Asian markets are cautiously higher this morning as the weekend produced lots of noise, but little of real actionable substance. US markets continue to price in an almost certain Ukraine-Russia peace agreement and seem to be quickly putting an expectedly hawkish FOMC behind them. Both could yet come back to bite, but until they do, or don’t, the street seems content to quietly price in “peak-Ukraine.”
Notably, the Turkish foreign minister said in a weekend interview that Ukraine and Russia were nearing an agreement on 'critical issues’ and that he was hopeful of a ceasefire. That has had little to no impact on markets in Asia which are probably more focused on a Reuters report that Europe is mulling an oil embargo on Russian oil. I’m not sure how that would work, to be honest. Oil is one asset class that is moving today because of that in energy-hungry Asia. Oil has climbed over 2.0% with as the IEA reports that OPEC+ is falling further behind pre-agreed production targets and a Yemeni Houthi missile attack on a Saudi Arabia energy facility in the south of the country.
China has probably disappointed markets slightly this morning as well, leaving both its one and five-year Loan Prime Rates unchanged, and only adding a modest amount to the market via the repo today. The talks between President Xi and Biden last week were notable for the fact that they didn’t vehemently disagree, nor for any concrete progress on a multitude of issues. Talking up markets has a declining marginal utility, and unless we see the color of their money, so to speak, we have probably seen the best of the breath-taking recovering in China equity markets. On the COVID front, markets will take some heart that Shenzhen’s lockdown has ended, although that risk persists elsewhere in the country.
New Zealand released much better than expected Balance of Trade data for February this morning, boosted by a jump in exports, while imports remained flat on January. There has been negligible impact on either local stock markets or the currency with markets focused on the cost of living and the box canyon the RBNZ has led itself and the country into.
That is pretty much the whole Asia-Pacific calendar out of the way today, with volatility slightly muted by a Japan holiday. The rest of the week features no Tier-1 data from Asia at all, with the global calendar noisy with Tier-2 data, but featuring only UK Inflation, German Manufacturing PMI and US Durable Goods among the heavyweights. We have an all-you-can-eat buffet of Fed and ECB speakers this week which could be good for some intra-day volatility. Otherwise, we are back to Ukraine-watching with China's stimulus and COVID developments providing entertainment during intermissions. Equity and currency markets are pricing in positive outcomes, energy markets are not. It will be interesting to see who is right.
Asian equities are cautiously higher
Wall Street had another exuberant session on Friday, pricing in the worst of the Fed being out of the way, and expectations of progress in a resolution of the Ukraine-Russia conflict. Asia, with one eye on oil prices this morning, is somewhat more cautious. Its modest rally today likely owed more to the Turkish Foreign Minster’s comments and the end of the Shenzhen lockdown. US index futures are creeping lower as well in Asia, introducing another note of caution.
On Friday, a market pre-programmed to buy the dip saw Wall Street post another impressive day of gains. The S&P 500 rose by 1.18%, the NASDAQ leapt 2.02% higher, and the Dow Jones rose 0.74%. Some profit-taking among the fast-money algo gnomes sees the index futures easing in early Asian trading, all three indexes down around 0.30%, taking the heat out of an Asian advance.
It looks like the rally in oil prices is also having an adverse effect, with early Asian increases easing as Brent crude climbs. Japan is on holiday, but South Korea’s KOSPI has fallen by 0.30%. China markets are also higher, helped along by the end of the Shenzhen lockdown. The Shanghai Composite and CSI 300 have climbed by 0.50%, while the ever-skittish Hang Seng has given back some early gains to be just 0.40% higher.
In regional markets, Singapore is 0.15% higher, with Taipei jumping 0.80% as Foxconn’s Shenzhen plant reopens. Kuala Lumpur has fallen by 0.60% as political uncertainty returns, while Jakarta is flat, and Manila is up just 0.25%. Australian markets are also quiet, the ASX 200 and All Ordinaries easing by 0.15%.
European markets had a very uneven rally on Friday and from here, probably need a concrete Ukraine agreement to re-energize their recovery. Oil prices are $14 a barrel of their lows last week, and if Europe does decide to somehow embargo Russian oil, it will be hard to see the European rally continue. US markets remain desperate to price in a Ukraine agreement and buy buy buy, however fragile its underlying intellectual foundations are. I wouldn’t bet against that continuing in the absence of any contradictory news headlines.
Currency markets are ranging
Currency markets had another choppy session on Friday, but ultimately, remained content to continue range trading. The US dollar rallied somewhat, despite US yields falling. I suspect that pre-weekend caution was the driver of moves in both asset classes. The Dollar Index rose 0.22% to 98.22, edging higher to 98.26 in Asia. A Japanese holiday today is muting volumes and volatility in the region.
EUR/USD gave back some of its gains above 1.1100, falling 0.36% to 1.1050, where it remains in Asia. A European oil embargo on Russia would be another headwind for the single currency, although a Ukraine agreement or progress will likely spark a sharp relief rally. Levels to watch for now are 1.1000 and 1.1200. Sterling edged higher to 1.3175 before falling to 1.3160 this morning. It looks to have traced out a major low at 1.3000 and its medium-term technical outlook is now constructive above that level. 1.3200 is initial resistance. USD/JPY rose sharply on Friday by 0.46% to 119.15 as oil prices continued to rally. Today's rises will keep the pressure on the yen which seems to be tracking oil more closely than US yields for now. It remains on track to test 120.00.
AUD/USD and NZD/USD booked gains on Friday, rising 0.50% and 0.40% respectively to 0.7415 and 0.6905. The antipodeans continue to ride the rebound in risk sentiment in US markets and until that changes, the technical picture suggests more gains lie ahead. The next technical resistances are at 0.7440 and 0.6925.
Asian currencies are steady after the PBOC left its Loan Prime Rates unchanged and set a neutral USD/CNY fixing. The rise in oil prices this morning had seen Asian currencies retreat modestly and imported inflation, particularly energy, remain their Achilles heel. Regional central banks have little to no interest in tightening monetary policy in response to the Fed, concentrating on maintaining growth. With commodity prices to remain elevated even if the Ukraine war ended tomorrow, any material gains by Asian currencies are likely to be temporary in H1 2022. If China is indeed weakening the yuan in response to a slowing economy, that will be another headwind for regional currencies.
Oil prices spike higher once again
Oil prices rose slightly in New York on Friday, with volatility modest by recent standards. Brent crude finished 0.85% higher at 107.80 a barrel, and WTI rose 1.70% to 105.35 a barrel.
In Asia, however, prices have spiked higher once again, continuing a trend we saw all last week, where Asia bought oil no matter what the price action was in New York. A Houthi attack on a Saudi energy terminal, warnings of a structural shortfall in production from OPEC, and a potential European Union oil embargo on Russia have seen oil prices jump in Asia. Brent crude is 2.85% higher at 110.85 a barrel, while WTI has rallied by 2.25% to $107.75 a barrel.
The prices fall of last week appear to have run their course now, being an aggressive and panicked correction to the equally panicked and aggressive reaction to the Russian invasion of Ukraine. As such I believe we have seen the lows in oil now. Brent crude and WTI should settle into a roughly $100.00 to $120 range. Even if the Ukraine war ends tomorrow, the world will face a structural energy deficit thanks to Russian sanctions.
We are now awaiting geopolitical developments. Although I don’t rule out a test below $100.00 on a Ukraine agreement, I believe that any dip to the low $90.00’s by oil will be very well supported.
Gold continues to struggle
Gold prices slipped on Friday in another negative day for the metal, as the washout of long positions placed above $2000.00 an ounce continued. That was despite lower US yields, with no sign of support from weekend risk-hedging. Gold finished 1.12% lower at $1920.50 an ounce.
Gold has eked out a modest gain of 0.33% to $1927.00 an ounce in Asia, but momentum is non-existent, and the downside is clearly the weaker side still. Gold has resistance at $1950.00 and $1960.00 an ounce, its previous capitulation point. Support lies at $1918.00, $1900.00, and then $1880.00 an ounce. A sustained failure of the latter signals gold’s torment continues and that $1800.00 an ounce beckons.