A Mainland China holiday today, with Hong Kong joining them tomorrow, was muting trading activity in Asia today. On Friday, the US Non-Farm Payrolls posted a lower than expected, but still very healthy, gain of 431,000 jobs. Notably, the previous month's total was revised higher by 95,000 jobs.
That was enough to keep the 50bps Fed hikes in May, June and July trade alive and well. Stocks edged to a positive close and the US dollar rose once again. Bond markets saw the most action though, with 2 and 5-year rates sharply higher while yields fell in the 30-year tenor. The US yield curve now has a humped inversion from the 2’s to 10-years and the 2’s to 30-years is almost flat.
The noise of an impending recession, the Fed behind the inflation curve, the Fed will overtighten, will increase from here. However, the economic data just wasn't supporting that thesis at the moment. Pricing and supply chain issues aside, something the entire world has been dealing with, the US economy continued to fire on all cylinders of its big-block hemi. That was likely one reason that equities kept defying gravity along with a fair amount of TINA (There Is No Alternative). Until those cracks start appearing, the FOMO gnomes of the equity market will keep doing what they’re doing, buying the dip.
Some good news out of China this weekend, which could be mildly supportive for Wall Street later today, was that China appeared to be loosening its audit restrictions, reducing the immediate threat of a mass delisting of US-listed Chinese companies. Many of those are listed in Hong Kong, which should also find reasons to cheer as a result.
On the negative side, Shanghai was now in a full lockdown as the government tried to get on top of the latest COVID-19 outbreak. It was sending resources to test all 26 million residents. China’s COVID vulnerability was a known unknown, and its evolution could yet impact Asian markets if it materially threatens growth this year. On the plus side, it may give some relief to commodity prices.
Additionally, Evergrande (HK:3333) had 36 illegally constructed buildings confiscated by the Hainan government. China’s property sector leverage woes have not gone away, they’ve just been knocked off the front page by other events. A COVID crisis in China will deepen the woes of that sector and give the government less wiggle room for an orderly wind down.
Although the world’s weekend press was dominated by alleged atrocities on Ukrainian citizens by retreating Russian troops, nothing market-moving emerged from the conflict this weekend. Negotiations between the two sides were to resume online again today, and once again, we could expect another "peace in our time" rally at the vaguest hint of good news.
Perhaps more problematically for the European Union, was Hungarian Prime Minister Orban’s landslide election victory over the weekend. Mr. Orban is well known for his bromance with the Kremlin and has been a thorn in the side of Brussels for a number of years. The Hungarian victory added a large dollop of uncertainty to EU unity regarding Russia at a critical juncture. Internal conflicts between members will be another headwind for Eurozone asset markets.
The week's data calendar will be dominated by Services PMIs from China on Wednesday, and Europe and the US. Tomorrow. China’s COVID restrictions give downside risk to their data, and for obvious reasons, European releases as well. Germany’s Trade Balance, Services PMI and Industrial Orders will be more closely watched than usual for signs of the Ukraine conflict further impacting Europe’s powerhouse. Weak prints will be another reason not to be enthusiastic about Eurozone asset markets this week.
The US Markit Services PMIs should hold steady, while ISM Non-Manufacturing PMI should climb slightly from last month. It will be interesting to see if higher oil prices were impacting consumer sentiment. Weak numbers will potentially take some heat out of the 50bps hike mafia, while stronger numbers will make the noise louder. Additionally, we have another plethora of Federal Reserve talking heads speaking this week. The first dribs and drabs of the US earnings season start this week as well. It presents a key risk to equity sentiment this time around. Not because of the actual results, which should be good, but because of the danger of material mark-downs in forward guidance.
In Asia-Pacific, the other main event this week will be the Reserve Bank of Australia policy decision tomorrow. The RBA will stick to its guns and leave rates unchanged at 0.10%. It will be what the RBA says, and not what it does that matters. Most especially, will the RBA finally shift its forward guidance from ultra-dovish. If it does, we can expect the Australian dollar to rally sharply, although it probably won’t be a great day for local equities. Inflation isn’t going away anytime soon, and it’s still hard to go past Australia as a hedge for commodity-based inflation in the bigger picture. As a Kiwi, it was hard for me to say that, but sometimes you just have to take it on the chin.
Asian equities tread water
A decent US Non-Farm Payrolls number on Friday was balanced out by weaker IS.
In Asia, equities were ranging around unchanged, with COVID-19 concerns in mainland China capping sentiment, with a mainland holiday also sapping trading volumes. The Nikkei 225 was 0.10% higher, while South Korea’s KOSPI was up 0.25%. Mainland China markets were closed but Hong Kong’s Hang Seng rose by 1.35% after Chinese authorities moved to ease audit inspection barriers for US-listed China companies.
In regional markets, Singapore was 0.10% higher, Kuala Lumpur eased by 0.25%, while Jakarta was unchanged. Bangkok was 0.10% higher, with Manilla falling 0.25%. Taiwan was also closed for a holiday. Australian markets were the day's best performers, the ASX 200 rising by 0.40%, and the All Ordinaries by 0.58%, led by resources.
The US dollar continues to rise
The US dollar continued gaining on Friday as firm US Data pushed US yields higher. The dollar index rose 0.22% to 98.57 where it remained in Asia, where a China holiday was impacting trading volumes. The index remained mid-range between key support/resistance at 97.70 and 99.45. A sustained break of those levels will signal the dollar's next directional move. With US yields continuing to firm at the short end of the curve, the US dollar will remain well supported on dips.
EUR/USD continued retreating from its mid-week foray to 1.1200 on Friday, slipping 0.15% to 1.1050, where it remained in Asia. With no positive developments from Eastern Europe over the weekend, risks remained skewed to the downside once again. Immediate support/resistance were 1.0950 and 1.1200.
The US/Japan rate differential widened on Friday and that saw the yen retreat sharply after gaining temporary support last week on year-end repatriation flows and BOJ yield curve operations. USD/JPY rose 0.70% to 122.50, climbing to 122.65 in Asia today. USD/JPY looked to have weathered a correction lower and pressures will now continue building on the topside. Key levels were 121.25 and 123.25.
AUD/USD continued to be bolstered by firm commodity prices, AUD/JPY buying and expectations that the RBA could role back its dovish policy outlook at tomorrow's rate decision. AUD/USD remained near the top of its range at 0.7515 today. A rise through 0.7550 will signal further gains targeting 0.7700. NZD/USD was at 0.6935 today, some 70 points from its recent highs. AUD/NZD buying was capping gains and it needed to rise through 0.7000 to signal renewed upside momentum.
A China holiday today and tomorrow will dampen trading volumes in the first part of the week. Asian currencies weakened slightly on Friday, but mostly, continued to range trade waiting for directional signals from elsewhere. Widening virus restrictions in China will be an additional headwind for Asian currencies, and the continuing rise in US yields meant down pressures were continuing to build as well.
Oil slightly softer in Asia
Oil prices eased slightly on Friday, robust US data and weekend risk supporting prices, while US SPR releases as well as yet to be determined ones from other IEA members capped gains. A UN brokered two-month ceasefire between Saudi Arabia and Yemen’s Houthi rebels had no noticeable impact on prices today.
The China holiday was definitely muting trading volumes in Asia today, leaving Brent crude unchanged at $104.50, and WTI unchanged at $99.35. With Mainland China, Hong Kong and Taiwan all on holiday tomorrow, I expected the first part of the week in Asia to be quiet.
Overall, I still expected Brent to trade in a choppy $100.00 to $120.00 range, with WTI bouncing around in a $95.00 to $115.00 a barrel range. The US SPR and monthly OPEC+ production hikes balanced out by geopolitical tensions elsewhere.
Gold fades as US dollar strengthens
Gold finished Friday on the back foot, falling 0.62% to $1925.00 an ounce. Higher US yields and a firmer US dollar continued to erode gold’s recent gains, with gold falling 0.37% to $1917.80 an ounce in Asia. A retreat below nearby support at $1915.00 an ounce should signal another test of $1900.00.
The risks of a material correction lower in gold were increasing sharply, as it failed to make any gains when both the US dollar and US yields fell at times last week. Ominously, it moved lower as soon as they both rose. Gold had resistance at $1940.00 and $1950.00 an ounce. Meanwhile, a sustained break of the $1880.00 region will probably trigger a capitulation trade, potentially pushing gold down to $1800.00 an ounce.