The risk-off tone has rolled into Asia this morning from North America despite the PBOC cutting its 14-day reverse repo rate by 20bps to 2.35%. COVID-19 fears in Beijing and parts of the United States and geopolitical concerns in Asia continue to weigh on sentiment. The gloom was deepened by Australian Unemployment data, which came in below expectations.
Australia’s headline unemployment, encompassing both full-time and part-time jobs, fell by 227,700 versus a forecast drop of 125,000. The Australian Bureau of Statistics added another negative footnote. It stated that the headline unemployment rate would have been above 9.0%, instead of 7.1%, had they included those laid off but not officially looking for work. The fallout was most noticeable in the currency market, AUD/USD falling 0.50% to 0.6850, and AUD/JPY falling 0.60% to 73.20.
Relations between the US and China are set to worsen further as President Trump signed into law a bill authorizing sanctions on Chinese officials over its mass detainment of Uighurs. China has, of course, vowed retaliation. With disputes also ongoing over Hong Kong, Taiwan, the South China Sea, in addition to the very tense standoff with India in the Himalayas, along with disputes with Canada and Australia, Chinese diplomats must be worked off their feet now. The net result is a geopolitical maelstrom with China at its center, that seems to be quietly evolving as a potential roadblock to recovery that the world doesn’t need in a post-COVID-19 world.
Today will see Indonesia and Taiwan announce rate decisions. With the currencies of both countries having strengthened impressively in recent weeks, we expect further cuts from both. That though is unlikely to lighten Asia’s somber mood today. Equities and local currencies are set to remain on the back foot.
From the author's perspective, however, the underlying driver of the global peak-virus trade remains intact. That is, the seemingly infinite amounts of central bank money sloshing around the world’s financial system to keep credit ultra-easy. The Bank of England will likely add more to that pot this afternoon, increasing their quantitative easing targets. Against this backdrop, the negative tone still looks like a bull market correction, rather than a structural change in sentiment. The risks are more balanced now though, meaning that the outsized gains since the mid-March capitulation trade, will likely proceed at a slower, and less linear, pace.
Asian equities are a sea of red following a mixed New York session
Asian equity markets continue to ease this morning, as aftermarket US stock futures resume their sell-off after a mixed Wall Street session. COVID-19 and geopolitical concerns continue to weigh on sentiment, despite soothing noises from various central bank officials that they stand ready to support a recovery for as long as necessary.
The S&P 500 e-mini, NASDAQ and Dow futures are all down by over 1.0% in aftermarket trading in Asia today. That has lent a negative tone to Asia after the leading indices had a mixed finish in New York.
The Nikkei 225 is down 1.15%; the KOSPI is down 0.40% with China’s Shanghai Composite and CSI 300 lower by 0.50%. Singapore is down 0.50% with the Hang Seng lower by 1.15%, receiving no boost from trading starting in JD.com today. Australian indices are 1.50% lower on the day.
Regionally, the negative picture is much the same. We expect the negative tone to continue as markets closely watch Beijing’s COVID-19 containment efforts, and the India/China standoff. At this stage, the price action of the past few days continues to look corrective rather than structural, although it may persist for some days yet. A complete lockdown of Beijing would change that outlook markedly.
The US dollar continues rising as investors hedge geopolitical risk
The US dollar continued strengthening overnight, driven by strong demand for new 20-year Treasury issues, and risk hedging flows by investors. Like equities though, the overall price action looks more consolidative than structural, after a concerted period of losses for the Dollar as investors jumped into the peak-virus trade.
The majors continued to give ground, notably the euro and GBP, with the Dollar Index rising 0.20% to 97.12 overnight. The AUD, used as a proxy for China growth and risk sentiment in general, continued easing overnight. That pace increased this morning after the weak Australian employment data, AUD/USD falling 0.50% to 0.6850. The 0.6800 region remains the critical support level for AUD/USD. A daily close below their signals that the price action is no longer consolidative and that a deeper correction in risk positioning is occurring.
Another critical risk barometer, the Japanese yen, also appears to be signalling a deeper pullback in risk sentiment is on the cards. USD/JPY has failed multiple times in the past week to reclaim its 50-day moving average at 107.50. USD/JPY is at 106.90 this morning, with nearby support at 106.60. However, a failure at 106.00 signals the potential for much deeper losses and would potentially signal that the global asset market rally has temporarily run out of steam.
Oil’s momentum continues to fade
Oil is certainly not immune to geopolitical risks, most notably a potentially widening lockdown in Beijing, or the escalating COVID-19 cases across America’s southern states. That has sapped confidence in oil’s rally but has not yet chopped the legs out from under it.
Brent crude continues to outperform, probably because the near-term curve is in a slight backwardation of prices. Its grip on the $40.0 a barrel level is starting to look tenuous, however, having failed to close its March chart gap to $45.00 a barrel. Brent has fallen by 0.50% to $40.30 a barrel in Asia, a victim of the general risk aversion environment. A daily close below $40.00 a barrel will signal a deeper correction to its 100-day moving average around $38.00 a barrel.
WTI has also eased lower by 0.60% to $37.50 a barrel. WTI needs to maintain a daily close above $37.00 to protect its recent gains. A failure there signals a much deeper correction lower, possibly as far as its 100-day moving average at $33.50 a barrel.
Gold finds support near $1700.00 an ounce
The headline number shows that gold finished almost unchanged again at $1727.00 an ounce overnight. That though does not tell the entire story. Gold, yet again, suffered another sharp intra-day sell-off, this time to $1712.00 overnight. Yet again, however, it staged a strong comeback to finish almost unchanged.
The price action suggests that even in a risk-averse environment, longer-term players are content to be patient, preferring to buy dips rather than chase the market higher. That preferred region appears to be between $1700.00 and $1715.00 an ounce. That said, gold has well-denoted resistance above $1745.00 an ounce.
With both sides content to bide their time for gold to arrive at their preferred levels, gold’s multi-week range trading environment looks set to continue for some days yet.