China’s instruction to state-owned produce buyers to halt purchases of US soybeans and pork caused only a temporary blip in markets overnight. Digging a little deeper, private companies were not issued the same orders and the exercise—along with the PBOC's USD/CNY fixes recently—appears to be more a shot across the bows of the US over Hong Kong, and not an imminent threat of withdrawal from the US-China trade agreement. That, off course, would help precisely no one in these difficult times.
Markets quickly recovered their composure, despite disappointing PMI data from Germany and France, and moved back to their happy place, the global recovery trade. Equities and energy continued to perform well, and the rotation out of US dollars continued at pace, most noticeably with the commodity currencies.
The US riots, disturbing as they are, are also being discounted in the greater economic picture. Rightly so, without sounding insensitive, as they are unlikely to derail the expected US rebound. Whether the lack of social distancing by protestors, police and soldiers comes back to bite them, is a story for another day.
After a strong start in Asia yesterday, that effectively led the US session, the region's stock markets continue to probe higher, although with less verve than the previous session. The Reserve Bank of Australia has left its cash target rate unchanged at 0.25%, and its 3-year bond yield target unchanged at 0.25%. It has reiterated that policy will remain easy for as long as necessary, noting that the economy remains weak despite some nascent signs of recovery in some areas. There was nothing unexpected in either the decision or comments though, and the fallout on the Australian dollar will be minimal as it rides the strong trade winds of the global recovery expectations across the world.
Overnight, Moody’s downgraded India’s sovereign rating to just one notch above junk. The reasons cited were a slowing economy due to the pandemic, government finances and policy ineffectiveness, and a continued degrading of the financial sectors creditworthiness profile. The latter was already a significant issue in India before COVID-19 and has been exacerbated since. That will likely cap India’s markets today and maintain pressure on the Indian rupee.
The data calendar for the rest of the day across the globe is strictly second tier, meaning that markets will happily continue their bullish outlook unless we receive a headline bomb. Tomorrow sees Australian GDP and China Services PMI, with both having the potential to outperform adding more fuel to the peak-virus fire in regional asset markets.
Equity rally continues, albeit at a more muted pace
Asian equities are mostly in the green today with the outperformer being Jakarta. The JCI is playing catch-up for the past week, rising 2.40% as Indonesia returns from its extended end of Ramadan holiday. The Nikkei 225 has risen 1.20% with the KOSPI all up 0.80%. Hong Kong has risen 0.50% with Singapore climbing an impressive 1.30%.
Mainland China exchanges are nearly unchanged on the day with the Shanghai Composite down 0.15%, and the CSI 300 flat. The lack of excitement in China likely reflects concerns that US-China trade issues, and Hong Kong, have only in a temporary lull.
Overall, however, the global recovery trade remains in full swing, powered by unlimited central bank money and the end of national lockdowns across the developed world. Momentum remains strong, and global equity markets look set to stay “forward-looking” into Europe and North America.
The US dollar sell-off pauses for breath in Asia
The belated charge by currency markets out of defensive US dollar positioning, and into more risk-seeking homes continued overnight. The Dollar Index of developed currencies fell by 0.53% to 97.82. EUR/USD and GBP/USD consolidated their recent gains although USD/JPY remained anchored around 108.00. US dollar outflows being balanced by JPY outflows from Japan investors.
The real stars of the overnight session continue to be the commonwealth commodity-based Australian, Canadian and New Zealand Dollars. With their high beta to China and world trade, all three rallied impressively overnight and look set for more gains in the short-term. The AUD/USD rose 1.95% to 0.6800 and now targets 0.6930. The NZD/USD rose 1.40% to 0.6295 overnight, and this morning is currently testing its 200-day moving average (DMA), at 0.6320. A close above here today signals more gains ahead for the Kiwi. The USD/CAD fell 1.45% to 1.3570, falling through its 100-DMA at 1.3725 in the process. USD/CAD’s next target is now its 200-DMA at 1.3460.
Overall, despite pausing for breath in Asia, the rotation out of US dollars is set to continue. The euro, commodity and Asian emerging currencies are all set to outperform into the second half of the week.
Oil consolidates aa markets await OPEC+ meeting
The OPEC+ grouping is likely to meet on June 4th, although there is no official confirmation as yet. The behind-the-scenes gossip appears to imply that both Russia and Saudi Arabia are content to extend the production cuts for a few months more. Oil markets though, have been burned before on the bonfire of Saudi/Russian relations, and appear to prefer to wait for official confirmation. US oil must also negotiate the API and official US Crude Inventory data today and tomorrow.
The week’s event risk has taken the heat out of the oil rally for now, although both Brent crude and WTI remain consolidative, rather than retreating. Brent crude climbed 1.70% overnight to $38.35 a barrel, with WTI unchanged on the day at $35.40 a barrel. Prices have crept cautiously higher in Asia today, boosted by a positive equity market performance and no headline surprises from Beijing or Washington DC. Brent has risen to $38.70 a barrel, and WTI has climbed to $38.60 a barrel.
Assuming that oil successfully navigates the OPEC+ meeting and the egos of Washington DC and Beijing, both contracts should be able to continue their recent climb. Notably, a close above $40.00 a barrel on Brent crude, sets up a potential rally to $45.00 initially, to close the considerable price gap on the daily charts.
Gold grinds higher but lacks momentum
Gold continued to grind higher, boosted overnight by a generally weaker US dollar, and residual shorter-term concerns over US-China trade relations. Gold rose by 0.60% to $1740.00 an ounce, although it has retreated slightly to $1737.00 an ounce in Asian trade, as equities rise across the region.
Having been burnt so severely buying into the break of resistance at $1750.00 an ounce previously, traders are unlikely to show the same enthusiasm this time, should gold rise above that level. We also note that gold faces formidable resistance still in the $1800.00 area. Gold’s rally most likely reflects the weakness in the US dollar and not a sea change in its near-term structural outlook. Gold will probably continue higher, but at a glacial pace, and caution should be exercised above $1750.00 an ounce, lest another bull-trap spring shut.