There were no ugly surprises over the weekend, either from the German Federal elections, or, more importantly, the Evergrande (HK:3333) saga in China. Nor has the surge in oil prices on Friday, that has continued unabated today in Asia, dented equity investors enthusiasm, with Asian stock markets off to a rollicking start to the week.
The German elections have reached an inconclusive result, to the surprise of no one. At time of writing, the ruling Christian Democrats (CDU) are narrowly trailing the Social Democrats. (SPD) Both leaders are claiming a mandate to start coalition negotiations which on the mathematics, will require three parties coming together. That means that CDU incumbent, outgoing Chancellor Angela Merkel, and her government remain in power until a coalition is formed. With an outcome possibly months away, that probably explains why EUR/USD is sharply unchanged at 1.1720.
Markets seemed to be rapidly pricing in Evergrande as a fully controllable outcome that won’t spill over China’s borders into the wider financial universe. Evergrande has not made its $85.0 million US dollar coupon payment due last week, and it has another $47.5 million coupon due this week. It appeared that the 30-day grace period will be used to its fullest.
News that its Electric Vehicle subsidiary was facing severe liquidity problems sent those Hong Kong listed shares down 25.0% in early trading today, but seemed not to have mattered a jolt. China stocks were on fire today, helped along by another CNY 100 bio liquidity injection by the PBOC, and I suspect, China’s “national team” “smoothing” stock markets.
That was given more credence by news outlets running stories all weekend and about electricity-intensive sectors and factories being forced to shut down temporarily to meet emission targets and to cap the rise in energy prices. That won’t be good news for value chains anywhere in the world or inflationary input anywhere in the world. Once again though, markets were unconcerned.
In the US, the House of Representatives pushed back the $1.2 trillion infrastructure bill vote. Progressives, seemingly intent on destroying the Democrats mid-term election chances next year as quickly as possible, want the bill tied to the $3.5 trillion build back better plan, something moderate Democrats have pushed back on due to cost.
The US debt ceiling is fast approaching as well with Republicans indicating the Democrats will have to pass a vote to raise it on their own, instead of the usual bi-partisan vote. Once again, a mess like this should weigh on market sentiment, but was being complacently ignored. Nike’s announcement on Friday that supply chain issues could affect stock levels into the crucial shopping season had a greater dampening effect on Wall Street.
Even the sight of gas pumps running dry over Britain this weekend, as panic buying took hold amidst a truck-driver crunch and skyrocketing energy prices, didn't dent sterling this morning, again sharply unchanged at 1.3665. That said, plans to draft the army in to deliver gasoline, and a government backtrack on foreign drive visas hasn’t move sterling either.
Japan’s LDP will select a new Prime Minister to replace PM Suga on Wednesday. Japan equity markets have outperformed over the last month as investors there expect whoever is chosen to reopen the fiscal pork barrel. The four way race appears to be wide open, and nothing can diminish Japan’s fiscal stimulus myopia, not even surging oil prices.
On that note, nerves about energy shortages continued to add momentum to oil’s price rally. Notably, natural gas was trading at nearly twice the per barrel equivalent of oil. Thanks to some ill informed headline grabbing by the UK press, Britains were panic buying gasoline over the weekend.
Natural gas storage was also below seasonal levels in Europe with Norway’s Equinor promise of more gas ignored by markets. China was forcing parts of key industries to temporarily close, and oil was 1.50% higher in Asia, a most unusual move as Asian markets prefer to buy dips and not chase prices. All of Asia is basically reliant on energy imports and thus, surging energy prices should be weighing on regional equity markets.
I learned long ago that markets can remain irrational longer than you or I can stay solvent, and it appears that is how Asia was choosing to start the week. Financial markets never let the facts get in the way of a good story and I’m not sure a set of shocking China PMIs, due on Thursday, will change the stimulus forever.
Evergrande being contained, the winter of energy discontent, and US political economic self-harming will shake the FOMO-TINA dip-buyers. It seems the no news or bad news is good news. To quote Gordon Gekko, “Greed, for lack of a better word, (I have one by the way, its starts with St and ends with y), is good.” I will observe the migrating herds with interest this week from the safety of my safari vehicle.
Asian equities off to a flying start
With no major developments on the Evergrande front over the weekend, markets seem to have priced in oblivions for the EV subsidiary already, Asian stock markets were off to a flying start. Banks were leading the rally across the Asia-Pacific region, I am guessing on the assumption that no material compromise will occur if the China property market hiccups.
All the more interesting was that Asia was ignoring the non-descript finish in New York, where rising US bond yields and a supply chain warning from Nike (NYSE:NKE) ahead of the crucial Christmas season, unwound intraday rallies and left Wall Street almost unchanged. The S&P 500 rose just 0.15% whiles the NASDAQ edged lower by 0.03% and the Dow Jones closed just 0.10% higher. US futures on all three indexes rallied powerfully today, rising by 0.50% on no news is good news euphoria.
Asian markets gave back some of their early gains but were broadly higher. The Nikkei 225 was up 0.50% while the KOSPI was 0.45% higher. In China, the broader Shanghai Composite was 1.30% lower, but the narrower SOE-heavy Shanghai 50 leapt 2.0% higher. The CSI 300 rallied 0.85% while the Hang Seng was 1.05% higher. The price action suggested to me that China’s “national team” was out and about buying, with another liquidity injection by the PBOC helping proceedings.
Regionally, Singapore leapt 1.20% higher led by the big banks, while Kuala Lumpur and Jakarta slipped by 0.30%. Taipei rose by 0.20% while Bangkok and Manilla were unchanged. Australian markets were enjoying a stellar day as commodities and energy rallied, with those two sectors and banking outperforming. The ASX 200 was 0.80% higher, with the All Ordinaries rising by 0.70%.
It seems that a dialing down of contagion fears, with some subtle assistance from China has been an irresistible lure for the buy-the-dippers. Interestingly, the commodity-centric KLCI and JCI were the worst regional performers today, with ASEAN, Singapore excepted, suffering from a rotation back into the North Asia heavyweights. European stock markets are likely to take their lead from Asia’s reduced Evergrande concerns, and open higher this afternoon. UK markets could be the exception after gas stations ran dry there over the weekend and winter of discontent noises increase.
Currencies are sleepless in Singapore
Currency markets limped to the close in New York on Friday, with a rise in US yields reversing the US dollar’s early losses and leading most majors to an almost unchanged close. The dollar index rose 0.21% to 92.28, easing modestly to 92.24 in directionless Asian trading with the index locked in a 92.00 to 92.50 range.
EUR/USD was unchanged at 1.1722 today and its key levels at 1.1680 and 1.1660 below, and 1.1750 above. GBP/USD was also unchanged from Friday at 1.3675, its Friday rally running out of steam ahead of resistance at 1.3750. With news that the government is looking at conscripting the army into the fuel delivery business, the UK energy woes will likely cap gains in sterling. A failure of critical support at 1.3610 potentially signals another 300 points lower.
USD/JPY climbed 0.35% to 110.70 on Friday before fading to 110.55 in Asia today. USD/JPY remains a yield differential play, ignoring politics in Japan. If US yields firm again this week, USD/JPY could test resistance at 110.80 which would signal more gains to 111.70 initially.
Rising commodity prices, diminishing Evergrande fears, and state reopening plans lifted AUD/USD 0.35% higher to 0.7285 today, after both it and NZD/USD fell 0.80% on Friday as risk-proxy indicators. Because of that, both Antipodeans remain acutely vulnerable to more selling pressure if news out of China takes another turn for the worse. As such, both likely remain sell on rallies for the first few days this week and definitely so if China’s Thursday PMI data is very weak.
Another neutral USD/CNY fixing and liquidity injection by the PBOC left Asian currencies free to follow improving risk sentiment. That has seen regional currencies rally across the board versus the US dollar today. USD/KRW fell 0.35% to 1175.80, USD/CNY by 0.10% to 6.4590 while the Indonesian rupiah, Malaysian ringgit, Thai Baht and Singapore dollar all recorded small gains. Like the Australian and New Zealand dollars, Asian FX will move to the nuances of swinging fear aversion levels this week. Negative developments on Evergrande could quickly see today’s gains disappear.
Oil rallies in Asia
Oil prices finished last week on a firm note as ever increasing natural gas prices continued to lift oil prices and coal prices as energy substitutes. With OPEC+ struggling to meet its present production targets and US shale production returning at a snail’s pace from last year, global energy woes were set to continue as the Northern hemisphere winter approaches, leaving the case for higher oil constructive. Brent crude and WTI closing 1.0% higher at $78.00 and $73.95 a barrel.
With news over the weekend that China was enacting energy curbs by shuttering factories and other limits on heavy energy users, Asia was once again scrambling, helped along by the UK’s energy distribution woes and winter fears. Oil was once again sharply higher, Brent crude and WTI rallying by 1.20% to $79.00 and $74.85 a barrel, having been nearly 2.0% higher at one stage this morning.
Markets were nervous about supply constraints, no more so than Asia, which imports most of its energy needs. That alone should mean that price dips will have plenty of buyers queued up. Despite the Relative Strength Indexes (RSIs) moving close to overbought on both contracts, the fear index and physical demand equation indicated that an $80.00 handle on Brent crude will occur sooner rather than later. Next weeks OPEC+ JMMC meeting now assumes a far greater importance, although I do not expect OPEC+ to indicate any change to their present production plans.
Brent crude will have resistance at $79.50, the intra-day high, followed by $80.00 a barrel. It should then move quickly to $82.00, and a rally to the 2019 highs around $87.00 a barrel in the days ahead is not inconceivable. Brent crude’s technical picture remains constructive as long as prices remain above $76.00 a barrel.
Having risen through resistance at $74.20, WTI traded as high as $75.30 intra-day, marking out initial resistance. Its next targets $75.50 and $77.00 a barrel, a significant double top and the high of 2018 and 2021 which would likely see $80.00 tested quite quickly. Only a failure of $70.00 a barrel darkens the bullish technical outlook.
Gold lingers in limbo
Gold rose in Asia today, but that was probably a coat-tailing move of the strong rallies in palladium and platinum this morning, itself a function of a decent rally industrial metals. On Friday, heightened fear sentiment continued to provide modest support to gold as it rose 0.47% to $1750.50 an ounce. In Asia, the broader commodity rally lifted gold another 0.47% higher to $1758.50 an ounce even as Evergrande nerves have diminished.
Given that US yields and the US dollar have risen over the past week, always a negative for gold prices these days, it is a measure of the power of the commodity rally and the fear sentiment in markets that gold is now nearly 1.0% higher over the last two sessions. If Evergrande and China nerves continue easing, it is likely that gold will start to, once again, find headwinds.
Gold had support around $1740.00 an ounce, with resistance at $1780.00 an ounce. That range was likely to cover trading for the greater part of the week but I believe that gold’s rally remains fragile and a move lower to $1700.00 an ounce will eventually occur, especially if Fed tapering momentum rises.
Bitcoin shrugs of China
Bitcoin and other alternative currencies tanked on Friday as China announced a complete cryptocurrency ban. Bitcoin fell by around 10.0% at one stage. However, over the weekend sessions, Bitcoin has shown some resilience and has now recovered the majority of those losses, trading at $43,950.00 in Asia. It may well be that China’s previously announced crackdowns had already been built into prices, meaning the kneejerk reaction quickly ran out of steam, or maybe Elon Musk said something.
What I do note is the Bitcoin’s 100-day moving average (DMA) has successfully stopped every sell-off over the past week in its tracks. Although Bitcoin seems to be confined within a noisy $41,000.00 to $45,000.00 range, and as long as the 100-DMA, today $41,106.00, holds on a daily closing basis, Bitcoin’s price action remains constructive. A rise through $45,000.00 should see the FOMO-gnomes driving the price back towards $50,000.00.