Q2 of 2022 is going to start as messily as Q1 has finished, with markets buffeted by a multitude of strong winds from various directions, with the outcome no clearer for the future than ever. The Russian invasion of Ukraine continues to grab headlines, with massive downstream impacts on commodity prices globally. The Federal Reserve may engage in a series of 0.50% rate hikes that will change the investing landscape profoundly for the world. Other countries may also be forced to play vigorous catchup on monetary policy to rein in soaring inflation. The Ukraine invasion re-energised the commodity price complex, pushing into the future, the previously anticipated falls in inflation as baseline effects kicked in.
Economic historians and others are fretting that the sanctions on the Russian central bank and the freezing of its international reserves, could be the start of the end of the US dollar as the world’s primary reserve currency. The world's food supply chain is in danger as well as fertiliser prices soar. Natural gas is a vital component in that process and it is expensive. Russia and Belarus are major potash exporters and Russia and Ukraine are global wheat powerhouses.
Will Europe have its gas supplies from Russia turned off in May if it refuses to pay for them in roubles? President Putin signed a decree saying as much, having told the Germans something completely different a few days ago. Will there be blackouts that plunge Europe into a recession? Are Venezuela and Iran going to make their way back onto international oil markets? That would certainly be helpful.
Did I mention elections in France, Japan and Australia and mid-terms in the US?
In Asia, all eyes are on China, whose economy is has been slowing anyway. The property developer leverage problem has gone quiet but has not been resolved. Its Covid-zero policy is also becoming a bit more challenging, with Shanghai’s lockdowns tightened overnight. That will weigh on equity markets locally today. Will the Chinese leadership hit the “s for stimulating” button this time around? That’s not a foregone conclusion if you look at China's equity markets.
There’s plenty there to give investors headaches and I know I’ve missed some. I pity the economic forecaster in this environment. Further signs that all these forces are starting to impact Asia have appeared this morning in the PMI data dump across the region.
China’s Caixin Manufacturing PMI fell to 48.1 from 50.4 in March. Plenty of that retreat can be laid at the feet of Covid lockdowns but soaring energy and commodity prices are playing their part. Across ASEAN S&P Global Manufacturing PMIs for March eased. The exceptions were commodity-heavy Indonesia which recorded an asthmatic 0.10 gain to 51.3, and the Philippines, which rose to 53.2 but was starting from the back of the pack anyway.
Other bright spots were Japan, where Jibun Bank Manufacturing PMI rose to 54.10 in March, helped no doubt by a weaker yen. South Korea's trade balance shrank though to $0.14 billion (in dollar terms), versus an expected print of $6.50 bio. Soaring imports, which rose by 27.90% in March are to blame. It is not at all clear whether soaring imports were due to a post-lockdown consumption rally, or whether soaring costs of manufacturing inputs are starting to bite. Finally, Singapore’s URA Property Index rose only 0.40% QoQ, a far cry from Q4 2021s 5.0% gain. With the MAS due to tighten this month, Singapore’s property rally, like plenty of others right now, appear to be running out of steam in the face of higher rates and less disposable income.
Rising interest rates around the world, soaring food and energy prices, re-energised by the Ukraine invasion, have yet to make their presence fully felt, and are not going away anytime soon, even if that war ended tomorrow. The initial data from Asia, encompassing the Ukraine war, is not making comforting reading today.
US equities fell yesterday, but I am taking that with a grain of salt. Price action over a month and quarter-end can be very misleading thanks to portfolio rebalancing flows. Not just in equity, but also in currency markets as well. Today's Nonfarm Payrolls data will hopefully answer some of the questions around whether the Fed really will have to say 0.50% multiple times this year. Yesterday's PCE Price Index and Personal Income and Spending came in roughly on expectations and didn’t move us closer to a definitive answer.
Markets are pricing in a gain of around 500,000 jobs. Another monthly print above 600,000 will have the hawks locked and loaded. A soft number under 400,000 will probably just add to the head-scratching about the future. I won’t guess what equity markets will do in either scenario, they probably don’t know which headless chicken direction they will take either. It will be a similar story for bonds. Be prepared for a “peace in our time rally” once again at the first sign of progress in today’s Ukraine/Russia talks as well. As ever, the winner will be V for volatility, surely the best call I’ve made in 2022.
Soft data leaves Asian equities cautious
Asian equities had a very mixed day after stocks in the US ended the quarter on a soft note, although quarter-end flows may have muddied the price action. The S&P 500 fell 1.57%, the NASDAQ fell 1.54%, and the Dow Jones fell 1.56%, even as US yields eased on quarter-end buying and on target US data. In Asia, some of those moves have been immediately reversed, with futures on all three indexes rising around 0.50% today.
The picture in Asia is rather more mixed. Soft PMI data from across Asia and a weak close yesterday have been offset somewhat by US futures rallying in Asia. Overall, though, Asia is trading with a slightly negative tone and appears content to wait for the US employment data this evening.
One glaring exception is Mainland China's equity markets which are rallying strongly today. The Shanghai Composite is 0.70% higher, while the CSI 300 has rallied 1.30%. That is despite Caixin PMI data disappointing and tightening Shanghai lockdowns. China markets could well be seeing portfolio inflows from investors related to the start of the quarter or some assistance from China’s “national team” to “smooth” markets. Notably, Hong Kong has fallen 0.75% today as Modern Land (HK:1107) and Evergrande (HK:3333), possibly over audit delays.
Elsewhere, the Nikkei 225 has fallen by 0.40%, with South Koreas KOSPI losing 0.50%. Taipei is 0.75% lower, with Singapore unchanged and Kuala Lumpur 0.35% higher. Jakarta and Bangkok are flat. Australian stock markets have booked modest gains, the ASX 200 and All Ordinaries edging 0.10% higher.
European equities slumped once again yesterday as potential energy shortages sapped sentiment once again. None of the developments, including President Putin’s signing of a “pay in roubles or no gas” order will make the landscape any happier for European equities. I expect them to remain heavy today before we move into the directional turkey shoot known as the US Nonfarm Payrolls.
The US Dollar reverses losses
The US dollar rebounded yesterday as the energy payment standoff with Russia and Europe took a turn for the worse, and quarter-end demand for US bonds boosted dollar demand. The dollar index rose 0.52% to 98.35, adding another 0.13% to 98.48 in Asia. Some weekend risk-hedging buying could well be supporting the greenback in Asia. Support at 97.70 has held nicely, forming a rough triple-bottom. That support level remains key to the US dollar’s direction into next week.
EUR/USD retreated as the Euro/Rouble payment standoff with Russia became murkier. Markets were lulled into complacency by Ukraine/Russia negotiations, while President Putin telling the German Chancellor it was ok to pay in Euros, only to reverse that yesterday, sent a curveball to the single currency while giving a harsh lesson on caution regarding anything that Russia says. EUR/USD fell 0.82% yesterday to 1.1067 where it remains in Asia. EUR/USD remains stuck at the bottom of its recent range and the risks have now skewed to the downside once again. Immediate support/resistance are 1.0950 and 1.1200.
It looks like the sell-off in USD/JPY was in no small part due to financial year-end repatriation flows, as the pair has sharply reversed yesterday’s losses in Asia. USD/JPY has jumped 0.77% to 122.63 today, despite some oblique jawboning by Japanese officials. US yields may have dropped slightly, but so have Japanese ones after the BOJ operations this week. The US/Japan rate differential trade is back with a vengeance today. Key levels are 121.25 and 123.25.
Oil is slightly softer in Asia.
Oil prices fell in Asia after the Biden SPR release story started circulating. That was confirmed yesterday, with 1 million bpds for the next 180 days to be released. Markets had mostly priced it and the OPEC+'s 432,000 bpd production increase, meaning both Brent and WTI eased only slightly in New York trading. Brent crude finished 4.60% lower at $107.40, and WTI fell by 5.85% to $101.15 a barrel.
In Asia, softer PMI data across the region has sparked growth worries and sees oil easing once again. Brent slipping to $106.00 a barrel, and WTI to 99.90 a barrel. The US SPR release should be enough to cap oil prices now unless the Eastern European situation deteriorates markedly. Conversely, if Venezuelan and/or Iranian oil is allowed to return to the official international market, in combination with OPEC+ hikes and the SPR release, I would confidently say we have seen the highs in oil. I fully admit there are a lot of different variables there.
Overall, I still expect 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 are balanced out by geopolitical tensions elsewhere.
Gold trades sideways
Gold traded sideways once again yesterday, eking out a 0.23% gain to $1937.00 an ounce, having tested $1950.00 intraday. Gold remains trapped in a $1920.00 to $1950.00 range, but its inability to rally as the US Dollar and US yields fell this week is a concern and I believe risks are still skewed to the downside. Gold is unchanged in Asia, with no sign of weekend haven buying, another ominous sign, especially as the US Dollar continues to rally today.
Gold markets once again look like they have got themselves long and wrong, this time above $1960.00 an ounce. With gold unable to rally on a softer US Dollar or lower US yields, the risks of another downside washout are rising once again. Gold has resistance at $1950.00, with support at $1920.00 and $1915.00. A sustained break of the $1880.00 region will probably trigger a capitulation trade, potentially pushing gold down to $1800.00 an ounce.