With US markets closed overnight, Asian markets are drifting today. Equities are mixed with currency markets are indulging in some modest US Dollar short covering as US bond futures fall. (yields up) Gold and silver remain comatose. Only oil is on the move, continuing its rally overnight as Shanghai eases more restrictions and the European Union announces a partial Russian oil ban.
Overnight, German inflation soared to 7.90%, with the HCIP for May leaping to 8.70%. Both numbers were well above forecast, sparking a sell-off in European government bonds. The ECB’s Lagarde and Lane also signalled a July lift-off for rate hikes and an end to quantitative easing. Some are already talking about the ECB hiking by 0.50% in July now, these are strange times we live in. Although the Euro got a brief lift from the inflation data and ECB comments, it stalled ahead of 1.0800 as European growth fears ratcheted higher.
The data in Asia today has been a mixed picture. South Korean Industrial and Construction Production held steady for April, but Retail Sales eased to just 0.50% YoY for April as the cost of living increased and Bank of Korea hikes start to bite. The Australian Current Account fell to AUD 7.50 billion for Q1, old news by now, but Private Sector Credit and Business Inventories for April remained steady. Japan’s Retail Sales for April YoY surged to 2.90% thanks to a reopening boom in consumption, it probably won’t last. Meanwhile, Industrial Production in April MoM fell by 1.30%, with China’s covid zero restrictions making their presence felt. All-in-all, it suggested that Asia-Pacific ex-China continues to keep its head above water, but with no chance of breaking the 50-metre crawl record.
Most importantly, China’s Manufacturing and Non-Manufacturing PMIs showed some signs of life after the shocking April numbers. May Manufacturing PMI rose 49.6, with Services PMI recovering to 47.8. Both numbers remain below 50.0 and are thus in contractionary territory. But are markedly less so thanks to an easing of restrictions in Beijing and Shanghai. A less worse than expected set of data has prompted a modest rally in China equities today, holding the promise of an accelerating recovery in June if the virus situation remains benign. That’s a big if.
This afternoon, it is France and Italy’s turn to release May Inflation and although neither is likely to reach German levels, both have upside risks now. Eurozone Inflation, though, is set to rise to 7.70% YoY for May with upside risks as well. With the partial EU ban on Russian oil imports now in the home straight, inflation nerves will be even tauter, especially after the ECB comments on monetary policy overnight. Expect another European bond sell-off if the inflation prints come in above forecasts. That will be a mixed blessing once again for the Euro, although I suspect growth fears will continue capping the topside.
The inflationary pressures and the accompanying noise around recessions as central bank’s hands are forced, are slowly permeating their way out of what I call the Anglo-Saxon world, and into Europe and Asia. Europe’s position is more complicated as it is effectively moving into a wartime economy for some time to come. That is going to complicate the growth picture everywhere and give the bottom fishers of the equity and bond markets pause for thought. Inflation is a new concept for anyone who started working in financial markets in the last 20 years, and this time, the world’s central banks won’t be able to cut rates or open the QE tap. Some may describe the end of the artificial 15-year edifice constructed by global monetary policy to steal the wealth of our children, NPV-ing it to the present day to keep the party going, as a disaster, I call it an economic cycle. Welcome back, you have been missed.
One last word for FOMO bottom-fishers, Brent crude is above $122.00 a barrel and Europe is enacting a Russian oil ban. The Fed starts quantitative tightening this week. Just saying this on behalf of a friend.
Asian markets mixed after the US holiday
US markets were closed overnight, but European markets enjoyed a positive overnight session, grasping the baton from Asia. Equity markets have had some of the gloss removed thanks to hawkish ECB comments and higher than expected German inflation. Today in Asia, US futures are all over the place, raising a red flag on holiday-market liquidity and bored dentists in Minnesota trading from their studies to get away from the kids. S&P 500 futures are 0.15% higher, with Nasdaq futures falling by 0.60%, and Dow futures easing 0.20% lower.
In Asia, the picture is equally mixed after this morning’s data releases showed signs of an incipient recovery in China but presented a very mixed picture elsewhere. Oil’s rally continues in Asia after the announcement of the partial EU oil ban on Russian oil. A headwind for energy-hungry Asia.
Japan’s Nikkei 225 is unchanged with the retail army lost with the Nasdaq to coattail. The Kospi is just 0.10% higher. Mainland China markets are rallying after less-worse PMIs and an easing of Shanghai restrictions. The Shanghai Composite has gained 0.70%, with the CSI 300 rallying by 1.05%. Hong Kong, meanwhile, absent US markets for direction, has added just 0.35%.
Regionally, Singapore is 0.40% higher, with Taipei down 0.05%, and Kuala Lumpur easing by 0.10%. Jakarta is 0.25% higher post-GOTO’s first public quarterly result, while Bangkok is down 0.20%, and Manila has lost 0.45%. Australian markets are retracing some of yesterday’s gains, the ASX 200 falling 0.65%, while the All Ordinaries have lost 0.50%.
The partial EU oil ban on Russian imports, and a mixed picture in Asia, is likely to see European markets open slightly lower this afternoon. The turkey shoot known as the US open remains just that, it really depends on what mood they come back from holiday in, although the rise in US yields in Asia may give the bulls some pause for thought, as will hawkish comments from the Fed’s Waller overnight. The meeting between President Biden, Treasury Secretary Yellen, and Fed Chairman Jerome Powell should be a non-event. President Biden will moan about his prospects in November’s mid-terms, Mr Powell will say that’s not his job, even if he hasn’t done that job very well up until now. The end.
US Dollar stages corrective recovery on a quiet day
Currency markets are quiet post the US holiday overnight, and that has allowed a modest short-covering US Dollar rally to develop after US yields ticked higher in Asia. The dollar index has added 0.26% to 101.63 this morning, mid-range between support/resistance at 101.00 and 102.50.
EUR/USD has given back most of its overnight gains, easing 0.28 to 1.0750 today. The overnight rise in oil prices, the EU Russian oil ban, and the tick higher in US yields are likely the cause of the retreat. EUR/USD is struggling to find the momentum to challenge resistance at 1.0800 and 1.0830, with support remaining at 1.0700.
GBP/USD also faded ahead of resistance at 1.2700, falling 0.36% to 1.2610 this morning. That has brought support at 1.2600 back into play, with failure potentially extending losses to 1.2500.
USD/JPY has seen an immediate reaction to firming bond yields overnight and this morning internationally. USD/JPY rose through resistance at 127.50 overnight, gaining 0.405 to 127.62. Today it has booked another 0.28% gain to 128.00. If nothing else, it highlights that the overriding driver of USD/JPY direction remains the US and to a lesser extent, European/Japan rate differentials.
AUD/USD and NZD/USD posted modest gains overnight but have given all of those back as long-covering set in today and risk sentiment dipped. AUD/USD has faded ahead of 0.7200 resistance, falling 0.22% to 0.7180 today, with interim support at 0.7150. NZD/USD has fared worse, falling 0.37% to 0.6535, with resistance at 0.6570 holding overnight. Both currencies remain at the mercy of global swings in risk sentiment.
USD/Asia is also rising today as the EU Russian oil ban and the rise in US yields have flowed through into US Dollar strength. That said, the losses today have only partially retraced the recent gains by CNY, CNH, KRW, NTD and MYR, and as such I am not reading too much into the price action given it is a quiet day. At this stage, it looks corrective, and we will have to wait until the US session for more direction.
Europe’s ban on Russian oil sends black gold higher
The announcement that a partial EU ban on Russian oil imports has made it over the finish line sent oil prices higher overnight. Recovering PMI data from China today, and by default recovering energy consumption, has seen the rally continue in Asia. The price action by oil this past week has been ominous, suggesting that supplies of refined products is getting worse, and not better. The EU oil ban on Russia further complicates that picture and I am wondering how long markets can continue bottom-fishing elsewhere while ignoring oil’s price rise.
Overnight, Brent crude rose by 2.05% to $121.65 a barrel, and today, it has rallied another 1.20% to $123.10. WTI rallied by 2.20% to $177.65 overnight, gaining another 0.80% to $118.55 in Asia today. Brent crude is now a hair’s breath away from resistance at $123.80, after which there is no resistance on the charts until $131.60 a barrel. Support lies at $116.00 a barrel. WTI has taken out resistance at $116.70 a barrel, which now becomes support, followed by $116.00. The $120.00 region will provide some psychological, and possibly option-related resistance, but there is now nothing on the charts until $126.80 barrel.
Markets will find no solace from this week’s OPEC+ production meeting, as outlined in yesterday’s note. If China is reopening, and Europe is limiting Russian oil, there is only one obvious direction from here, for too long, ignored by markets. Only a surprise Iran deal, unlikely as they are seizing tankers at the moment, or a capitulation to Venezuela’s autocratic government, could change the supply/demand dynamic. Neither would alleviate the squeeze in refined products underpinning the rally.
Gold trades sideways
Gold seems determined to bore traders to death after another inconclusive overnight range-trading session. It probed resistance around $1860.00 an ounce overnight but retreated to finish just 0.14% higher at $1855.80 an ounce, marking another inconclusive session. Ominously, gold has fallen in Asia at the first sign of US Dollar strength, Gold has eased by 0.13% to $1853.50 an ounce. Gold’s price action continues to suggest caution, with the US Dollar sell-off not translating to any meaningful gold strength. If global risk sentiment turns lower, gold could quickly follow.
Gold has nearby support at $1840.00, followed by $1836.00 an ounce. Failure sees the possibility of a mini-capitulation by longs that could reach as far as $1780.00 an ounce. Gold has resistance here at $1862.00, then $1870.00, followed by $1886.00 an ounce, its 100-day moving average.