Asian markets calm on light data calendar
Financial markets in Asia are off to a subdued start today. The weather has delayed the opening of Hong Kong markets while the PBOC USD/CNY fixing was nondescript, and Covid-19 concerns are weighing on a number of regional markets. The data calendar is exceptionally light today as well. However, the pace on the front accelerates impressively as the week moves on, culminating in the one ring to rule them all, the US Non-Farm Payrolls on Friday.
Wall Street finished the week on a positive note, with equity markets boosted by President Biden’s retreat on linking the bi-partisan infrastructure package to his social spending programmes. Bond yields firmed on that news which boosted banking stocks, which were already moving higher after passing the Federal Reserve stress tests with flying colours. That has lifted expectations of a bumper series of buybacks.
The weekend news was relatively sedate, with China Industrial Profits (YTD) YoY released yesterday. Industrial Profits rose 83.40%, a retreat from last month’s 106.10%. Price increases and the ongoing chip shortage were notable headwinds and YoY base effects are starting to ease.
Malaysia’s Balance of Trade and Thailand Industrial Production are the only Asian data of note today and there also, base effects from last year are starting to ebb, as they will be for much of the region going forward. Both sets of data will show healthy increases, but Covid-19 is most definitely on the mind of Asian investors this morning and will subsume any upside surprises.
Across the region, Covid-19 restrictions are eroding sentiment. Malaysia has extended its MCO national lockdown once again. Thailand has tightened restrictions in Bangkok. Jakarta, where I am based, is in a dark place, with cases surging, with that pattern being repeated across Java. In Australia, the Greater Sydney area lockdown was widened, and Darwin also entered a snap lockdown with the trans-Tasman air bubble suspended until the end of tomorrow. Milder restrictions in the Wellington area of New Zealand were all extended.
Although much has been made about the vaccine progress in the US, the UK, and Europe, Covid-19 and its new delta variant remain a severe problem for much of the world. Nowhere more so than Asia, with Japan and Taiwan also dealing with persistent virus cases and Singapore subject to still-severe, domestic restrictions. I have stated before that resurgent Covid-19 posed the largest threat to the post-pandemic economic bounce across Asia. We are not there yet, but if we are at this point this time next month, many economic forecasts will need to be revisited for surgery.
Circling back to China, I am not expecting too many downside surprises this week. The week will be dominated by China’s official Manufacturing and Services PMIs, released Wednesday, and the broader Caixin Manufacturing PMI, released Thursday. Services should remain robust around 55.0, but manufacturing could be vulnerable to downside surprises, as price input increases and chip shortages bite. That said, China’s communist party spends the week celebrating its 100th birthday, so to some extent, the week will be scripted. The PBOC added CNY 20 billion in liquidity to the financial system today visa the repos, and I am expecting mainland China equities to be remarkably resilient this week.
Europe releases National Consumer Confidence data tomorrow which should show an improving trend. Wednesday sees the US releases ADP Employment, which will see a rejig of Non-Farm Payroll forecasts, although it has been a very poor indicator of late, ahead of Thursday’s Initial Jobless Claims.
Thursday, being the first of the month is huge. Asia, Europe and the US all release official and Markit Manufacturing PMIs. That will give the world a much clearer idea of the direction of travel for the global economy. Most notably, whether rising material prices, labour shortages, and chip shortages are slowing the pace of the recovery. You can cut the cake both ways on this front. Rising prices equals rising inflation equals sell everything and buy US dollars. Or rising prices equals slowing demand equals lower bond yields, so buy everything and sell US Dollars. Given the US 10-years have crept back above 1.50% and the US dollar has held of its gains against Asia FX and most of them versus Developed Market (DM) FX, I am inclined to go with the former.
US Non-Farm Payrolls finish the week, and the market reaction to a higher or lower than expected print should follow the playbook outlined in the previous paragraph. The one million-plus forecasts nirvana of the earlier in the year has been replaced with a less exuberant recovery, as it becomes clear that millions of Americans, for a variety of reasons, aren’t rushing back into the workforce. The street is around 600,000 jobs added at the moment, although if form follows function, that median will be adjusted as the week moves on.
OPEC+ meets this week as well, with oil prices continuing to grind higher. I suspect much of that relentless increase is due to the American’s, and not OPEC+. US shale is returning at a snail’s pace with bit the financing and production sides of the equation being badly burnt in the Covid-19 meltdown last year. Financing shale is probably a poisoned chalice for the newly woke; I mean ESG-sensitive banking community. However, the sector as a whole will undoubtedly continue to produce large amounts of hot air. All good news for OPEC+, and I expect them to ease production cuts further, but not by too much. I believe Brent crude in a USD70.00 to USD80.00 range is the groupings’ happy place. Filling their coffers, but not upsetting the American’s too much.