I’m hearing the name Tina a lot these days and frankly, I can’t disagree with it. Tina stands for “There Is No Alternative” and is mostly used these days to justify the relentless equity rally. With interest rates at rock bottom globally and zero in much of it, even a 2.0% yield on a half-decent stock looks attractive. In a world where the Italian and Greek governments can fund at close to zero percent, and you have to pay the Germans for the right to lend them money, Tina looks even more attractive. No red carpet awards designer dress required.
China markets have taken Tina to heart today, sending China Evergrande Group's (HK:3333) shares 22.0% higher intra-day so far after Hong Kong, where they are listed, returned from holiday. Vacuous promises from the Evergrande Chairman that obligations to home buyers and wealth management product owners would be met, along with being able to pay a local coupon payment today, have markets in a worst is over frenzy. China investors seem to have taken Tina to heart although Tina Evergrande does sound like the stage name of a Eurovision Song Contest contestant, the sacred peak of Euro musical talent.
A story posted by www.asiamarkets.com yesterday said that the China government is getting ready to take Evergrande over and split it into three separate companies to be folded into the bottomless maws of state-owned enterprises. That was apparently good news, certainly Mainland China and US markets thought so. I’m pretty sure though that Tina Evergrande holders would be left dressed in rags, making today’s price action even more irrational.
Nor is there any word yet on whether Evergrande intends to pay the coupon due today on its offshore US dollar bonds. It has 30 days to do so before being labelled a defaulter. The Eurovision Song Contest is often controversial, and I suspect Tina Evergrande will be just as much. I note that major shareholders are dumping their holdings into Tina Evergrande’s rally today, so perhaps holding off on voting for her song, a better contestant will surely follow.
Speaking of Tina, we saw a similar effort in New York overnight. The FOMC meeting was interesting in that it signaled that a taper was almost locked and loaded to start by the end of the year. Perhaps more intriguing was the Fed dot plot. Half of the 18 committee members now have their first rate hike dot in 2022, and if employment accelerates along with inflation, more may join them.
The reaction was what I expected though, such is life as a pilot pish in the world’s capital markets. US yields stayed pretty much unmoved as expected. The US dollar rose which I did expect. But equity markets in the US rallied strongly. Not what I expected. I suspect Tina belted out a top-ten chorus after US yields stayed put and the encore was a diminishing of Evergrande nerves as outlined above. Tina may never win the Eurovision Song Contest, but until the cold reality of the Fed taper hits home, she is still going to sell a lot of records. (Young people, google vinyl records for clarity.)
Markets in Asia have shrugged off Fitch’s downgrade of China growth today, preferring Moody’s narrative that China will permit faster credit in the second half of 2021, even though we are already halfway through it. Evergrande resolution hopes are also driving positive sentiment across equities and commodities where the dip-buyers were already out in force yesterday.
Looking ahead, we have more central banks to come today in a busy week for the masters of monetary policy. Norway will almost certainly hike rates today, the first G-10 central bank to do so. With oil and gas prices firm to stratospheric, it’s hard to construct a bearish case for the Norwegian krone at the moment. The Philippine’s will ignore above-target inflation once again and leave rates unchanged at 2.0%. ASEAN monetary policy is entirely focused on economic recovery, inflation be damned.
Brazil hiked by 100 bps overnight, but Turkey will remain on hold today, lest another central bank governor joins the unemployment queue. The Bank of England will also remain on hold with some tail risk that they may signal more clearly, a tightening path. With gas prices wreaking havoc in Britain and not enough wind in the North Sea (who would have thought) to fill the energy gap, the BOE will probably sit on its hands.
Asian equities jump on Evergrande hopes
Asian equity markets were having a good day as perceptions of reducing Evergrande risks lifted sentiment. Evergrande’s stock price has rocketed over 20.0% higher in Hong Kong today despite any resolution probably meaning equity owners get wiped out. Much the same sentiment seemed to sweep New York markets overnight as it quickly became clear that the US dollar would be the Fed taper pressure valve, and not US bonds or stocks. That allowed Wall Street to seize the day on what it perceived as diminishing Evergrande tail risks.
The S&P 500 jumped by 0.95%, the NASDAQ leapt 1.02% higher and the Dow Jones powered to a 1.01% gain. Futures on all three continued rallying in Asia, climbing by around 0.20%. Japan was on holiday today, but South Korea returned with the KOSPI playing catchup for the past three sessions, easing by 0.40%.
Elsewhere though it is Thunderbird’s Are Go as Asian markets follow Wall Street and hitch a ride on Evergrande hopes. China’s Shanghai Composite rose 0.70% with the CSI 300 climbing by 0.60%. Hong Kong was 0.65% higher thanks to the buying frenzy in Evergrande stock.
Singapore jumped 0.85% higher with Taipei gaining 0.90% and Kuala Lumpur rising by 0.50%. Manilla was 1.05% higher ahead of a BSP decision expected to leave rates at record lows, while Bangkok was just 0.20% higher. Australian markets were rallying strongly as well, boosted by a continuing rally in commodities prices. The ASX 200 was 1.0% higher while the All Ordinaries rallied by 1.15%.
European markets enjoyed a strong session yesterday thanks to Wall Street, and a Fed taper is probably good news for them in the medium term as the euro is likely to fall as euro-rates remain low forever. With Asia also climbing aboard the rally today, European equities should enjoy another strong start. My one caveat on all the joy in equities today is that much of it seems to be built on diminishing Evergrande tail-risks. I would argue that all it will take is one nasty headline to emerge on that front and the entire day’s rally could quickly evaporate.
The US dollar rises on FOMC tapering talk
The US dollar had a choppy session overnight but with the FOMC clearly signaling that a year-end start to tapering is imminent, and with more members joining the 2022 hiking club on the dot plot, the US dollar finished the night higher. It would appear, for now, that the US dollar is the favored method of expressing the Fed taper, and not equities or bonds. The dollar index finished 0.26% higher at 93.44, easing to 93.37 in Asia as profit-taking hit the market.
Among the majors, euro and sterling looked the most intriguing. EUR/USD fell to 1.690 overnight before rising to 1.1705 in Asia. GBP/USD fell to 1.3617 overnight before recovering slightly to 1.3638 in Asia. Failure of 1.1680 on EUR/USD will signal a test of 1.1600. Failure of 1.1600 signals a larger move targeting 1.1200 to 1.1300 in the weeks ahead. GBP/USD appears to be tracing out a head and shoulders formation. Failure of around 1.3600 signals a 400 point move lower to 1.3200.
USD/JPY rose 0.50% to 109.80 overnight after the FOMC decision. Liquidity was much-diminished today with Japan away but any slight move higher in US yields should see 110.00 tested and a break of the recent 109.00 to 110.00 range. However, I believe that USD/JPY needs to break through the 110.50/111.00 range to signal a long-awaited directional move is finally occurring. That will likely require US yields to move quite a bit higher, certainly not a guaranteed outcome.
AUD/USD and NZD/USD both eased back to their weekly lows today and looked vulnerable to any negative headlines coming out of China. Asian currencies, for their part, gave ground only modestly overnight post-FOMC. Another neutral USD/CNY fixing from China was aiding stability in the region and it appeared that regional currencies were being more responsive to positive or negative developments in Asia, rather than the US, for now.
Oil prices on falling US inventories
Oil prices powered higher overnight as official US crude inventories fell by 3.50 million barrels, sending US crude stocks to their lowest level in three years. With Gulf of Mexico production returning slowly, and natural gas prices remaining sky high, the structural outlook for oil remains promising as OPEC+ struggles to meet even its current production quotas.
Brent crude rose by 1.60% to $75.85 overnight, climbing another 0.65% to $76.35 a barrel in Asian trading today. WTI rallied 1.55% to $71.95 before climbing another 0.60% higher to $72.35 a barrel in the Asia sessions.
Brent crude had support at $74.50 and $73.35 a barrel, and only a fall through $72.00, where its 50 and 100-day moving averages (DMAs) lie, changes the medium-term bullish outlook. Resistance was nearby at $76.70 and a rally through that level signals more gains targeting $78.00 a barrel.
WTI had support at $72.00 and $70.70 a barrel. Only a failure of the $69.50 region, the week’s lows and the 50 and 100-DMAs, signals a chance in the bullish outlook. Resistance was at $73.00 and $74.25 a barrel. In any case, even if we get sudden downward spikes in either contract due to short-term long capitulation, sell-offs should be short in duration with plenty of longer-term buyers waiting to pounce.
FOMC and Evergrande send gold lower
The temporary lull in Evergrande nerves removed haven support from gold overnight, as did a stronger post-FOMC US dollar. Gold fell by 0.35% to $1768.00, having failed above daily resistance at $1780.00 an ounce intra-session. In Asia gold eased once again after a giant rally in Evergrande stocks, falling by 0.23% to $1764.00 an ounce.
Much of gold’s recent rally has been built of increasing fear gauges led by our friends in China. It is unlikely that the Evergrande saga is past “peak-fear,” and we are probably only one headline from another havens rally. As such, gold is not likely to capitulate lower this week and should hold any dips towards support at $1740.00 an ounce. However, with a higher US dollar clearing the FOMC taper pressure valve at the moment, unless Evergrande turns into a contagion mess, gold is unlikely to gain enough momentum to recapture $1800.00 an ounce.
As such, I expect any gold rally this week to run out of momentum in the $1780.00 to $1790.00 an ounce zone, with $1740.00 an ounce covering support below. That should be a wide enough range to keep short-term traders happy, but I am afraid the Evergrande may only be giving long-term bullish investors a temporary respite.