Asian markets are showing tentative signs of life today after the sell-everything move lower yesterday. It looks more dead cat bounce than brave new world though as Beijing’s Covid-19 situation has knocked the Ukraine/Russia was, the Federal Reserve, threats of nuclear war from Russia, and even Elon Musk and Twitter off the headlines. I can’t imagine Elon is happy about that. Nothing that a 6,000km wide (3,728.25 Miles for Americans), hashtag etched on the surface of Mars won’t cure.
It seems that threats to China’s growth outlook thanks to its Covid-zero policy but begun by its regulatory clampdown and the property developer leverage trainwreck, trumps all as far as financial markets are concerned. That is an entirely reasonable assumption. For over two decades, China’s growth has been as solid an investment as a AAA-rated bond. China stopped the rot in the Asian financial crisis (the 1990’s kids), by not devaluing the Yuan. It became the consumer of last resort through and post the GFC. If this party is about to end as leverage, a virus and stubbornness catch up with China, it is indeed a schism, and not just for China.
Part of the problem is that the rest of the world has become addicted to China hitting a stimulate button bigger than anything you could buy in Amsterdam at the first sign of trouble. This time around, China appears to be sticking to its guns and simultaneously trying to deleverage certain sectors (property), while applying targeted stimulus to specific sectors such as SMEs, energy, agricultural production etc, as it locks down swaths of the country and keeps borders closed to play whack-a-mole with Covid-19.
Little surprise then that news of mass testing and limited lockdowns in areas of Beijing was the straw that broke the camel’s back. Unfortunately, China is finding out what other previously Covid-zero countries have. You have to be right 100% of the time, the virus only has to get lucky once. The incipient relief rally across currencies, equities, energy, and metals that we saw in New York and early Asia is likely to run into a China growth brick wall, as news emerges that China will expand mass testing to the whole of Beijing between the 26th and 30th of April. Asian currencies, including the offshore Yuan, and equities, are showing almost no reaction to the PBOC’s overnight foreign reserve cut for China banks, or further PBOC-speak around adequate liquidity and targeted support measures.
The China growth concerns have subsumed any data releases from Asia today. South Korean Advanced Q1 GDP eased to 3.10%, slightly better than expected. Similarly, Japan’s Unemployment for March fell to 2.60%. The Japanese Finance Minister has been on the wires denying the US and Japan were planning joint USD/JPY intervention, while also trotting out the usual watching currency markets closely rhetoric. USD/JPY hasn’t moved.
Singapore Industrial Production later today has downside risks, and a soft print may increase pressure on the Singapore Dollar once again, suffering like the Malaysian Ringgit, from its high beta to China growth. The Indonesian Rupiah weakened notably yesterday, breaking out of its carefully managed multi-month range after President Jokowi announced a palm oil export ban. The government has softened Pak Jokowi’s ban today to processed oils but contained a non-too-subtle warning to the country’s food oligarchs, that if cooking oil disappeared off the shelves again, the ban would be expanded. As I mentioned yesterday, food nationalism is an existential threat to social order and inflation in 2022. The Rupiah’s fall won’t be enough to bring forward Bank Indonesia’s tightening schedule, for now.
Europe’s data calendar is quiet, but the US releases a swath of data. That includes Durable Goods, S&P Case-Shiller House Prices, the House Price Index, Richmond Fed Manufacturing and Service, as well New Home Sales. Soft data will ease the Fed tightening noise, possibly supporting equities. While firm data is likely to have the opposite effect. Likely we will get a mixed bag with New Home Sales, in particular, having downside risks as mortgage interest rates soar.
With Fed speakers in pre-FOMC media lockdown, the only data that could break the markets out of its hawkish FOMC/China growth funk will be tech heavyweight earnings this week. Today we have Microsoft and Alphabet. Both should have had impressive quarters, but the real meat in the sandwich will be their 2022 outlooks going forward. Softer guidance will have stock markets back to square one once again.
Asian equities tentatively follow China higher.
US equities managed a dead cat bounce overnight as Twitter announced it had accepted a takeover bid from Elon Musk. That lifted the tech space on the Nasdaq sparking a relief rally. The S&P 500 rose by 0.60%, the Nasdaq climbed by 1.30%, and the Dow Jones gained 0.74%. The rally was assisted by a rally in US bonds, pushing long-dated yields lower. In Asia, US futures on the three indexes have posted modest 0.20 to 0.25% gains.
China stock markets plummeted yesterday on Covid-10 growth concerns, both the Shanghai Composite and CSI 300 losing around 5.0%. Mainland stock markets refused to take the bait of a foreign currency reserve cut for China banks overnight, starting the day soft as virus testing was extended to all of Beijing. Mysteriously, mainland markets have suddenly rallied along with bombed-out iron ore and palladium futures. I suspect that China’s “national team” has been asked to do some “smoothing” and restore some order to local markets. The Shanghai Composite has risen by 0.40%, with the CSI 300 jumping by 0.90%. The retail hot money is out in force in Hong Kong today as well, the Hang Seng has jumped by 1.70%. All I can say is beware of government-owned fund managers bearing gifts.
In Japan, the Nikkei 225 is tracking the Nasdaq recovery, rising 0.55% today. Similarly, South Koreas Kospi has climbed by 0.70%, while Taipei is only 0.10% higher. Price action across ASEAN is far more circumspect. Singapore is 0.15% lower, Jakarta is down 0.25%, but Kuala Lumpur has risen by 0.45%, perhaps supported by the Indonesia refined palm oil restrictions. Bangkok has gained 0.65%, with Manila losing 0.75%. Australian markets are playing catch up to the global selloff after being closed yesterday. The ASX 200 has tumbled by 1.80%, with the All Ordinaries retreating by 1.85%.
European equities managed to stem some of the bleedings overnight as the German IFO survey showed resilience. European equities may stick their head above the parapet again today if China’s engineered rally holds, although nuclear war comments from Russia will rightfully dampen enthusiasm. New York’s bullish-forever HODL FOMO gnomes are probably itching to buy the dip again, strong results from Alphabet and Microsoft will give them that excuse.
Currency markets remain in risk-aversion mode.
There was no sign of the modest relief rally spilling into currency markets overnight, with EM and DM currencies on the back foot as the US Dollar booked another night of gains. It has taken a rise by China stocks today to spur a gentle US Dollar retreat in Asia. The dollar index rose 0.61% to 101.74 overnight, before edging 0.20% lower to 101.54 in Asian trading. The index’s next technical target is the March 2020 highs around 103.00. Only a failure of 99.40 changes the US Dollar’s bullish outlook.
EUR/USD has closed on a weekly basis below 1.0810, a trendline that goes back to 1985. EUR/USD fell 0.80% to 1.0710 overnight before joining the relief rally in Asia, rising to 1.0733. The technical picture, potential energy sanctions on Russia, and a widening US/Europe interest rate differential, suggest EUR/USD will now fall to 1.0600 en route to 1.0300.
GBP/USD fell to 1.2700 overnight, just above support at 1.2670. It has risen in Asia as well, climbing to 1.2765. Failure of 1.2670 signals deeper losses targeting 1.2200 and potentially sub-1.2000 in the weeks ahead. GBP/USD would need to reclaim 1.3050 to change the bearish outlook.
USD/JPY fell 0.35% to 128.15 overnight as US yields eased, drifting to 128.05 in Asia. Japan Finance Ministry currency rhetoric has had zero impact today. USD/JPY risks remain heavily skewed higher, thanks to a hawkish Fed. Support remains at 127.00 and 126.00, with resistance at 129.50 and 130.00.
Falling base metal and energy prices, led by iron ore, increased the pressure on AUD/USD overnight. It lost another 0.80% to 0.7180, before clawing its way back to 0.7215 in Asia. AUD/USD could spend the next few sessions consolidating between 0.7150 and 0.7250 but remains vulnerable to another base metal wipe-out or China risk-aversion move. NZD/USD is trading sideways at 0.6635 as most of its exports have four legs and are not mined or pumped. Short-term rallies back to 0.6700 are possible, but it remains on track to test 0.6525 this week.
USD/CNH and USD/CNY continued rallying overnight as China’s growth fears accelerated. That was the story for Asia FX in general as it turned out. Today, the Yuan is gleaning modest support from overnight moves by the PBOC to cut Chinese bank foreign currency reserve requirements, and a neutral USD/CNY fixing today. USD/CNY has fallen by 0.45% to 6.5325, and USD/CNH has eased 0.25% to 6.5540. The moves today look corrective and consolidative in the context of the scale of the Yuan’s recent losses and risks remain skewed to more weakness.
USD/MYR and USD/IDR rose around 0.70% overnight, although both have eased by around 0.20% to 4.3475 and 14405.00 in Asia, in line with the relief rallies seen elsewhere. The MYR remains a favourite correlation trade to China’s situation and as such USD/MYR pressures will remain with the next target at 4.4500. I am expecting more consolidation in the near term as we await more China Covid updates and ahead of US tech-heavyweight earnings which could extend the general relief rally.
Oil rises in Asia.
Oil markets were sold heavily overnight on the China risk-aversion trade, as growth fears fed through to lower oil demand calculations. Brent crude fell by 3.45% to 102.50 after testing and bouncing of the $100.00 a barrel region intraday. WTI fell by 3.50% to $98.60, having tested $95.50 a barrel intraday. In Asia, the cautious relief rally by China’s equity markets has lifted oil prices modestly, Brent crude rising to $103.50, and WTI rising to $99.40 a barrel.
I have reservations that potential European energy sanctions on Russian oil and natural gas can be ignored for long. Nor can the impact from the Ukraine war and Russia’s exclusion from global energy markets. Weaker China growth or not, energy supplies remain constrained with geopolitical risks very elevated. The week also has plenty of binary outcome risk from the week’s data calendar internationally, especially US earnings, which could swing prices either way.
With that in mind, I am sticking to my guns and continue to expect that Brent will remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. That said, a few more negative headlines from Beijing regarding Covid restrictions could shift the balance decisively lower this week.
Gold culls long positioning.
Gold tumbled once again overnight, falling by 1.80% to $1898.00 an ounce. As expected, the loss of $1915.00 set off another round of stop-loss selling pushing gold as low as $1891.50 intraday. In Asia today, the timid relief rally has spread to gold markets as well, which have climbed by 0.25% to $1902.80 am ounce. Nothing in the price action suggests gold’s sell-off has reached its nadir, the price action suggesting just the opposite.
The speculative longs, disappointed with a failure to break through $2000.00 remain at risk of more losses still. With the US Dollar ignoring the modest reversals elsewhere retaining its strong inverse correlation. Gold has support at $1891.50 and $1880.00 an ounce. Failure of $1880.00 signals a capitulation trade targeting triangle support at $1835.00, and then $1800.00 an ounce.
On the topside, gold has resistance at $1915.00, $1940.00, $1980.00, and $2000.00 an ounce. I believe option-related selling at $2000.00 will be a strong barrier as evidenced by the price action last week. But ahead of that, gold still has a huge amount of wood to chop and probably needs some good news to come out of China.
