It seems appropriate on Oscar day that one of the worst films ever made according to critics, Shanghai Surprise, is also dominating Asian markets today. In what was really not much of a Shanghai surprise, Chinese authorities announced over the weekend that Shanghai the city, would enter a two-stage lockdown to stymie surging COVID cases and allow mass testing. Half of the city will lockdown from today through to April 1st. The other half will lockdown from April 1st through to April 5th.
As China’s financial center and an economic powerhouse in its own right, the impact has been immediate. Tesla (NASDAQ:TSLA) has halted production at its factory there and other major manufacturers are sure to follow. Mainland China equity markets have fallen today along with Taipei which has a high manufacturing beta to the region. The impact on growth and consumption had also seen oil prices, at least temporarily, sink by around 2.0%.
That has drowned out an improved China Industrial Profits number that was released over the weekend. Industrial Profits for a combined January and February rose by 5.0% YoY, an improvement on December’s 4.0%. Dig below the surface though, and the gains were concentrated, unsurprisingly, in the energy and raw materials sectors.
Additionally, it looks like China’s third-largest property developer missed two bond payments on Friday. This soft underbelly of the China economy has been shifted from the front pages by the Ukraine conflict but hasn’t gone away. The cost-push inflation from the Russian sanctions won’t make the sector any more appealing. China still has work to do on the stimulus front, despite its obvious reluctance to do so. RRR and LPR rate cuts, and a weaker yuan, should be on the way, especially as China’s attempt to jawbone the stock market higher two weeks ago, has quickly run out of steam.
Friday’s main data points haven’t done much to dispel economic nerves around inflation dampening demand, or the downstream effects of the Ukraine conflict. UK Retail Sales and Germany’s IFO both missed badly to the downside. US Pending Home Sales slumped by 4.10% versus a 1.0 gain expected. Michigan Consumer Expectations for March also eased to 54.3. They say the best cure for high prices is high prices. Be that the cost of goods or rising mortgage rates. It seems that the signs of that are increasing while inflation shows no sign of abating. Unsurprisingly, the US yield curve moved higher again on Friday. Even more surprisingly, US equities recorded modest gains. You must think one of them has to lose eventually. I know which one my money is on.
The news stream around the Ukraine conflict was relatively light over the weekend, allowing markets to temporarily focus on fundamentals. The main headlines surrounded President Biden saying President Putin had to go. That was greeted by European allies’ face-slapping as they try to negotiate the delicate nuances of not escalating an already very unstable situation on their doorstep. US officials have gone to great lengths to walk back those comments, and the market impact has been limited.
One thing that is moving today in Asia is USD/JPY, which has shot 0.70% to 122.90 this morning. As one of the few dovish central banks left in the world, the Bank of Japan placed an unlimited offer to buy 10-year JGBs at 0.25% this morning, capping yields as they move to the top of the BOJ’s acceptable rate corridor. We can expect some more “watching forex moves closely” comments as well, but I expect their impact to be much less potent than last week. Japan and the USD/JPY are a microcosm of the stresses much of Asia will face this year, with the propensity to tighten monetary policy with the US very low.
The heavyweight data releases this week are skewed towards the end of the week. We have Australian Retail Sales and US JOLTS Jobs Openings tomorrow and German Inflation on Wednesday. Asia’s highlight will be the release of China’s official Manufacturing and Non-Manufacturing PMIs on Thursday, with the Caixin PMIs on Friday. Thursday also features US Personal Income and Spending before we hit US Nonfarm Payrolls on Friday, with the early betting on a 475,000 gain. I don’t know about you, but the Nonfarms seems to have come around again very quickly.
I’ll be watching the US bond market this week, and another strong US Nonfarms is likely to spark more upside pain for yields. The China COVID situation and the Ukraine conflict will keep the news tickers busy, as will more Talking Heads than Stop Making Sense from the Federal Reserve.
Asian equity heavyweights’ edge lower
With some exceptions, Asian equities are edging lower today, mostly driven by the rolling Shanghai COVID lockdowns. US equities finished slightly higher on Friday, despite a rise in US yields, but futures on the S&P500, NASDAQ and Dow Jones have eased by around 0.25% this morning in sympathy.
The Nikkei 225 is down 0.35%, with the South Korean KOSPI just 0.10% higher. Mainland China equities have retraced early losses, but remain in the red. The Shanghai Composite is 0.10% lower, while the CSI 300 has fallen by 0.65%. Hong Kong has climbed by 1.10%.
Across regional markets, Singapore is just 0.20% higher, while Jakarta is rising IPO fever, climbing by 0.45%, Kuala Lumpur has eased by 0.20%, while Taipei, with high beta to China lockdowns, has slumped by 1.25%. Bangkok is 0.35% higher. Australian markets have followed Friday’s price action in New York, the ASX 200 and All Ordinaries rising by 0.30%.
The negativity initially seen in Asia as China's nerves increased from the Shanghai lockdowns, has been partially dispelled by the resulting fall in oil prices today. Ironically lower for the same reason. With a light calendar, Asia seems content at the moment to wait and see how the week evolves elsewhere, especially with so much tier-1 data due at the end of the week. A worsening COVID-19 situation in China, and wider restrictions, would be a serious headwind for Asian equities as a whole.
US Dollar rises in Asia
The US dollar moved sideways in New York on Friday, the Dollar Index finishing almost unchanged at 98.80. However, with the Bank of Japan standing in the JGB market today to cap rises in yields the dollar index has risen sharply, boosted by a weaker yen and euro. The dollar index is 0.33% higher at 99.13. In the bigger picture, 99.50 and 97.75 remain the levels to watch.
USD/JPY has surged 0.80% higher to 123.05 this morning, a 100 point gain. Short of a spectacular reversal lower by US yields, USD/JPY is now on track to retest 125.00, potentially this week, with the BOJ having now shown its hand. Attempts by Japanese officials to talk down USD/JPY will have a short-lived impact and are likely to be dips to buy.
The Biden, Putin must go, rhetoric over the weekend is weighing heaving on the euro today as it sparks fears of wider escalation from Russia. EUR/USD has fallen 0.30% to 1.0950, and rallies above 1.1000 are going to be challenging to sustain at the start of the week. The fall today leaves EUR/USD mid-range between longer-term support at 1.0800, and resistance at 1.1150.
Weak Retail Sales data weighed on GBP/USD into the end of the week, and it has moved lower in sympathy with the euro today. GBP/SD has fallen 0.25% to 1.3145, mid-range between major support/resistance at 1.3000 and 1.3300.
AUD/USD and NZD/USD continue defying a stronger US dollar as markets price in a faster pace of rate hikes on both, and commodity prices remain in space. Also helping is a relatively quiet Ukraine news ticker, reducing risk aversion sentiment for now. Both currencies continue to consolidate at the top of their ranges, at 0.7325 and 0.6950. A rise through 0.7550 and/or 0.7000 signals more gains ahead.
Asian currencies are modestly weaker across the board today as USD/JPY soars, amid worries about a COVID slowdown in China. In the bigger picture, rising US interest rates and soaring commodity prices will weigh on Asian currencies. As we start the week though, Asian currencies prefer to wait for directional inputs from the Northern hemisphere heavyweights.
China worries push oil lower
Oil prices consolidated their week’s gain on Friday, Brent crude closing at $119.25, and WTI closing at $112.65 a barrel. The Shanghai rolling lockdowns have prompted some consumption fears in China and pushed oil prices lower today. Brent crude has fallen by 1.70% to $117.25, and WTI has dropped by 2.0% to $110.40 a barrel.
Oil is already taking back some of those early losses and the fall is likely to be a temporary aberration. However, if COVID restrictions spread in China, that could be enough to cap price rises this week, especially with less than stellar data from the US and Europe at the end of last week.
Brent crude has resistance at $124.00 and support at $112.00 a barrel. A wide but real range that could cover oil prices this week. WTI has resistance at $116.00 and support at $107.00 a barrel. In the bigger picture, I still believe that Brent crude will consolidate in a broader $100.00 to $120.00 range.
Gold eases in Asia
Gold prices finished almost unchanged in New York on Friday at $1958.00 an ounce, taking their cues from a sedate US dollar, rather than US yields, which climbed once again. In Asia, the US dollar has sprung higher on Japanese JGB intervention and European escalation concerns regarding President Biden’s weekend comments. That has pushed gold 0.76% lower to $1943.00 an ounce in Asia.
I believe downside risks persist in gold from these levels. The weakness of gold bugs to wear intra-day losses aside, gold has been rising even as the US dollar stays elevated and while US yields continue to rise sharply across the curve. It can’t all be explained by haven flows. Gold either knows something the rest of us don’t, or higher US yields and a higher US dollar will exact their pound of flesh on gold prices.
Gold has nearby resistance at $1965.00 and $1975.00 an ounce, followed by $2000.00 where I expect option-related sellers to be lying in wait once again. Support lies at $1938.00 and $1910.00 an ounce.