The overnight session was a noisy one. The heads of the Netherlands and Austrian central banks wrung their hands about runaway European inflation, briefly lifting the euro. US Consumer Confidence fell. However, S&P/Case Shiller Home Prices rose to 19.10% YoY for June.
Delta nerves and supply chain bottlenecks are impacting some data, but the unlimited zero per cent central bank money continues to pump up asset prices. In other words, business as usual.
The net result made for a boisterous session, particularly in the currency and equity space, but ultimately, prices closed not too far from where they started. We can expect more of the same for the rest of the week ahead of Friday's US Non-Farm payroll data, which is really the only game in town ex-Asia.
Turning to Asia, the first day of the month saw pan-Asia manufacturing PMIs released across the region. The ASEAN 10 came in at an average of 44.50, highlighting the impact of the groupings' COVID-19 battle. With perhaps the exception of Singapore, I expect those effects to linger well into Q4 of this year.
If the Non-Farm Payrolls prints above 1 million jobs this Friday, the taper trade will return, and many of those recent Asia FX currency gains will be reversed. If both the US and Europe move to taper in Q4 as I expect, the divergence in monetary policy (ASEAN is in no position to hike rock bottom rates right now) means I expect ASEAN FX to underperform for the rest of the year.
The North/South divide in Asia was also stark. South Korea, Japan and Taiwan Manufacturing PMIs remained firmly in expansionary territory. That is a continuation of a trend that has been well entrenched since the pandemic's beginnings, with Northern Asia making a lot more of what the rest of the world wants, in contrast with the legacy sector dominated ASEAN.
The elephant in the room for the long North Asia, Short ASEAN view is China. This morning, the Caixin Manufacturing PMI followed yesterday's official number South, falling under 50.00 to 59.20, contractionary territory. That rounds out a grim week for China's PMIs as COVID-19 lockdowns and the same supply chain challenges the rest of the world is experiencing erode economic performance.
Whether some of those are transitory or not, like the transitory inflation question, is just about impossible to predict. We will just have to wait and see how it plays out; it is unlikely to be good for Mainland equities, though.
We would expect China to open the stimulus spigots at this point based on their past playbook. In all likelihood, they will. However, President Xi's "Common Prosperity" drive, which involves so many sector clampdowns or "investigations," I can't keep up, complicates the picture. China's government doesn't enact policy for a few months and then drop it; when they do something, they keep doing it. Thus, any stimulus transmission this time around may have a lesser impact than previously.
The nuances of capitalism don't appear to be high on President Xi's agenda, although I am super happy President Xi is cutting kids' online game time to zero. Hopefully, they start reading books instead of having their brains turned to digital mush. Slower China growth will have implications for the rest of Asia as well, and I am sure the downward revaluation exercise for China equities is not yet done.
Between the Delta variant and China's pivot to wealth inclusivity and redistribution, my view that ASEAN would be the value trade of Q4 is now in the dustbin. Asia will recover, but I expect it will be a laggard except Singapore, where the vaccination triumph and a powerful financial and high tech manufacturing center leave it well placed to jump ahead of the crowd.
The Manufacturing PMIs dominate the economic calendar across Europe and the Americas today. In Europe, they should be supportive, although with some ECB members becoming very vocally hawkish, further rhetoric from that quarter will dominate investors' minds.
The ECB meeting next week could be frisky. A low print by the US ISM PMI may spark some temporary selling in the greenback and lift equities as taper fears recede, but any directional moves will be temporary ahead of Friday's jobs data.
Asia equities shrug of weak PMIs
Asian equities were broadly higher today, with even China markets quickly shrugging off the soft Caixin PMI. Being the first day of the month, some mechanical institutional money could be deploying as monthly savers restock fund managers' coffers. Or it could be that the soft PMI data across much of Asia has investors pricing in ultra-low rates for longer.
The US had an almost unchanged finish overnight despite all the noise surrounding the consumer confidence data. The S&P 500 finished just 0.14% lower while the NASDAQ edged 0.04% down while the Dow Jones was just 0.12% lower at the close. The rally in Asia lifted futures on all three by around 0.30% today.
Today, Japan's Nikkei 225 leapt 1.15% after PM Suga suggested an election could not be held while Japan battled COVID-19. A lowering of election uncertainty played out well with investors and was helped further when the BOJ's Wakatabe suggested the BOJ could "do more" if the economy worsened; read more easing. The KOSPI was quiet comparatively, rising by just 0.15%.
China markets also rallied strongly after dipping on the low-ball Caixin PMI release. It seems again that hopes of stimulus were lifting stocks, with the Shanghai Composite rising by 0.50% and the narrower Shanghai 50 leaping 1.95%. The CSI 300 rallied an impressive 1.15%, while the Hang Seng was 0.60% higher.
The story is similar in Singapore, 1.0% higher today, although Taipei was unchanged. The poor regional PMIs seem to be weighing on ASEAN, though, with Jakarta down 0.75%, Bangkok down 0.35%, Manilla down 0.25% and Kuala Lumpur down 0.65%.
India could have enjoyed a decent start to the day after last night's GDP release showed an impressive rebound even considering YoY baseline effects. Australian markets were slightly lower on the day after softer Q2 GDP, and its continuing COVID-19 battle introduced a dose of reality to domestic markets. The ASX 200 fell by 0.35%, while the All Ordinaries edged 0.15% lower.
Given the first day of the month buying evident among the heavyweights of North Asia, it is not unreasonable to expect European markets to open higher this afternoon along with London. Tonight in the US, volatility will be driven by the ISM Manufacturing data and the ADP Employment. Although poorly correlated lately, the ADP data will be used to adjust expectations for this Friday's Non-Farm's release.
The dollar remained in ranging mode
The euro and sterling spiked overnight after ECB officials made hawkish comments, but the rally quickly ran out of steam. The weak consumer confidence and Chicago PMI data similarly failed to inspire a deeper US dollar retreat. Looking at the price action overnight, it seemed that markets were content to play the range in the major currency space while waiting for the Friday Non-Farm release.
The dollar index fell 0.06% by the session's end overnight but reversed that today in Asia, climbing 0.10% to 92.74. I expect the index to trade in a 92.50 to 93.00 range until Friday's data release. Today's, weaker regional PMIs appeared to have sparked some US dollar short-covering in Asia.
EUR/USD briefly spiked 50 points to 1.1850 before returning to 1.1800, and GBP/USD spiked to 1.3805, its 200-day moving average (DMA), before returning to 1.3745, where it remains in Asia. Those two levels were forming barriers to further rallies, and the price action overnight suggested that stronger US data prints this week could leave them vulnerable to another downward correction.
AUD/USD and NZD/USD maintained their V-shaped recovery gains, trading at 0.7325 and 0.7050, respectively. Both currencies were lifting by falling New Zealand COVID-19 cases yesterday. Still, today's data showed an increase once again, which has flattened the exuberance but has not been enough, yet, to turn sentiment. Having said that, a rise through 0.7400 and 0.7100 by the down-under dollars suggests another 200 point rally by both is possible.
The USD/CNY was once again unmoved at 6.4615 today after almost unchanged basket components led to an uneventful fix. The PMI data had little impact on USD/Asia today, which mostly traded lower led by 0.25% rallies by the Malaysian ringgit and Korean won. Asian currencies, it seemed, were also content to remain on a shallow glide path into Friday's Non-Farm Payroll data.
Oil awaits OPEC+
Oil markets moved sharply lower overnight despite the ravages of Hurricane Ida and a huge 4.0 million-barrel fall in US API Crude Inventories, proving once again that markets use this data very selectively if it doesn't agree with the popular narrative. Brent crude plunged by 2.25% to $71.70, and WTI fell by 0.85% to $68.50 a barrel.
The best line I read to explain the fall overnight was that US demand would fall because of the damage from the hurricane. This is, of course, complete nonsense when you think about it. A better explanation is likely to be the softer US PMI and Consumer Confidence data and traders reducing long positioning into today's OPEC+ meeting, with a dash of month-end flows thrown in for good measure.
This evening's OPEC+ meeting will set the tone for the market, although the scheduled 400,000 bpd increase is well priced into markets. Only a significant deviation from that would spark volatility. Oil markets were rising on the first day of the month along with Asian equities, though. Brent crude increased by 0.55% to $72.05, and WTI by 0.60% to $68.95 a barrel. It seemed that Asia was pricing in a higher change of China stimulus lifting demand after this morning's disappointing Caixin PMI, we shall see.
Despite the volatility overnight, I am holding to my view that Brent crude will remain in a roughly $72.00 to $74.00 a barrel trading ranges this week, OPEC+ or not. Similarly, $68.00 to $70.00 a barrel should contain WTI.
Gold's consolidation continues
Gold contented itself to trade in a roughly $1800.00 to $1820.00 an ounce range overnight, finishing 0.14% higher at $1813.80 an ounce. Asia was equally moribund, with gold rising just 0.14$ to $1816.40 an ounce.
Gold's V-shaped recovery has run out of momentum for now, but that said, it was not showing any meaningful signs of fatigue here either. Gold had nearby support in the shape of the 100 and 200-day moving averages (DMAs) at $1809.50 and $1814.00 an ounce. As long as gold holds above this zone on a closing basis, it will continue consolidating gains with the moving averages offering an almost magnetic attraction at the moment.
Only a fall through $1780.00 an ounce will call the rally's longevity into question while it faces formidable resistance between $1830.00 to $1835.00 an ounce. Like currency markets, gold looked to be waiting for Friday's US employment data to determine its next directional move.