China held its one and five-year Loan Prime Rates steady for the 18th month in a row this morning in a completely expected outcome. Easing from the PBOC is more likely to come in the form of more MLF’s or via a RRR cut for mainland banks. Far more attention is being focused on the commodity and property space instead. China threatened to intervene in onshore coal markets yesterday to cap prices which sent mainland coal futures plummeting by a limit-down 10%. Hong Kong coal futures have dived by 8.50% so far today. Oil prices have reacted only modestly though, and like its threats in other commodity spaces, as a price taker and importer, its rhetoric is likely to only have a passing effect.
Evergrande deadlines loom
Evergrande and the China property developer sector have fallen off the radar in the past week or so, but the issues there have not gone away. We may see more Evergrande headlines weighing on China markets into the end of the week as the first 30-day grace period on unpaid offshore bonds approaches. This Saturday is D-Day for the first grace period to expire which I assume will trigger a formal default if no funds appear. That will be followed by another due date early next week. The silence from Evergrande and the government is deafening, and as other developers default or struggle to pay offshore debts, this story may make its way back to the front pages.
Elsewhere though, market sentiment remains decidedly positive, despite an ominous rise in long-dated US yields overnight. That sentiment is being supported on several fronts. US earnings continue to perform very well with very little in the way of downbeat 2022 forecasts. Progress appears to be being made on President Biden’s double-header multi-trillion-dollar in Washington DC, amongst the Democrats at least. The social spending side looks to be going on a severe diet though which was not entirely unexpected. Lastly, tightening monetary policy expectations are rising in a number of developed economies around the world, which is taking the heat out of the Fed taper trade. A plethora of Fed officials was on the hawkish side of the taper last night, and I expect many of tonight’s list to be of the same mind. We haven’t heard the last of the Fed taper trade by any means.
Another risk point is the rise in energy and commodity prices as well as the ongoing supply chain challenges around the world. Japan’s trade balance deteriorated today to JPY 622.8 billion. Although exports were healthy, including those to China, imports rose sharply. Much of that increase was due to material costs and most especially, a 105% jump in energy costs. Transitional versus embedded inflation is like having a vaxxer/anti-vaxxer conversation. Both parties are left with a headache and no discernible progress. But either way, with most of the world’s international commerce priced and transacted in US dollars, it’s hard to see the dollar falling materially in an environment of constantly rising input prices.
The data calendar is a blank slate in Asia now, leaving markets to happily ride the optimism wave washing in from New York. In fact, Asia’s calendar for the rest of the week is lightweight. German PPI and UK PPI and CPI will probably reveal the challenges the Japan trade balance hinted at earlier today. Noises around inflation and trimming the ECB’s ultra-easy QE forever monetary policy are rising, despite some officials trying to dampen it. K markets are already on a trigger happy hiking watch from the BOE next month. A high print from the CPI and PPI will add to that noise and probably see another jump by sterling. Likewise, a firm German PPI could have a similar, if more sedate, effect on the euro.
The US calendar is a sleeper as well, with only crude inventories to relieve the monotony. US markets will continue to be driven by US earnings, which will drown out another round of multi-character Fed-speak this evening. The recovery trade probably has another few days in the sun.
Lastly, bitcoin’s rally continues as trading started in the first bitcoin futures ETF overnight. A dig under the bonnet shows that most of the very healthy volume on its first day came from legalised front-runners, I mean high-frequency traders (HFTs), and retail punters, I mean retail investors. Institutional volume was thin on the ground. Although a regulated ETF based on regulated futures does fit nicely into the mandates of many in the institutional space, I suspect they may wait a while before dipping their toes in the water.
For one, they probably want to see what the liquidity is like when bitcoin aggressively retraces, as it will do at some stage in the future (don’t hate me crypto-nista’s, I’m not dissing your “mainstream asset” story. It’s just that markets go up and down, that physical nature.) Secondly, as Reuters rightly observed, bitcoin futures markets trade on a contango curve. That is longer-dated contracts are more expensive than the front month. That means you lose money rolling expiring contracts into the new front month. They probably want to see an orderly roll with decent two-way liquidity and a shallower contango.
I can’t believe I am into a third paragraph on cryptos, but life is funny in 2021. Directionally, in the spirit of it being a tradeable versus an investible asset, and with the launch of the first exchanged-traded hype-fund (EThF sounds very “DeFi,” yes?), Bitcoin remains a bull market very much. From a technical perspective, a series of higher daily lows, and a 4.5% gain overnight to USD 64,000.00, has left the crypto Dutch tulip poised to test all-time highs around USD 64.900.00. A close above USD 65,000.00 opens the road to USD 80,000.00. I respect the momentum and the price action, not the concept readers. Only a fall through USD 56,500.00 implies the mindless hype of the emperor’s new clothes, I mean the bitcoin as a mainstream investible asset class, rally, is over for now. On that note, I am off to buy a used car with genuine low mileage and three previous lady doctor owners.