The overnight session was another sideways in Seattle sleeper for most asset classes as even equities struggled to maintain upward momentum. US yields edged slightly lower; gold fell while oil rallied but remained confined in pre-OPEC+ noisy range-trading and industrial metals did much the same. The US dollar ground higher as the forex market continues to signal its concern about the impact of the delta variant globally and its lingering post-FOMC taper concerns.
More hawkish rhetoric from another Fed official hit the wires late in the session. But Waller’s comments that tapering and tightening expectations might occur sooner had little effect. Financial markets, generally, seem to be settling in for the global manufacturing PMI dump tomorrow and the US employment data on Friday. Adding to the apathy is the end of the month and the quarter ending today, which usually sees quite a few rebalancing random price movements in New York across asset classes. As good a reason as any to stay on the sidelines.
North Asia powerhouses, Japan, South Korea, and China, have all released data this morning, which erred on the side of slightly disappointing. Japan’s MoM Industrial Production fell by a higher than expected -5.90% for May, while South Korean MoM Industrial Production also underperformed, falling -0.70%. Additionally, its Retail Sales MoM for May also surprised to the downside, falling -1.80%.
The weakness in Japan and South Korean Industrial Production was broad-based across almost all sectors. Automobiles stand out in Japan, while transport stands out in South Korea. Virus concerns may have kept South Korean shoppers at bay. At the same time, it looks like softening demand from key export markets, exacerbated by chip shortages and logistic logjams, are muting orders across many sectors.
China’s official Manufacturing and Non-Manufacturing PMIs were underwhelming, albeit still in expansionary territory. Manufacturing PMI just missed at 50.90, while Non-Manufacturing PMI came in at 53.50, well below expectations. Stories of Chinese consumers saving instead of spending have been circulating for a while now, and it seems to be showing up in the data. Logistics and chips are making their presence felt in manufacturing. Tomorrow’s Caixin Manufacturing and Services PMIs could have a more significant impact now if they print on the soft side.
Although the data didn’t set the world on fire, it is no reason for panic. Chips and ships will be a problem for the world as a whole for some time to come, and it could be that the initial northern hemisphere reopening spending frenzy has eased somewhat. The biggest concern for Asia, and to a lesser extent, Europe and the UK, is the Covid-19 delta variant. In particular, it is dampening sentiment in the Asia Pacific, with Brisbane and Alice Springs also entering lockdown in Australia, and Malaysia and Indonesia in a world of pain.
Markets will give the Asia Pacific a cautious pass mark for now on the global recovery story. However, if the US continues to power ahead, and Asia is in the same place it is today in a months’ time, something will probably have to give. A US economy on a recovery trajectory that is unsynchronised in Asia will negatively affect regional markets. Interest rates are at record lows across Asia but with no room to hike if monetary conditions tighten in the US, i.e., yields rise. Thankfully, Asian central banks have built up a massive stockpile of foreign currency reserves. They may need them.
The data calendar is second-tier across the world for the rest of the day. Asia looks like it has got bored being bearish on equities for today, but headline and sentiment swings, along with month and quarter-end flows, are likely to make for a random session across markets for the rest of the day.
On a final note, I will be away tomorrow and Friday celebrating another locked-down wedding anniversary celebrating year four. Instead, I will be attempting a mighty culinary challenge, an all-day slow-cooked lamb Sikandari Raan on my kamado. Good enough for Alexander the Great, good enough for Mrs Halley. I shall return on Monday.