Wall Street edged lower overnight as markets shuffled between concerns over the US recovery after a downbeat Fed Beige Book and tapering nerves after the New York Fed President Williams said tapering could occur sooner rather than later. William's comments were further backed up by a monster 10.924 million JOLTS Jobs Openings release suggesting that employment isn't the issue in the US; it's getting Americans to take those jobs. That is, in some way, ameliorating the shocker of a Nonfarm Payroll print last Friday.
Stirring the pot more, US Treasury Secretary Yellen sent a letter to Congressional leaders overnight warning that the US Government will run out of money in October unless Congress agrees to raise the debt ceiling. Given the polarized nature of US politics these days, you wouldn't bet against a serious game of blink developing between the two sides, and we haven't even got to President Biden's 3.50 trillion packages yet.
So, we have a lot of uncertainty pulling markets in both directions with no clear theme developing and plenty of risks circling. It's no surprise, therefore, that investors have pushed equities slightly lower. However, the primary beneficiary of a move to safety has been the US dollar, which has staged a pretty impressive comeback. US equity markets could easily drop 10% and still be in a rampant bull market, so that is not concerning me much. I can't see the buy-the-dip mafia being able to resist a material pullback; look at Chinese equities. Perhaps this month's FOMC will provide some much-needed clarity on the Fed taper; I won't be holding my breath, though. I can see September typified by danger when overtaking, choppy range-trading ahead.
China's inflation data has passed without incident this morning. August Inflation YoY and MoM came in 0.80% and 0.10%, respectively, lower than expected. PPI YoY soared to 9.50%, but this was only slightly higher than July and well-priced in. More attention will be focused on Tencent (OTC:TCEHY) and NetEase (NASDAQ:NTES) being called in for a meeting and being told to end their focus on gaming profits, along with a host of "suggestions" regarding children and online games. Another day, another intervention by the Chinese government. I remain concerned that buying the dip in China equities is a dangerous business at the moment.
Bank Negara Malaysia announces its latest policy decision today, with markets probably less focused on it than usual. The ringgit has rallied impressively of late, removing that pressure from the central bank. BNM has also been vocal that their priority is supporting the countries pandemic recovery. That should see rates left at record lows of 1.75%, with only a surprise cut shaking the tree.
Today, attention will be focused on this evening's European Central Bank policy decision. It is likely to drown out any reaction to Germany's Trade Balance later today. Rates will remain unchanged, of course, with markets only interested in if the ECB announces a dovish taper to their pandemic support bond-buying programme, or at least signals a timetable to such. Despite some hawkish inflation table-slapping from some Northern European members, I believe the doves will carry the day this time around. A tapering, whether by cutting the headline bond-buying targeted amounts or doing less month, but over a longer period (a very European can-kicking strategy), should support the euro.
Asian equities err on the side of caution
US equities fell overnight as conflicting signals on recoveries, employment and QE tapering saw investors err to the side of caution and take exposure off the table. The S&P 500 fell 0.12%, the NASDAQ retreated by 0.56%, and the Dow Jones edged 0.20% lower. The negativity continues in Asia, with futures on all three indices down 0.20%.
That sense of caution has flowed into Asia today, which is in the red. The further clampdown on Tencent and NetEase is further dampening the mood on the Mainland and Hong Kong. I continue to believe that buying the dip in China equities is only for the wildly optimistic or the very nimble.
Japan has finally paused for breath following the impressive Suga-rush resignation stimulus hope rally. The Nikkei 225 is 0.60% lower this morning but is still over 5.0% higher for the week. In South Korea, the KOSPI is 1.05% lower, continuing a tough week with its high beta to the global recovery.
In China, the Tencent and NetEase news has dampened spirits and highlights that the Government's "shared prosperity" drive still has plenty of juice left in it. The Shanghai Composite is down just 0.15%, but the CSI 300 has fallen by 0.50%. Hong Kong, home to the listings of many China-tech juggernauts, including Tencent, is feeling the brunt, tumbling by 1.55%.
Singapore's Straits Times has risen by 0.20% today, with sentiment perhaps buoyed by the arrival of the first flight from Germany under the quarantine-free scheme. After several days of conflicting virus advice from various Singapore government departments (very un-Singapore-like, I can assure you), there is nothing like a light at the end of the tunnel to lift spirits.
Elsewhere, though, the picture is mixed. Kuala Lumpur has fallen 0.75% ahead of the BNM policy decision, while Bangkok is unchanged, while Jakarta and Taipei have climbed by 0.20%. With a high beta to the global recovery, Australian markets have taken fright over those fears overnight, led by resource companies. The ASX 200 has plunged by 1.65%, while the All Ordinaries has tumbled 1.50% lower.
The generally nervous performance by Asia, coming after a wary Wall Street session, is likely to see European equities open lower later today, especially with an ECB policy meeting ahead. With many conflicting signals pushing investors both ways right now, it is unsurprising that many choose to move to the sidelines and wait for the fog to clear.
Uncertainty equals a stronger US dollar
You can take your pick from the US recovery, the global recovery, the US debt ceiling, the ongoing China government clampdowns on the private sector, tapering nerves from the Fed and ECB, or just the plain old pandemic. It all adds up to a mish-mash of conflicting signals now, and in such markets, a flight to safety, meaning US dollars, is almost inevitable.
With that in mind, it was no surprise to see the US dollar rally once again overnight, the dollar index climbing 0.20% to 92.70, where it remains in Asia, which once again looks to be in possum in the headlight’s mode. The rise overnight leaves the index in the middle of its recent trading range between 92.00 and 93.20, which I still expect to contain the week's trading.
Both EUR/USD and GBP/USD eased overnight to 1.1820 and 1.3765, being unchanged this morning. Support in EUR/USD at 1.1800 is unlikely to be challenged unless the ECB is very dovish, with risks skewed to further rallies post-meeting. GBP/USD, on the other hand, broke a rising support line at 1.3800 on Monday, which has risen to 1.3830 as of this morning. With record worker shortages, compounded by Brexit, threatening consumer goods shortages, and tax hikes on the way, GBP/USD's rally to 1.3900 last week, could be its best showing for a while.
The deteriorating risk environment globally is weighing on AUD/USD and NZD/USD, both falling overnight before easing another 0.10% to 0.7360 and 0.7090 in Asia. Further US strength and support failure nearby at 0.7345 and 0.7075 respectively threaten further losses to 0.7300 and 0.7000 this week, possibly more.
Asian currencies are trading quite mixed now. The Malaysian ringgit continues to hold near a recent high with USD/MYR at 4.1470 today. An attractive carry, a new Prime Minister and firmer oil prices continue to offset pandemic woes, a trend I am noticing across the currency space. Meanwhile, the South Korean won and Indian rupee have staged sharp reversals. USD/KRW rising to 1170.25 and 73.669 as of this morning, with KRW and INR down around 1.0% this week. Both countries have arguably, a greater delta to the global recovery, and both may be suffering fast money outflows to Japan and China markets this week. If China equities turn sharply lower once again and risk sentiment improves, both stand to post sharp gains.
With the global data calendar relatively light this week, currency markets have been left to their own devices and will always jump around on shifts in sentiment. Yesterday and today, it is negative, leading to US Dollar strength, tomorrow it could be positive, leading to US dollar weakness. I expect the chop-fest to continue with no small amount of tail-chasing.
Oil prices rise overnight
Speaking of choppy range-trading, oil markets are doing just that this week. Overnight, prices rose, ostensibly because Gulf of Mexico production is struggling to get back on. But when one looks at the ranges of this week, last night’s price increases have merely returned Brent and WTI back to roughly unchanged for the week. That suggests that the street is divided in the near-term direction, as disrupted Gulf of Mexico production is offset by global recovery nerves. So, oil markets are suffering from lots of noise but little substance right now.
Brent crude rose by 1.60% overnight to $72.65, adding another 10 cents to $72.75 a barrel in Asia. WTI rose by 1.33% to $69.30 and has added five cents to $69.40 a barrel in Asia. With Asian trading comatose, we are again awaiting New York markets tonight to set the tone.
Brent crude has double tops nearby at $72.80 and $73.70 a barrel. Support is at $71.35, the 100-DMA, and $70.50 a barrel. WTI has resistance at %69.75 and $70.60 a barrel, with support at $68.35 and $67.70 a barrel.
Gold struggles once again
Gold continues to warn that its upward momentum had waned materially and that its rally is in trouble. Overnight, another bout of US dollar strength saw gold ease by 0.25% to $1789.50 an ounce, edging lower to $1788.00 an ounce in Asia.
Gold still looks highly vulnerable to further US dollar strength. The short-covering yesterday to $1797.50 an ounce in Asia looks like a dead cat bounce. Should the US dollar fall by chance tonight and gold not rally still, the outlook will become darker still.
Gold has nearby resistance at $1800.00, followed by the 100 and 200-DMAs at $1809.50and $1815.65 an ounce. Support is at $1782.50, the overnight low, followed by $1780.00 an ounce. If $1780.00 fails, gold could fall to $1750.00 an ounce.