China released an excellent set of tier-1 data points, with Industrial Production (+7.50%), Retail Sales (+6.70%), and Fixed Asset Investment (+12.20%), blowing market expectations out of the water.
Although the data covered both January and February, the data was all the more impressive as the government had imposed quite vigorous movement restrictions over the Chinese New Year. Unsurprisingly, given the strength of the data, China left its 1-year medium-term lending facility (MLF) unchanged at 2.85% today, although after the rollover, there was a net injection of CNY 100 bn.
That hasn’t helped Chinese stock markets though, which were down sharply again today, after a rout yesterday. There were plenty of storms blowing through China right now, not least the lockdown of Shenzhen yesterday to limit Omicron's spread. Cases were still rising in China and Shanghai was also subject to tactical lockdowns within the city. Fears continued to dog stock markets, that lockdowns could spread, which would severely impact China's growth.
The tech sell-off continued unabated after the NASDAQ suffered disproportionately, with China ADRs on their knees anyway over sanctions and delisting fears if China started supporting Russia, either by sanction avoidance or military hardware sales. China’s quandary was weighing on sentiment. China has been ideologically aligned with Russia from a geopolitical perspective, but made most of its money by selling goods to the West. It will be interesting to see which talks loudest.
Concerns around further shared prosperity clampdowns, fines and property sector leverage and credit worthiness persist. I have warned previously about trying to catch a falling knife on these fronts, so I won’t repeat myself.
Although the data was positive, there did appear to be some concerns about the forward outlook from Beijing. That was most notably manifested in the recent countercyclical adjustments made to the PBOC USD/CNY fixing this week. The last three fixings (including today), have featured a much weaker than expected yuan, pushing USD/CNY up to 6.3750, and USD/CNH to 6.3925.
The long bull market on yuan seemed to be drawing to a close as China went down the tried and tested route of making exports cheaper. That will not bode well for other Asian currencies, which also face a Federal Reserve rate hike this week.
On the Ukraine-Russia front, the continuation of talks saw carnage in the commodity space as base metal prices and energy prices plunged. Platinum fell by over 15% overnight. Nickel trading is to reopen on the LME tomorrow I believe, and it will be interesting to see if the mother of all short squeezes abates there as well.
Markets were desperately in search of good news and were pricing in that the talks will lead to a negotiated settlement. I really hope that was correct on a personal basis, but I have seen zero concrete progress from them, and Vladimir Putin’s handshake or signature on a document doesn’t inspire my confidence, and I defiantly would accept a cup of tea. If this is a false dawn, the reversal higher in commodity prices is going to be ugly, very ugly.
In the US, markets were suddenly waking up to the fact that the FOMC will hike this week, and likely signal a long series of hikes going forwards. US yields across the curve shifted higher in unison, notably in the long-dated tenors. The process was aided by a reduction in haven flows as markets priced in peak-Ukraine. Those reduced flows into US bonds likely reduced US dollar demand as well, explaining why it held mostly steady even as yields rose.
Stock markets saw a distinct rotation from value to growth, or to cut through the financial market-speak, they sold massively over-priced technology companies and bought companies that make tangible stuff people can touch. This was another reason why China markets, notably Hong Kong, were having a very bad day.
How far this rotation will go, or how far stocks still have to go, will be very dependent on how hawkish the FOMC is on Thursday (Asian time). But behind the FOMC and Ukraine hopes, other forces will remain at work, notably the stagflationary wave caused by the conflict.
The Bank of Japan and Japan Government officials were clearly saying they have no intention of changing loose monetary policy and were looking at a Ukraine-derived stimulus package. You can be sure that much of Asia will choose the same path, tolerating inflation to keep growth at least unchanged.
The sharp divergence in monetary paths across the world signaled Asian currency weakness ahead, especially if China has called time on the yuan rally. An environment of price input shocks and declining growth won’t be good for equities either, growth or value.
Asia stock markets fall
Asian stock markets were a sea of red today as higher yields ahead of the FOMC pushed US markets into the red. The S&P 500 fell by 0.76%, the NASDAQ slumped by 2.07%, while the Dow Jones finished unchanged. US futures saw a modest rebound, NASDAQ futures rising 0.50%, but that did not translate into material support in Asian markets.
The only exceptions today were Japan, where the government and BOJ talked stimulus and easy monetary policy, which lifted the Nikkei 225 by a paltry 0.35%. Singapore also rose by 0.65%, potentially catching some haven flows and also coat-tailing the growth-centric Dow Jones’ robust performance overnight.
Asian markets seemed more fixated suddenly on China economic nerves, despite the strong data today, and the pre-FOMC fright shown by US markets overnight. Mainland China’s Shanghai Composite slumped 2.20%, with the CSI 300 fell 1.75%. Hong Kong plummeted for the second day in a row, down by 2.85%.
In regional markets, the KOSPI had fallen 0.75% while Taipei slumped 1.85% as Foxconn (TW:2354) suspended operations in Shenzhen. Kuala Lumpur was 0.45% lower, and Jakarta down just 0.25% with Indonesia likely to be the stagflation winner in Asia initially. Manilla was 0.85% lower while Australia’s ASX 200 fell 0.75%, and the All Ordinaries by 0.90%.
European markets rallied strongly overnight on Ukraine-Russia negotiations, a rally that has lasted a couple of sessions. There was still room for more, and Europe will be boosted by the sharp falls in natural gas and oil prices, even if they can’t get it from anywhere except Russia. If the week goes on with no notable progress, I expect this momentum to wane, and a hawkish FOMC this week could stop the recovery rally in its tracks.
The US dollar rises versus Asia
The US dollar held steady versus most majors overnight, with reduced haven flows on Ukrainian hopes offset by rising US yields. The dollar index finished 0.04% lower at 99.09, before easing another 0.25% to 98.835 in Asia. However, versus Asian currencies, the US dollar continued to grind higher and with the USD/Japan rate differential widening overnight, USD/JPY exploded higher to 118.30. With the BOJ as dovish as ever, and concerns mounting over Japan’s rising import bill, USD/JPY should target 120.00 if this week's FOMC is as hawkish as expected.
Most of the majors were rallying today in Asia as oil has fallen 4.0%, giving renewed momentum to the peak Ukraine trade. EUR/USD rallied by 0.40% to 1.0983, and GBP/USD rose 0.35% to 1.3050. EUR/USD remained uncomfortably close to multi-year support at 1.0800, and it's bearish outlook won’t change unless it rises through 1.1200 and 1.1400. AUD/USD and NZD/USD were holding steady at 0.7190 and 0.6750, respectively, as reduced Ukraine nerves gave a temporary reprieve from the buffeting of sentiment flows.
USD/CNY rose sharply to 6.3735 this morning after yet another markedly stronger USD/CNY fix. Beijing seemed to be signaling that the Yuan rally was over as it circled back to its old playbook of a weaker currency to support growth. That will be another headwind to Asian currencies which mostly run dirty pegs to the US dollar in some form or manner like China. With the FOMC due to hike this week, rates are going nowhere in Asia and it faces rising import bills from the commodity rally, Asian currencies are set to endure prolonged weakness. It was notable that the fall in oil prices these past few sessions have produced no meaningful rally in regional currencies.
Oil prices slump in Asia
Oil prices slumped again overnight in New York and have done so again in Asia today. Growth concerns from the Ukraine-Russia stagflation wave, and FOMC hike this week, and hopes that progress will be made in Ukraine-Russia negotiations saw Brent prices fall nearly $40 over the past few sessions. It seemed like the old adage that the best cure for high prices, was high prices, was as strong as ever. The procession of analysts all calling for $200.00 oil last week was also a leading reverse indicator of a medium-term top.
Overnight, Brent crude slumped by 5.70% to $106.00 a barrel, tumbling another 3.75% to $102.00 in Asian trading. WTI tumbled by 6.30% to $102.30 a barrel overnight, falling another 3.90% to $98.25 in Asia this morning. Brent crude actually tested $100.00 a barrel this morning before bouncing sharply. A fall through $100.00 will likely see another wave of stop-loss and algo selling sweep the market, potentially extending losses to $96.00. WTI has fallen through $100.00 a barrel today and also had support at $96.00 and then $92.00 a barrel.
Like trying to pick the bottom in China tech stocks these past few months, picking the top in oil is a fraught business. And banking on Russia and Ukraine reaching a peace agreement is optimism of the highest order. The technical picture for oil is now neutral, meaning it could go down OR up from these levels. Any negative developments from Eastern Europe, or a refusal by OPEC+ to pump more, or complete failure of the Iran nuclear deal, could inspire a gigantic, short squeeze. The world’s supply problems won’t go away with a Ukraine settlement. I do believe, however, that markets saw the top in oil prices last week.
Platinum leads gold lower
The shifting sands of Ukraine risk sentiment saw platinum plunge by nearly 16.0% overnight, and those same forces undermined gold’s haven appeal once again, sending it 1.90% lower to $1950.00 an ounce in New York. In Asia today, gold continued to retreat as sentiment found its feet, gold falling 1.0% to $1931.50 an ounce.
Gold has taken out support at $1960.00 an ounce, which now became resistance, and could target support at $1920.00 later in the day. That opened a deeper correction targeting $1880.00. Adding to gold’s woes, the market seemed to be belatedly waking up to the implications of a hawkish FOMC meeting this week, and the rise in US yields will not help gold’s cause. Regaining $2000.00 in the near-term, likely meant the Eastern European situation deteriorating markedly.
Silver broke support at $25.0000 an ounce. Although it remained well clear of its multi-month breakout at $24.0000 an ounce, I will move to the side-lines on this trade, awaiting the FOMC and the Ukraine-Russia negotiating teams.