As expected, US Retail Sales and Factory Output data on Friday plunged to record lows. That wasn’t enough to topple the reopening trade though, with asset markets' eyes firmly focused on the future and not the here and now. Equities and energy both managed to chisel out more gains to end the week.
Much the same theme is dominating the start of the Asian week, although the Trump administration continues to rachet up pressure on China vis-a-vis trade. Huawei is facing yet more restrictions on the use of US technology with the as-expected threats of Chinese retaliation. China, meanwhile, is facing uncomfortably raising pressure to be more “open” about the origins of the COVID-19 virus from around the world. The Trump administrations rhetoric has continued, with another US official accusing China of deliberately exporting COVID-19 across the globe. As the world’s largest exporter, I am slightly lost as to why China would want to send the rest of the world into a depression. I look forward to more clarity over their motives from Washington DC.
If Washington DC’s intent to escalate trade issues has markets nervous, it is being trumped by the increasing pace of lockdown reopenings around the world, and the expected follow-on uptick in economic activity. The peak virus recovery trade remains in the ascendant. China, for its part, is helping the process along with comments from officials at the long-delayed People’s Congress meeting that started yesterday. The PBOC head stated that it would implement a “flexible and powerful monetary policy.” For its part, the Finance Minister said that the government would increase the fiscal deficit and issue special Treasury bonds. After being relatively quiet as the world melted down, China appears to be launching a two-pronged monetary and fiscal approach to support growth and jobs, and this should be supportive of the Asian market this morning.
China’s announcements have also trumped statements from the Fed Chairman Jerome Powell, in a television interview yesterday. Mr Powell saw a recovery lasting until the end of 2021. He expressed concern that secondary COVID-19 outbreaks could adversely affect asset prices. Therein lies the rub; the recovery trade is predicated on the hope that the world dodges a bullet on secondary waves of COVID-19 infections, that double-dip deep-sixes the global economy. The jury is out on that one though, and until we see actual evidence of it occurring, the peak virus buy everything trade will likely remain the path of least resistance.
Data this morning from Asia has been mixed. Japan GDP fell once again, tipping the country into an official technical recession. Officials are considering a further supplementary budget to support the economy. Singapore Non-Oil Exports rose by 9.70% in April YoY, although they fell by 5.80% on a MoM basis. The numbers, while welcome, flatter to deceive. Outsized gains in the medical sector are boosting exports. Thailand’s GDP is released today and is expected to have fallen by 4.50%, although Bangkok’s emergence from lockdown should limit the damage. That concludes Asia’s major data points, and internationally, it is a tranquil day from a data perspective.
Much attention will be focused on gold today. Despite other asset markets rallying strongly as well, gold has continued to grind out gains over the past week. This morning, gold has finally broken to the topside of its one-month range, rising through the $1750.00 an ounce resistance, to $1756.00 an ounce. I will deal with the technical aspects below, but what is fascinating, is that gold is rising along with other asset markets. I have long suspected that inflation potentially can return from its 20-year exile post-COVID-19. A bit like the Eagles, maybe it just took a vacation. Gold’s rally I believe is based on inflation prospects, and not haven buying. If the rally is sustained, exciting times lie ahead for both gold and silver.
China’s increased clarity on fiscal and monetary stimulus will dovetail nicely into the peak virus recovery rally. That should trump Trump’s trade narrative and other more salutary warnings from officials around the globe. The net result should be that Asia, and Europe to follow, are set for a positive session.
Equities open stronger on China stimulus and peak virus
Regional stock markets have enjoyed a positive start after Wall Street managed to shrug off bad data on Friday, and still close in the green. China’s announcement of two-pronged monetary and fiscal stimulus measures to boost the economy have given an extra tailwind to Asian markets this morning. Chipmakers though, are underperforming following the United States’ new measures to restrict Huawei from access to technology over the weekend.
The Nikkei 225 and KOSPI are 0.30% higher, with the Shanghai Composite, CSI 300 and Hang Seng all 0.10% higher. Singapore’s Straits Times has climbed 0.60% after the Non-Oil Exports data with Kuala Lumpur up 0.25% and the Jakarta JCI unchanged.
Trade-centric Australia and New Zealand are the star performers as lockdowns ease, and China prepares more stimulus. The ASX 200 and All Ordinaries are 1.45% higher, with the NZX 50 rising by 0.70%.
Trade tensions are tempering Asian technology stocks today, which is in turn muting, what is, a generally positive start for Asia. With the momentum clearly still with the peak-virus trade though, Asia looks set to enjoy a positive start to the week.
The US Dollar eases slightly as investors price in economic recovery.
The Dollar Index contract versus major currencies has eased by 0.11% this morning as traders price in further global gains as lockdowns are eased across the world. USD/JPY has risen 0.30% to 107.10 today though, as the haven yen also weakens. A rally above 108.00 heralds more gains to the 100.00 level.
Elsewhere though, the dollar has generally eased against the major currencies with both the AUD/USD and NZD/USD outperforming today, rising 0.50% to 0.6445 and 0.5950 respectively. Having borne the brunt of trade-war concerns last week, both Antipodeans have potentially generous recovery potentials this week if the peak-virus momentum continues.
The British pound continues to be concerning, however, as officials at the Bank of England (BOE) continue to sound alarms over the actual state of both the British and global economy. The BOE Chief Economist said over the weekend that the Bank continues to look at negative rates. GBP/USD fell sharply on Friday by 1.05% to 1.2100. Given the weekend comments, it is somewhat surprising that it remains unchanged today. The technical picture remains strongly negative for GBP/USD. Having broken support at 1.2160, GBP/USD looks poised for further falls to the 1.1800 regions. A confused reopening message from the government, and the prospect of difficult Brexit negotiations ahead, are not helping matters.
Oil’s rally continues as the global recovery story, and June shorts are squeezed
Oil continued to power higher on Friday as global production curbs, and global recovery expectations continued to underpin the impressive rally. The Baker Hughes Total Oil Rig count fell again on Friday, dropping 9.40% to 339, another multi-year low, further supporting prices. Brent crude rose 5.0% to $32.70 a barrel and WTI had another outstanding day, rising 6.60% to $29.70 a barrel.
Both contracts continue to outperform this morning as China stimulus measures, decreasing supply and peak virus hopes see Brent crude climbing 3.80% to $33.70 a barrel, and WTI rising 4.40% to $30.70 a barrel.
Most of the market’s attention will be on the June WTI futures expiry tomorrow. Perversely, compared to last month, the pressure is to the upside, with the intra-month rolls skewed in favour of the bulls. Although open interest in the June contract has plummeted, CME data still shows an open interest of 55,605 contracts in the June futures. That is a fall of nearly 20,000 contracts from Thursday, but still leaves some 56 million barrels of oil open for the expiry tomorrow.
Obviously, some of that number is underlying commercial interest and not speculative interest. Nor did the back month's contract open interest spike markedly on Friday, implying that shorts were being closed, and not rolled. With oil bid anyway, that leaves a lot of potential shorts still to be rolled, or closed out, in the next two days. The set-up of the June WTI expiry should ensure that WTI in particular, remains supported on any dip, and maybe vulnerable to short squeezes in the near term.
Gold prices jump again in Asia as technical resistance fails
I have said previously, that I would not take my feet off the desk until gold broke through either $1650.00 an ounce, or $1750.00 an ounce. Much to Mrs Halley’s pleasure, my feet are officially off the table this morning as gold posts a sharp rally of 1.05% in Asian trading.
Gold has risen $18.00 today to $1761.00 an ounce as I write. A look back over the past three sessions, including today though, reveals some powerful price action by the yellow metal. The last three days have seen 1.0% rises, characterised by gold finishing at its highest, and then moving directly higher during the new trading day. That implies that the gold rally has some strong underlying momentum to it, that cannot be ignored.
As I have stated above, we are perhaps seeing the beginnings of the long-awaited inflation hedge occurring, as opposed to the safe-haven trade. The amount of monetary policy easing, conventional and unconventional, cannot be ignored and unlike the GFC, in a post-COVID-19 nationalised supply chain world, has the potential to generate inflation that has been missing in action for the past 20 years., Unless you are trying to buy a house, stocks, save for your retirement as a young person; or are looking for a pay rise. In which case, you have seen the inequality effect of quantitative easing's secret inflation in all its glory.
Gold is at its highest in eight years this morning, but we require a daily close above $1750.00 to confirm a break of the one-month range. Undoubtedly, there has been stop-loss and model buying today once $1750.00 an ounce gave way, but gold has teased and broken my heart before. Gold now faces formidable multi-month resistance at $1800.00 an ounce before a retest of the post-GFC highs above $1900.00 can be considered. The initial picture today though, suggests that gold is now well and truly on the move to higher levels, as its fundamentals have been screaming for quite some time.