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Beijing Blues Hold Asia In Thrall

Asian markets are showing tentative signs of life today after the sell-everything move lower yesterday

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

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.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Another Turbulent Day

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

It’s been another turbulent session after stock markets turned sharply lower on Wednesday as investors fret over the outlook for the economy this year.

Results from Walmart and Target this week have brought into sharp focus the plight facing companies and consumers as inflation begins to bite. And that’s in a country that is still performing relatively strongly with a consumer that still has plenty of savings built up over the last couple of years. Others are not in such a fortunate position.

But inflation is catching up and profit margins are taking a hit. Soon enough though, those higher costs will continue to be passed on and consumers will stop dipping into savings and start being more careful with their spending. There’s a feeling of inevitability about the economy, the question is whether we’re going to see a slowdown or a recession.

The language we’re seeing from Fed officials isn’t filling me with confidence either. We’ve gone from them being confident of a soft landing, to a softish landing and even a safe landing, as per Patrick Harker’s comments on Wednesday. I’m not sure who exactly will be comforted by this, especially given the Fed’s recent record on inflation and past record on soft landings.

And it seems investors aren’t buying it either. A combination of these factors and no doubt more has sent equity markets into another tailspin, with Wall Street registering another big day of losses on Wednesday and poised for another day in the red today. Europe, meanwhile, is also seeing substantial losses between 1% and 2%.

Oil slips as economic concerns weigh

Those economic concerns are filtering through to the oil market which is seeing the third day of losses, down a little more than 1% today. We were bound to see some form of demand destruction if households continued to be squeezed from every angle and it seems we may be seeing that expectation weigh a little as we move into the end of the week.

Meanwhile, China is reportedly looking to take advantage of discounted Russian crude to top up its reserves in a move that somewhat undermines Western sanctions. Although frankly, it would have been more surprising if they and others not involved in them didn’t explore such a move at a time of soaring oil prices.

Still, I expect Brent and WTI will remain very high for the foreseeable future, boosted by the inability of OPEC+ to deliver on its targets and the Chinese reopening.

Gold buoyed by recession fears?

Gold appears to be finally seeing some safe-haven flows as markets react strongly to the threat of recession rather than just higher interest rate expectations. The latter has driven yields higher and made the dollar more attractive while the economic woes they contribute to seem more suited to gold inflows, it seems.

It will be interesting to see how markets react in the coming weeks if the investor mindset has turned from fear of higher rates to the expectation of a significant slowdown or recession. And what that would mean for interest rate expectations going forward. Perhaps we could see gold demand return.

Can bitcoin continue to swim against the tide?

Bitcoin is holding up surprisingly well against the backdrop of such pessimism in the markets. Perhaps because it’s fueled by economic concern rather than simply interest rates. Either way, it’s still trading below $30,000 but crucially it’s not currently in freefall as we’re seeing with the Nasdaq. Whether it can continue to swim against the sentiment tide, time will tell.

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Inflation Hits 40-Year High

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

European equity markets are a little flat on Wednesday, with inflation data this morning once again offering a reminder of the struggles that lie ahead.

Not that we need reminding given all of the data we’ve seen recently. And then there are the gloomy forecasts from central banks, with even the Fed now targeting a softish landing which feels very much like the stage before a mild recession. It may be time to buckle up and prepare for a very bumpy year.

Will BoE move to super-sized rate hikes?

UK inflation is running at a 40-year high and it’s not peaked yet as the cost-of-living crisis looks set to squeeze the economy into recession. While annual inflation came in slightly below expectations at 9%, pressures are broad-based and as the year progresses, it is expected to hit double figures.

There is still plenty more pain to come for households, most notably when the energy price cap increases again in October. But price increases are broad-based, as evident in the jump in core inflation to 6.2%. This comes as the Bank of England has warned of more pain and a probable recession, as it continues to aggressively raise interest rates in the hope of being able to catch up without inflicting too much harm in the process.

Like many other central banks, it has been heavily criticised for its misjudged faith in pandemic-induced inflation being transient for too long. And in the UK’s case, the problem looks far greater and more widespread, with Brexit effects compounding the problems and driving up prices. Can the BoE afford to continue raising rates so gradually, as markets expect with 25 basis points every meeting or will they be forced to join their US counterparts with super-sized hikes? Pressure is mounting.

Oil higher as China starts reopening

Oil prices are on the rise again as Shanghai takes a big step towards reopening following three days of no new cases in the broader community. Restrictions have been tight in many cities across China which have helped keep a lid on oil prices in this very tight market. But with activity now likely to pick up, crude prices could be on the rise once more.

Efforts toward a Russian oil embargo have failed, with Hungary continuing to stand in the way. That could be slowing the rally in oil still, as could US talks with Venezuela which may eventually lead to additional supply. Although ultimately, this comes at a time when major producers simply aren’t producing as much as they should. Russia saw its output fall by another 9% last month as a result of sanctions, which contributed to OPEC+ producing 2.6 million barrels below target, lifting compliance with cuts from 157% to 220%.

Gold looking shaky once more

Gold is a little lower on Wednesday, as the dollar strengthens once more following a few days of declines. We’ve seen a slight corrective move in the greenback which has eased some of the pressure on the yellow metal but we may be seeing that return already. Gold is currently trading a little over $1,800 and a break of it could trigger another wave lower as investors continue to factor in more interest rate hikes and therefore higher yields.

The path of least resistance

With risk aversion starting to creep back in, bitcoin finds itself back below $30,000 which may make some a little nervous. It was always going to be difficult for risk assets to significantly build on the rally in the current environment. What may be encouraging to some is that we haven’t seen a sharp reaction to the move back below such a key level. Of course, that could quickly change with below appearing to offer the path of least resistance.

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Further Pressure on Central Banks

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

It’s been a relatively calm start to trading this week, with Europe a mixed bag at the close and the US a little lower.

The weaker Chinese figures overnight will be of some concern at a time of slowing economic activity around the world. Still, as has been the case so often in recent years, the lockdowns will have heavily distorted the data. With lockdowns priced in to an extent, the key will be how quickly restrictions are lifted and then how well the economy bounces back.

Stock markets have come under heavy pressure globally as central banks have been forced to become part of the problem rather than the solution, as has so often been their job in the past. We’ve become very used to easy monetary conditions but now we have a devastating combination of a cost-of-living crisis, looming recession, very high inflation and much higher interest rates.

And as we’re hearing so often now, policymakers understand the pain that households are feeling and will experience going forward but getting inflation back under control is the primary focus. Which means further pain ahead.

The BoE monetary policy report hearing reflected everything we’ve heard in recent weeks as the UK heads for recession and double-digit inflation. Bailey and his colleagues accept how bad the situation in the UK is and the scale of the task at hand but whether they’re doing enough to address it is hard to say. They were among the first to start hiking late last year but have still been criticised for starting too late.

Oil near recent highs after falling on Chinese data

Oil prices have recovered earlier losses that came in the wake of the Chinese figures. While lockdowns have been priced in over the weeks, the numbers were much worse than expected which weighed heavily on crude. While an EU ban on Russian oil suffered another setback as Hungary stood firm against it, the bloc is continuing to work on an agreement while Germany is reportedly planning to phase it out regardless, which could be helping to support prices today.

Oil is trading around $110, towards the upper end of where it’s traded over the last couple of months. China looking to ease restrictions could keep prices more elevated having contributed to them trading at more reasonable levels. A move above $115 in Brent would be interesting, with that having been something of a ceiling for rallies over the last couple of months.

Gold flat but remains under pressure

Gold is flat on the day after slipping this morning below $1,800 for the second time in as many sessions. The yellow metal has been very vulnerable to rising yields and a stronger dollar recently as central banks are forced into much more aggressive action. With the dollar remaining a hot favourite and pressure intensifying on central banks to tackle inflation, gold could remain out of favour for a while yet.

Bitcoin struggles at $30,000

An impressive rebound in bitcoin after breaking $30,000 may already have run its course, with the cryptocurrency giving up earlier gains to trade a little lower on the day. It’s spent a little time over the last couple of days above $30,000 but it is struggling to hang on to them. That doesn’t bode well at a time of risk aversion in the markets and such negative coverage of stablecoins following the Terra collapse. There may be more pain ahead.

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