the spillover rallies in EUR. GBP and CAD. Like those, the rally is going to be a temporary one. AUD/USD is holding above critical support at 0.7320, trading at 0.7415 today. NZD/USD has risen to 0.6760, but its technical picture remains grim unless it recaptures 0.6850.
The onshore and offshore USD/CNY and USD/CNH exploded through one-year resistance lines overnight, suggesting a new wave of yuan weakness is beginning. That was reinforced by a very strong USD/CNY PBOC fixing today at 6.3996. (6.3853 exp) It could well be that China will now use US dollar strength to weaken the yuan as a backdoor stimulus measure. Other headwinds remain a slowing economy compounded by COVID-zero policy risks leaving the government increasingly less wiggle room on all-out stimulus. USD/CNY should now target the 6.5000 region in the weeks ahead.
USD/Asia rose with USD/CNY overnight, led by losses from the SGD, KRW and MYR, the latter compounded by the oil price retreat overnight. Rising US interest rates already spelt challenges to Asian FX. If China is now embarking on a yuan weakening path in a rear-guard action to support growth, Asian regional currencies now face even more challenges as their monetary policies diverge from the United States. More weakness lies ahead.
IMF China forecast slams oil prices
Libya’s production and export issues have been quickly forgotten as the IMF belatedly lowered its forecast for China's GDP this year, citing COVID-zero challenges amongst others. Lower China growth equals lower oil consumption in the simplistic minds of day traders, and oil prices duly slumped. Brent crude fell by 4.60% to $107.50, and WTI slumped 5.0% to 102.60 a barrel.
In Asia, the material overnight fall in prices has proved too hard to resist for local buyers who have piled in to buy the dip. Brent crude has risen 0.65% to $108.20, and WTI has risen 0.80% to $103.40 a barrel. Both contracts continue to suffer from illiquidity in the futures markets as high volatility and raising margins impact volumes, magnifying intraday ranges.
With so much volatility in intraday oil prices, and extreme reactions to headline risks, technical levels have become rather irrelevant. Overall, therefore, I continue to expect that Brent will remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. Brent crude has further support at $96.00, and WTI at $93.00 a barrel. The start of the second Russian offensive in Ukraine is set to lift price volatility even more.
Gold’s whipsaws fast money long positions
Gold prices slumped by 1.50% to $1950.00 an ounce overnight, easing another 0.30% to $1944.00 in Asian trading. The price fall has been blamed on rising US yields and US dollars overnight, but this position is irrational given that gold has happily rallied in similar conditions over the past week.
A much simpler and far more likely reason is that the fast money traders who bought gold for the test of $2000.00 have been squeezed out of their positions. Gold fell short of a material test of $2000.00 an ounce earlier this week, with gold peaking at $1998.50 an ounce. The fall through $1970.00 triggered stop-loss selling of those positions, pushing it lower in one-way price action to $1950.00.
Gold still looks vulnerable and failure of $1940.00 could see more speculative long positions getting culled and gold falling to $1915.00 an ounce. However, gold’s price action of the past few weeks has been quietly signaling those risks, be they inflation or geopolitical, have been increasing. Nothing I can see has changed that fact, and thus, the correction lower could be an opportunity to load up again at much better levels.
Gold still has resistance at $2000.00 an ounce, and I believe option-related selling there will be a strong initial barrier. However, if $2000.00 is cleared, gold could quickly gap higher to $2020.00 an ounce quickly, and potentially, retest of $2080.00 an ounce. Failure of $1915.00 will signal a retest of important support at $1880.00 and possibly $1800.00 an ounce. The question is whether the overnight fall is a short-term correction, or something larger.