Although we have seen some interesting political developments across the world over the weekend, it was China that was weighing on Asian markets this morning. China inflation came in slightly above expectations YoY for March rising by 1.50%, while PPI eased back to 8.30% YoY, likely thanks to COVID restrictions crimping economic activity.
It was China’s COVID situation that was making Asia nervous. The weekend press was full of stories of locked down Shanghai residents unable to secure food supplies, with cases rising to 27,000 yesterday.
Ominously, the city of Guangzhou closed its schools until Apr. 17 and began mass testing. With China’s government doggedly sticking to its COVID-zero policy, fears were increasing that an extended lockdown in China, which may spread to other major industrial cities, will darken an already cloudy outlook for China's growth.
Asian equity markets were lower in response, although one silver lining was that a slowdown in China was taking some heat out of the commodities market. Oil prices moved 2.0% lower in Asia this morning.
The less than stellar news continued from China, where the property developer sector debt woes, knocked off the headlines for the past two months, but certainly not gone away, made an appearance today.
Developer Zhenro (HK:6158) officially defaulted on some US dollar bonds after a grace period expired. It also said it would struggle to pay some upcoming coupons. The slow-moving debt trainwreck that was the China private developer sector, continued, with no sign of relief from the central government, although municipalities were busy removing buying restrictions to keep the property market supported. The property market gloom was another headwind blowing across Asia today.
China releases New Yuan Loans on Tuesday, and markets will be looking for a strong increase to back up assertions from the central government that it was standing behind the economy. Additionally, the 1-year MTF rate should be announced sometime this week and a cut in the financing rate would go some way to reassuring investors that China was not going to sacrifice growth over deleveraging.
Whichever way you cut it though, China equities were in for a challenging start to the week and escalating bad news on the Omicron front was likely to offset any tinkering central government does on the sidelines.
We have a lot of inflation data out this week, including the US on Wednesday, and New Zealand Food Price Index on Wednesday. US Inflation data had upside risks, expect the race to pencil in 0.50% hikes by market experts to go into overdrive and look for more US dollar strength.
The latter is important, as it precedes the RBNZ policy meeting by a day. The United Kingdom has an avalanche of data starting with GDP today, Employment tomorrow and CPIs on Wednesday. All of it has upside risks and could increase the noise around faster Bank of England tightenings.
We have a packed week of central bank policy decisions as well. In Asia, the MAS will announce its semi-annual policy decision Wednesday. A tightening by raising the bands of the S$NEER and the pace of appreciation is 100% locked in, more interesting will be its policy outlook which has hawkish risks.
The Bank of Korea announces on Friday, with markets expecting a 0.25% hike to 1.50%, Again, its policy outlook will be a key bellwether as to whether Asia will finally look to hike rates with the Federal Reserve.
In the South Pacific, one of the developed world's worst-performing central banks, the Reserve Bank of New Zealand also announces its latest policy decision. Markets were locked and loaded for a 0.50% increase as the RBNZ plays a major game of catchup to spiraling inflation. Markets will be expecting the RBNZ statement to be competing with the FOMC for the number of 0.50% increases to come. Anything less will see the New Zealand dollar get slammed. New Zealand remains at the top of my which developed country will have a hard landing first, chart.
Moving into the heavyweight category, the Bank of Canada should join the 0.50% rate hike club on Wednesday. With the government enacting foreign property buyer bans last week, the mood in the Ottawa halls of power is clearly somber. Once again, like the RBNZ, markets will be looking for hawkish forward guidance.
Finally, the European Central Bank announces its ECB Deposit Rate and Refinancing Rate on Thursday. I expect them to remain unchanged at -0.50% and 0.00% respectively, thanks to the Ukraine war.
Europe is on the frontline of the economic war now, and hiking into a wartime economy is usually not a good thing. What will be more interesting will be the internal battle between the doves and the hawks and the ensuing policy outlook.
I believe Ukraine has left the ECB’s hands tied and it will have to accept stagflation for some time to come. There won’t be many reasons to be excited about the euro this week and long-term multi-year support at 1.0800 will almost certainly be tested.
But wait, I’ve not finished. Pakistan’s Prime Minister was deposed in a no-confidence vote over the weekend. The dropped catch by the PM means a caretaker PM will take over the bowling.
Unfortunately, a mass resignation by Mr. Khan’s MPs could yet see fresh elections and another change in coaching staff. That is just the selection instability its giant neighbor India does not need this week as Prime Minister Modi is meeting US President Biden for talks.
Just how much discounted Russian oil India intends to buy will be a delicate balancing act for Mr. Modi, as will a potential swing by Pakistan back into the US sphere of influence thanks to an impending IMF bailout that can probably now be signed.
Geopolitical currents may weigh on India's equities and the rupee this week, with a hawkish RBI last week seeing no strength occurring in the INR.
France’s presidential runoff on 24 April will be between the incumbent Emmanuel Macron, and the far-right’s Marine Le Pen. Macron holds a slim lead, but as we have seen in elections over the last few years, angry people get out and vote.
Ask the Americans and the British and the Brazilians. That lesson may finally have sunk in, and French election uncertainty will be another reason for the ECB to stay it's hand this week. It is already holding back any Euro gains. A Le Marine victory will make Brexit look like scones, marmalade, and clotted cream.
Australia’s Prime Minister, Scott Morrison, also announced Australia’s next election date on May 21. The Liberal Party is trailing the Labor Party quite badly and has about 5 weeks to turn this around.
Having come from behind before, you can’t rule out ScoMo doing it again. The AUD was wilting today, although that is probably more China-related. Mr. Morrison will gain brownie points for standing up to China and winning, but will lose plenty on overseas trips during COVID and the cost of living.
Although Mr. Morrison is a pragmatic junkyard dog campaigner, I understand there is no truth that he will campaign on Christmas Island for swing votes, or among the diaspora in Auckland, New Zealand, wearing 501 jeans.
Over in the Ukraine, NATO and Western dilly-dallying over the resupply of the Ukraine of arms and other supplies threatens to swing the war decisively in Russia’s favor. Ukraine's armed forces have had success in the North because the Russians left, but have shown no capability to conduct large scale maneuvers in the East and South, where the Russians have shown no signs of going anywhere.
The East is open flat tank country and little drones and MPATs will be of limited use there. Additionally, the bombing by Russia of key fuel depots in Ukraine is threatening the fuel supplies of farmers just as the sowing season is about to begin. Think world food prices, think Ukrainian grain season failing, think much higher food prices across the world.
If you can make sense of all of that, you’re a better person than me. My overriding impression, as the week starts, is that risks on multiple fronts are increasing, led by China’s COVID-zero and potential slowdown, followed by inflation.
Don’t get wedded to lower oil prices or a sustained “the worst is over” FOMO bounce in equity markets. Staying more heavily weighted in cash, or perhaps some precious metals, buying a Kevlar helmet, and settling in to watch the whole mess develop from the sidelines, may be no bad thing. Or you could buy volatility.
China worries sink Asian equities
On Friday, US equities limped into a non-descript finish to the week as inflation fears were compounded by growth fears, notably from China. The S&P 500 fell 0.27%, the NASDAQ tumbled by 1.34%, while the Dow Jones booked a 0.40% gain as investors rotated into value for the weekend. Those same China fears, as the Omicron situation darkened there over the weekend, have sent futures on all three major indexes over 0.55% lower in Asian trading.
A similar story was playing out across Asia today, compounded by China's property developer nerves. The Nikkei 225 fell 0.75%, and South Korea’s KOSPI eased 0.35% lower. Mainland China markets were under heavy pressure, the Shanghai Composite tumbling by 1.75%, with the CSI 300 in full retreat, falling by 2.35%. Hong Kong also took fright, the Hang Seng dropping by 2.40%.
In regional markets, Singapore was 0.65% lower, Kuala Lumpur was rather surprisingly, unchanged, and Jakarta climbed 0.65%. The rally in Jakarta was driven by GoTo’s IPO commencing trading, with its stock climbing 23% on debut.
Elsewhere, Bangkok was down 0.45%, and Manilla 0.10% lower. The rise in platinum group metals prices seemed to be providing some support to Australian markets, with the ASX 200 and All Ordinaries unchanged. However, the prospect of multiple 0.50% RBNZ rate hikes, starting this week, sent the NZX 50 0.90% lower.
Nothing around Eastern Europe or the French presidential election will give European equities anything to cheer about this afternoon. Nor will the upcoming ECB meeting with lower risks of hiking offset by what was likely to be darkening growth projections from the ECB.
US dollar grinds higher
The US dollar had a choppy session on Friday, the dollar index spiking to 100.19 before retreating to finish just 0.10% higher at 99.84. In Asia, an uncertain outlook on multiple fronts lifted it 0.10% higher to 99.93. US yields, notably long-dated ones, continued to grind higher and will backstop and fall by the greenback. It remained on track to test resistance at 100.50 later this week.
EUR/USD probed 1.0850 on Friday before rallying to finish unchanged at 1.0875. There were plenty of dark clouds on the horizon for Europe this week and any rally towards 1.0950 was likely to be brief. If the Austrian PM makes some peace in our time progress with Vladimir Putin, a relief rally was once again possible.
Multiyear support at 1.0800 remained ominously close with risks skewed to the downside. A dovish ECB will compound the negative outlook for the euro. Failure signals more losses to 1.0600 and 1.0300 initially. Resistance was at 1.1200, with longer-termed resistance at 1.1300.
Sterling tested support at 1.3000 on Friday, but managed to close just above it. A daily close under 1.3000 signals another round of losses targeting 1.2850 and 1.2700.
USD/JPY left 0.50% higher in Asia as a Bank of Japan official remained dovish on monetary policy and said it could be eased if required. With the US/Japan rate differential soaring, USD/JPY climbed to 124.90 today and a test of the 125.00 resistance seemed imminent, followed by 125.80. Expect more “BOJ speak” above 125.00 initially. That said, any drop to 123.50 should find plenty of keen dip buyers.
AUD/USD and NZD/USD both fell on Friday as China and global growth risks deepened. NZD/USD, fell 0.65% to 0.6847, and fell another 0.25% to 0.6830 today. The NZD/USD faces a deeper downside this week if the RBNZ policy decision is not a 0.50% hike, and the statement is perceived as not hawkish enough.
AUD/USD appeared to be suffering some nerves today after a May election date was announced, with a change in government looking likely at this stage. A deteriorating China situation will weigh heavily on both antipodeans additionally this week.
Asian currencies weakened on Friday in New York time finally and fell again in Asia as USD/CNY rose 0.20% to 6.3720. Fears around China’s growth outlook, and not rising US yields, were driving the weakness. USD/KRW rose by 0.30%, USD/TWD by 0.35%, USD/SGD by 0.20% and USD/PHP by 0.75%, despite upcoming hawkish BOK and MAS policy decisions this week. It appeared Asian currencies would move in lockstep with China’s COVIDsituation this week.
China's growth fears prompt oil selling
Oil finished last week slightly higher in directionless trading. Brent crude rose 0.95% to $102.30 a barrel, and WTI rose 0.80% to $97.75 a barrel. In Asia, a darkening COVID-19 outlook in China prompted growth and consumption fears, sending Chinese equities and oil prices sharply lower today. Brent crude had fallen 2.0% to $100.30 a barrel, and WTI 2.05% to $95.80 a barrel.
With the latest scheduled OPEC+ increase, and US and IEA SPR release out there and priced in, it seemed that China continued to drive the bearish price action. Brent and WTI have fallen to the bottom of my ranges, but I expected Brent to remain in a choppy $100.00 to $120.00 range, with WTI a $95.00 to $115.00 range.
As previously stated, a serious escalation of the China virus outlook, resulting in wider and extended lockdowns of urban centers, will change my outlook. However, I believe those looking for a more substantial drop will be disappointed.
Short of Iran and Venezuela returning to international markets, even with larger China lockdowns, the world still faced a structural oil deficit for the next 6 months because of Russian sanctions. Brent crude was unlikely to fall too far below $90.00 a barrel, even if China’s lockdowns ramp up.
Gold shows signs of life
Gold rallied by 0.83% to $1947.70 an ounce on Friday, a rather surprising move given the US dollar stayed well supported. Gold appeared to have found haven-related buyers hedging weekend risks, but it still did not manage to take out resistance at $1950.00 an ounce.
Gold ran the risk of running out of upside momentum as investors unloaded weekend hedges, with gold longs being a very poor hedge of slowing China growth. Gold edged 0.30% lower to $1942.00 in Asia and could be setting itself up for one of those false dawn reversals markets have become used to.
Gold was still range trading, albeit to the higher end of that range. I believe the risks were still skewed to the downside for gold, especially if US yields and the US dollar kept climbing. Gold needs to break through $1950.00 and $1970.00 an ounce to change that outlook. Failure of $1915.00 will signal a retest of important support at $1880.00 and possibly $1800.00 an ounce.