Inflation fears persisted overnight with the US dollar continuing to march higher, despite long-dated US yields falling. New York markets seemed more preoccupied with the yield curve flattening as short-dated yield firmed once again. That weighed on equities once again which were also pre-occupied with the kick-off of the US Q3 earnings season, led out of the gates by JPMorgan Chase & Co (NYSE:JPM) today.
Critical this time around will be the Q4 and 2022 outlooks by corporate heavyweights. Most especially is whether their outlooks are pared back as supply chain woes, higher inflation and funding costs, higher energy, etc., take their toll. With equities so heavily priced towards a linear post-pandemic recovery, and with the Fed looking increasingly likely to withdraw the easy money punch bowl, we can expect a lot more two-way volatility in equity markets in Q4. Indeed, Fed officials Clarida and Bostic both alluded to as much overnight.
The IMF slightly reduced their global growth forecast overnight but slashed a full percentage point of US 2021 GDP to 6.0%. It also warned central banks that they may need to move quickly to tighten monetary policy if inflation spikes, despite reiterating that it felt inflation was transitory.
The dovishly hawkish, or is that hawkishly dovish, IMF taking a leaf out of the options open playbook of many a central bank these days. One part of the world that isn’t so concerned about inflation is Europe. ECB member Villeroy yesterday expressing concern at the short-term inflationary pressures but stating the ECB risks falling short of its 2023 inflation target, which is 2.0%. His comments kept on the pressure on the European yen, I mean the euro, overnight.
The US JOLTS Job Openings for August slumped to 10.439 million overnight but had little impact on markets as data showed a record 4.3 million Americans quit their jobs in August, presumably because they could get more money and better conditions elsewhere. Once again, I will say that a US Non-Farm Payroll number of 194,000, is inconsistent with a JOLTS of 10.4 million. Something has to give. Either a lot of Americans are suddenly going to go back to work, or wage-price inflation is going up.
In Asia today, New Zealand and Australian Consumer Confidence remained subdued thanks to their respective COVID-19 situations. South Korean Unemployment ticked slightly higher to 3.0%, while the Reuters Japan Tankan Index for October eased to 14% and Machinery Orders MoM for August slumped by 2.40%. With markets focused on the start of the Q# US earnings season, reaction has been muted, and in Australia’s case, tomorrow’s employment data carries a much higher weight in investors’ minds.
Today’s data highlight in Asia is the China September trade data at 1100 SGT. Exports and Imports are expected to hold just above 20% YoY. Both numbers needed to perform though, or else the China slowdown gremlins would win the day, and that was likely to weigh further on China equities this morning.
Conversely, steady to higher import and export numbers will soothe China nerves, against a background of energy woes and supply chain challenges and the never-ending series of government clampdowns of economic sectors, which appears to have moved to the financial sector now. The government's “shared prosperity” drive I believe, will continue to be a headwind for China equities going forward.
German Inflation will be of passing interest this afternoon along with the UK’s trade, GDP, and industrial production data dump. But all eyes are likely to be focused on US inflation data released this evening with Core Inflation in September expected to hold at 4.0% YoY, and Headline Inflation remaining at 5.30%.
There is likely to be a binary outcome to the data with high prints jarring Fed taper nerves with higher US yields, a higher US dollar and lower equities. Lower prints should see the opposite occurring although I believe this will be a temporary aberration lasting only a day or so.
Asian equities mixed today
Asian equities were mixed today with Asia’s heavyweights content to follow the lead of Wall Street overnight, where pre-earnings nerves, a flattening yield curve and a higher US dollar saw stocks edge lower. The S&P 500 eased by 0.24%, the NASDAQ edged $0.14 lower, and the Dow Jones fell by 0.35%.
Ominously, US futures have continued lower once again in Asia. S&P 500 and NASDAQ futures falling 0.30%, and Dow futures easing another 0.10%. Overall, it looks as if US markets are reducing exposure into the US CPI and the start of the earnings season. US markets are very much exposed to a tempering of 2022 outlooks by corporate heavyweights this time around and combined with inflation/taper fears, we can expect a lot more two-way volatility in Q4.
Asia has contented itself with following Wall Street’s lead today ahead of China trade data and most markets were lower this morning. The Nikkei 225 was down 0.30% but the KOSPI was 1.0% higher, led by exporting and manufacturing stocks on what I assume, is a weaker won. Mainland China was mixed, with the Shanghai Composite down 0.50% while the CSI 300 was steady, down just 0.05%. Hong Kong markets were closed this morning due to a typhoon.
ASEAN markets were very much in the green, as multiple announcements reopening the borders to tourism this week maintained bullish momentum across the region. It appeared that ASEAN heavyweights were becoming a defensive play, with their exposure to commodities and the upside of tourism restarting, with its positive downstream effects. Singapore leapt 1,30% higher today, with Jakarta climbing 0.35% and Bangkok rallying by 0.75%. Kuala Lumpur was 0.25% higher and Manilla had gained 0.50%.
Australian markets were unable to shrug off the drop in Wall Street overnight, and the slump in the US futures again in Asia, which pushed local markets lower. The All Ordinaries fell by 0.25%, while the ASX 200 retreated by 0.45%.
European markets are likely to take their cue from Wall Street and open slightly lower this afternoon. Wall Street will be very much beholden to the US inflation data tonight, but any gains will be tempered by caution ahead of the US earnings avalanche and persistent inflation nerves.
The US dollar remains firm
A fall in US long-dated yields was offset by a rise in the short-end yields overnight as markets continued to price in the Fed taper and higher near-term inflation expectations. The curve flattening allowed the US dollar to maintain its upward momentum aided by risk hedging buying ahead of US inflation data tonight and nervousness about growth outlooks in the Q3 earnings season releases.
The dollar index climbed 0.16% to 94.51 overnight before unwinding those gains this morning, retreating 0.16% to 94.35. The passing of the temporary extension of the US debt ceiling legislation through the House of Representatives this morning seemed to have temporarily relieved some of the nerves that have been supporting the US dollar. That is likely to be short-lived and a close well above 94.50 this evening will signal the next leg higher for the US dollar. For now, resistance is holding at that level, but the pullbacks are getting shallower, hinting that a break higher is coming.
EUR/USD and GBP/USD unwound overnight losses, rising 0.18% to 1.1550 and 1.3615 and both remained rangebound with a bias to the downside. EUR/USD remained the more vulnerable after an ECB council member suggested the ECB would fall short of its 2023 inflation targets. Yield differentials will weigh on the single currency. The Australian and New Zealand dollars probed the topside overnight, but both ultimately unwound those gains as heightened risk sentiment globally capped gains. Both will need soft US inflation prints tonight to continue their recovery.
In Asia, the PBOC left the USD/CNY steady at 6.4612 and continued to show little interest in weakening the currency. It looked like the Bank of Korea intervened yesterday to cap gains in the USD/KRW ahead of the important 1200.00 level. A pattern of behavior I expect to see much more of by regional central banks as the US dollar continues rising in Q4. A lower US dollar saw Asian FX rally modestly this morning, but overall markets remained nervously watching interest rate and inflation developments in the US.
Another sideways session for oil
Oil prices traded sideways once again overnight, with a slightly higher US dollar tempering gains. Both contracts edged slightly lower although in the bigger picture Brent crude and WTI remained at the top of their recent ranges. Brent crude eased 0.40% lower to $83.30 overnight, with WTI almost unchanged at $80.60 a barrel. Both contracts have given up another 20 cents a barrel in a quiet start to Asian trading.
The relative strength indicators (RSIs), short-term technical indicators remained in overbought territory. Speculative long positioning in the futures markets remained heavy leaving open still the possibility of 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. A sharp rise in US API Crude Inventories tonight, or muted outlooks for 2022 from Q3 earnings outlooks, could provide that catalyst.
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. One thing also to note, is that natural gas traced out a bearish outside reversal day last Thursday, with prices easing since. A sharp drop to cull speculators in that contract would likely have a similar effect on oil, such is the weight of speculative long positions.
Softer yields support gold
Gold prices edged higher overnight after it once again held interim support at $1750.00 an ounce overnight. Gold finished the overnight session 0.33% higher at $1760.00 an ounce where it remained in early Asian trading. Lower long-dated US yields helped gold’s cause but interestingly, gold also rose despite the US dollar continuing to firm overnight. That suggested that gold was seeing an increase in risk aversion buyers at the moment ahead of the start of the US earnings season today.
That said, gold was showing a lack of momentum to make a strong directional move either way for now and although it was well supported into $1750.00 now, there was nothing to suggest that my anticipated weekly range of $1740.00 to $1780.00 an ounce was under threat. In the bigger picture, the threat of the Fed taper, leading to a continuing climb in US yields and the US dollar should continue to cap gold rallies and the bias is still for a move lower in the coming weeks.
Gold has interim support at $1750.00 and $1740.00 an ounce with more important support at $1720.00 an ounce, and if US yields rise, it could be tested. Resistance lies at $1780.00 followed by the $1800.00 region, containing the 100 and 200-day moving averages (DMAs) on each side of it, a formidable barrier.