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Asian Markets In Wait-And-See Mode

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By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

US stock markets roared higher overnight as omicron nerves settled on initial indications that the new variant is very contagious, but less severe symptom-wise. Whether that is the case or not remains to be seen and omicron sentiment will continue driving swings in market direction into next week. It was enough to flush the FOMO gnomes of Wall Street into action though, with stock markets rallying impressively on Wall Street.

Believe it or not, there are other things going on in the world, however. Most immediately, the US releases Non-Farm Payrolls this evening and assuming the omicron news remains less end of the world, a print above 550,000 jobs should see the faster Fed-taper trade reassert itself. That may nip the equity rally in the bud, while the US Dollar and US yields could resume rising.

Asian markets are subdued today across asset classes and even US equity futures have edged lower this morning. There is a fair bit of negative news floating around this morning, and Asia as a whole, after a tumultuous week, looks ready to sit out today’s session on the sidelines. The US Non-Farm Payrolls is as good a reason to be cautious as any. Additionally, the US Congress has passed a bill to temporarily fund the US Government into mid-February, but no progress has yet been made on lifting the overall debt limit, which could be hit as early as next December 15th.

Staying with the US, the US SEC has announced a tightening of listing requirements surrounding ownership and the certifying of auditors in overseas territories who audit foreign companies listed on US exchanges. That is directly aimed at China of course, which have no intention of allowing any such thing. Markets are speculating today that the requirements will see an exodus of Chinese companies from the US exchanges. China ride-hailing giant, Didi Global, has announced it will delist from the US after a troubled IPO that also angered the Chinese Government, never a smart business move. It comes after the Grab SPAC IPO flopped yesterday, with a classic stagging of the IPO occurring. Buying the IPO and dumping into the initial rally. That saw Grab finish 20% lower on the first day of trading. Time will tell if Grab’s “patriotic” listing in the US will remotely justify its $40 billion valuation. I suspect not, and that the only winners will be the pre-IPO shareholders.

Nerves continue to swirl in the China property space as well today, with troubled developer Kaisa failing to gain the 95% approval to swap out its maturing $400 million, note due next week, for longer maturities. Default risks have now reached deafening levels for Kaisa who have until December 7th to pay. Additionally, a 30-day grace period on an $82.50 million coupon for Evergrande falls on 6th December next week.

China’s Caixin Services PMI for November fell unexpectedly to 52.1 this morning from 53.8 in October, raising fears that domestic consumption is fading on the Mainland on rising labour and energy costs, as well as selective virus restriction. That has overshadowed improved services PMI data from Japan, Australia, Singapore and Hong Kong. South Korean markets are struggling as well, with virus cases surging, capping gains on the Kospi and also the Won.

Add in the danger of being whip-sawed on random omicron headlines, it’s hardly surprising Asia wants to sit the rest of today out. I expect a similar response from Europe as well. Next week, we see a lot of CPI releases from the region, including China, as well as the Reserve Bank of Australia and Reserve Bank of India policy decisions, plus China trade data. The week after will see a central bank policy meeting frenzy, including the US FOMC, and depending on where the world is with omicron, a number of central banks will struggle to hit the W for Wimp button, regarding their inflation outlook. Volatility has been the winner this week, and I fully expect it to continue to do so through the rest of December.

Asian equities refuse to follow the US lead.

The perpetual mega-bulls of the US stock market had their day in the sun finally overnight as US indexes moved sharply higher as the armchair epidemiologists of day trading decided that omicron, while contagious, will be mild symptomatically. The S&P 500 jumped 1.42% higher, with the Nasdaq rising by 0.83%, while the Dow Jones leapt by 1.83%. In Asia, some short-term profit-taking is evident as the news wires turn slightly sour in Asia, futures on all three indexes edging around 0.15% lower.

With US equity futures markets unable to maintain upward momentum today, tier-1 US data due this evening, virus nerves and concerns reappearing around China property and China US-delisting worries, Asian markets have mostly rallied, but only modestly so. The Nikkei 225 has climbed by 0.35%, with the Kospi climbing by 0.45%. Mainland China sees the Shanghai Composite 0.55% higher, with the CSI 300 rising by 0.35%. Hong Kong is in the red, though, as China property nerves sap sentiment. The Hang Seng has fallen by 0.65%.

Across the region, Singapore is 0.25% higher, with Kuala Lumpur up 0.30%, while Jakarta has fallen by 0.30%. Manila has jumped by 1.05%, with Bangkok down 0.15% and Taipei unchanged for the session. Australian markets have recorded cautious gains, the All Ordinaries edging 0.10% higher and the ASX 200 gaining 0.20%.

European markets will likely unwind some of yesterday’s losses, but gains will be limited ahead of the US Non-Farm Payrolls. As ever this week, the street is one negative omicron headline away from turning sharply lower en masse. If the virus news ticker stays quiet, a higher US Non-Farm Payrolls print could see equity gains capped, with a slightly lower or on target print of 550K, not enough to entirely remove faster Fed-taper fears.

The US Dollar rallies.

With omicron nerves easing overnight the US Dollar reasserted itself, rallying modestly versus major currencies and holding steady in the EM space. The dollar index finished 0.10% higher at 96.12, edging higher to 96.17 in Asia. Notably, both the Australian and New Zealand Dollars, key risk-sentiment barometers fell once again to 2021 lows, hinting that caution remains the key mantra in currency markets still.

EUR/USD has slid back below 1.1300 to 1.1295 and an upbeat US Non-Farm Payrolls tonight will set up a test of 1.1200 again next week. In a similar vein, GBP/USD has moved back through 1.3300 to 1.3390, with a retest of 1.3200 possible. USD/JPY rose as Yen haven buying subsided overnight, climbing to 113.20 this morning. If indeed we are at “peak-omicron,” then this weeks low of 112.50 is likely to be the low for the pair for the foreseeable future.

The EM space was relatively sedate overnight, but the US Dollar has resumed advances once again versus Asia FX today with USD/KRW, USD/IDR and USD/MYR up around 0.20%. A firm Non-Farm Payrolls number tonight will increase the pressure of the Asian currencies, whose monetary policies, buy and large, are not aligned with a Federal Reserve set to increase the pace of its taper.

I expect currency markets to remain subdued into the US tier-1 data. As usual this week, the caveat is omicron. If another negative headline were to hit the wires today, we will likely see US Dollar selling with the Yen and Swiss Franc as the main beneficiaries.

OPEC+ surprises, with conditions.

Oil markets rallied last night despite OPEC+ surprising the markets and the author by deciding to continue their pre-planned 400,000 bpd production increases this month. OPEC+ has left a huge poison pill in their statement, retaining the right to convene an immediate meeting and to change their mind if omicron continues to send oil prices lower. That has made it dangerous to be short at these levels and the net effect was to lift prices higher, after the market sold immediately on the headline, before reading the small print.

Overnight, Brent crude finished 2.25% higher at %70.50 a barrel, while WTI rallied 2.25% to $67.35. In Asia, both contracts have continued to rally, rising 0.50% to $70.85 and $69.70 a barrel. Unless we get a major omicron escalation, I will stick my neck out and say that this week’s lows for Brent and WTI likely represent the lows for the medium-term. The relative strength indexes (RSIs) are still oversold meaning both contracts remain vulnerable to a further short-squeeze.

The overnight lows for Brent at $65.80 and for WTI at $62.50 a barrel form short and medium-term support, and it is unlikely the market will want to test OPEC+’s mettle at this stage. The grouping having shown itself to be relatively immune to pressure from the US President amongst others. That said, virus concerns continue to linger, meaning Brent crude will struggle to recapture $75.00 a barrel, and WTI $70.00 a barrel in the nearer term.

Gold’s standing 8-count continues.

With virus nerves subsiding and the Fed-taper stronger US Dollar story reasserting itself, gold continued to take a standing 8-count, remaining near its weekly lows. Gold fell 0.77% to $1768.25 an ounce overnight, before weekend risk hedging buyers in Asia lifted it back to $1772.50 this morning.

Gold is flirting with its last major support level at $1770.00 an ounce, and failure tonight sets up a possible wave of stop-loss sellers and a retest of $1720.00, possibly as early as next week. Gold’s inability to rally with skyrocketing risk aversion, a weaker US Dollar or weaker US yields remains deeply concerning.

Gold has resistance between $1791.00 and $1792.00 an ounce, where the 50, 100 and 200-day moving averages are clustered. Behind that is $1800.00 and then $1815.00 an ounce.

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Markets

Markets Today – Cautiously Higher, China, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European stock markets moved cautiously higher on Monday as investors were tempted back in after a turbulent start to the year.

It’s been a relatively quiet start to the week, with the US bank holiday naturally weighing on activity. With that in mind, I don’t think we can read too much into today’s advances, especially as they’re occurring alongside rising yields which doesn’t seem particularly sustainable at a time of such anxiety in the markets.

It will be interesting to see if investors are tempted back in now that earnings season is underway. The emergence of omicron may mean that many companies don’t enjoy the kind of performance that was expected before but that doesn’t mean there won’t be plenty of positives to take away.

Of course, there are areas that will naturally chip away at that enthusiasm. Whether that’s margins being squeezed, prices increased or staffing costs, for example, there’ll be plenty for investors to get their heads around as they contend with sky-high valuations and a tricky economy this year.

PBOC cuts rates despite strong growth in 2021

A mixed bag of data overnight from China, where GDP growth exceeded expectations but retail sales fell short and the unemployment rate ticked higher. While the economy is still performing well after far exceeding its growth targets for 2021, many challenges remain, not least the crackdown on the property market that has led to firms defaulting on coupon payments and being forced into negotiations with bondholders.

This explains the PBOC decision overnight to cut interest rates and further easing is expected to follow as the central bank looks to support the economy through a turbulent period.

Oil rally continues as output continues to fall short

Oil prices are edging higher again at the start of the week as it continues its remarkable run since bottoming in early December. It’s up more than 30% over that time and there still appears to be momentum in the move. Kazakhstan has seen its output return to pre-unrest levels but that’s done little to slow the rally in recent sessions.

Ultimately it comes down to the ability of OPEC+ to deliver the 400,000 barrel per day increase that it’s vowed to do each month. The evidence suggests it’s not that straightforward and the group is missing the targets by a large margin after a period of underinvestment and outages. That should continue to be supportive for oil and increase talk of triple-figure prices.

Can gold break key resistance?

Gold is marginally higher on the day after pulling back again late last week. The yellow metal has repeatedly struggled at $1,833 and it would appear it’s having the same struggles this time around as well. It did finally break through here in November but it didn’t last and it seems the psychological barrier is as firm as ever.

That said, it’s impossible to ignore gold at the moment as it continues to rally despite more and more rate hikes being priced in around the world and yields rising in tandem. There could be an argument that we’re seeing safe haven or inflation hedge moves due to the current environment which could become more clear over the coming weeks.

Another run at $40,000?

Bitcoin is down a little over 2% at the start of the week and continues to look vulnerable having failed to bounce back strongly off the recent lows. It appeared to be gathering some upside momentum at times last week but it quickly ran into resistance just shy of $45,000 where it had previously seen support. All eyes are now on $40,000 and whether we’re going to see another run at that major support level.

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Oil Extends Gain Above $86 Per Barrel Amid Tight Supply

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Brent crude oil extended gains above $86.16 per barrel on Monday as global oil investors are projecting that supply will remain tight despite the surge in Libya crude oil production. The increase, they bet would be offset by restraint from top crude oil producers.

Frantic oil buying, driven by supply outages and signs the Omicron coronavirus variant will not be as disruptive to fuel demand as previously feared, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained for a while longer, traders said.

“The bullish sentiment is continuing as (producer group) OPEC+ is not providing enough supply to meet strong global demand,” said Fujitomi Securities analyst Toshitaka Tazawa.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, together known as OPEC+, are gradually relaxing output cuts implemented when demand collapsed in 2020.

But many smaller producers cannot raise supply and others have been wary of pumping too much oil in case of renewed COVID-19 setbacks.

Meanwhile, Libya’s total oil output is back to 1.2 million barrels per day (bpd), according to National Oil Corp. Libyan output was about 900,000 bpd last week owing to a blockade of western oilfields.

“Libya’s oil production had dropped to a good 700,000 bpd at the start of the year, which had played its part in the price rise,” said Commerzbank analyst Carsten Fritsch.

Concerns over supply constraints outweighed the news of China’s possible oil release from reserves, said Fujitomi’s Tazawa.

Sources told Reuters that China plans to release oil reserves around the Lunar New Year holidays between Jan. 31 and Feb. 6 as part of a plan coordinated by the United States to reduce global prices.

Saudi Energy Minister Prince Abdulaziz bin Salman said on Monday that it is the prerogative of the U.S. government whether to release supply from strategic petroleum reserves.

Festering geopolitical threats to supply are also supporting bullish sentiment, analysts said.

U.S. officials voiced fears on Friday that Russia was preparing to attack Ukraine if diplomacy failed. Russia, which has amassed 100,000 troops on Ukraine’s border, released pictures of its forces on the move.

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Markets

Markets Today – Inflation, Jobless Claims, Boris Blunder, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a rollercoaster start to the year and as we head into earnings season, it’s hard to say exactly where investors stand.

Blocking out the January noise is one thing but it’s made far more complicated by omicron, inflation, and the rapid evolution of monetary policy. Yesterday’s reaction to the inflation data was a case in point. The data mostly exceeded expectations, albeit marginally, while headline inflation was a near 40-year high of 7%. And yet the response was broadly positive.

I get that traders were perhaps fearing the worst and, as I’ve referenced before, it does feel like markets are at peak fear on US monetary policy which could make relief rallies more likely. But there is also underlying anxiety in the markets that could make for some volatile price action for the foreseeable future.

Perhaps earnings season will bring some welcome normality to the markets after a period of fear, relief, and speculation. The fourth quarter is expected to have been another strong quarter, although the emergence of omicron will likely have had an impact during the critical holiday period for many companies. Of course, as we’ve seen throughout the pandemic, that will likely have been to the benefit of others.

And while earnings season will provide a distraction, it is happening against an uncertain backdrop for interest rates and inflation which will keep investors on their toes. It does seem that investors are on the edge of what they will tolerate and it won’t take much to push them over the edge. Which will be fine if we are near the peak of inflation, as many expect.

The data today looks a mixed bag on the face of it, with jobless claims coming in a little higher than expected, which may be down to seasonal adjustments. The overall trend remains positive and continues to point to a tight labor market. The PPI data on the other hand will be welcomed, with the headline number slipping to 0.2% month on month. Perhaps a sign of supply-side pressures finally starting to abate which will come as a relief after inflation hit a near-40 year high last month.

Sterling solid as pressure mounts on Boris

It seems impossible to ignore the political soap opera currently taking place in the UK, with Prime Minister Boris Johnson once again in the public firing line after finally admitting to attending an office party in May 2020.

In other circumstances, uncertainty around the top job in the country could bring pressure in the markets but the pound is performing very well. Perhaps that’s a reflection of the controversy that forever surrounds Boris, and we’re all therefore numb to it, or a sign of the environment we’re in that the PM being a resignation risk is further down the list when compared with inflation, interest rates, omicron, energy prices etc.

Oil remains bullish near highs

Oil prices are easing again today after moving back towards seven-year highs in recent weeks. It was given an additional bump yesterday following the release of the EIA data which showed a larger draw than expected. But with crude already trading near its peak, it maybe didn’t carry the same momentum it otherwise would.

The fundamentals continue to look bullish for gold. Temporary disruptions in Kazakhstan and Libya are close to being resolved, with the latter taking a little longer to get fully back online. But OPEC being unable to hit output targets at a time when demand remains strong is ultimately keeping prices elevated and will continue to do so.

A big test for gold

Gold is off a little today but the price remains elevated with key resistance in sight. The yellow metal has remained well supported in recent weeks even as yields around the world continue to rise in anticipation of aggressive tightening from central banks.

It could be argued that the bullish case for gold is its reputation as an inflation hedge, especially given central banks’ recent record for recognizing how severe the situation is. But with inflation likely nearing its peak, that may not last. That said, fear around Fed tightening may also be peaking which could support gold in the short-term and a break through $1,833 could signal further upside to come.

Can bitcoin break key resistance?

Bitcoin is enjoying some relief along with other risk assets and has recaptured $44,000, only a few days after briefly dipping below $40,000. That swift 10% rebound is nothing by bitcoin standards and if it can break $45,500, we could see another sharp move higher as belief starts to grow that the worst of the rout is behind it. It looks like a fragile rebound at the moment but a break of that resistance could change that.

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