Asian markets are trading with a negative tone today, with the ending of virus restrictions in Shanghai today having little to no positive impact. Mostly that is due to the flip-flop of the day in US markets, which reopened overnight. New York decided overnight to be nervous about Fed tightening once again, having dismissed it last week. Tomorrow, they may decide it’s not a problem once again, who knows.
Either way, the Fed’s Waller’s hawkish remarks on Monday and the start of quantitative tightening this week by the Fed prompted Wall Street to close slightly lower after US yields rose, after a few sessions of sideways trading. That also saw some modest US Dollar strength while gold moved lower in another session of unconvincing price action
With Wall Street setting a negative tone for Asia, Manufacturing PMIs from across the region did nothing to lift the tone. China’s Caixin Manufacturing PMI rose slightly from April, the May number climbing to 48.1. Partial reopenings in China have seen the official and Caixin PMIs rebound slightly this week, but not enough to push them into expansionary territory once again.
Notably, May Manufacturing PMIs from Australia, Malaysia, Taiwan, Thailand, and the Philippines all fell from April. Although mostly expansionary, one cannot but conclude that China’s slowdown is finally permeating regional economies. The only exception was Vietnam, long a China alternative. Manufacturing PMI rose to 54.7 from 51.9 previously. So a combination of soft PMIs and a negative Wall Street session are dampening Asian sentiment today.
Much has been made of the ending of Shanghai virus restrictions today, with many seeming to think it offers an instant panacea to an Asian slowdown. Unfortunately, I must add a word of caution here. China’s covid zero strategy has not suddenly gone away, the opposite in fact. And as other countries with covid zero strategies have found out, the country needs to get lucky 100% of the time, the virus only needs to get lucky only once. Any returning outbreaks in Beijing or Shanghai or Shenzhen etc, will put China back to square one.
One potential piece of good news for markets comes from OPEC+, who never cease to amaze me with their ability to surprise us sometimes. Late in New York, a story started circulating that OPEC might exempt Russia from the production quota agreement at the OPEC+ meeting tomorrow. That slack being taken up by other producers, although realistically, that means Saudi Arabia and the UAE. The potential for higher output making up for lost Russian oil saw crude prices fall by 5.0% overnight. All eyes will be on the OPEC+ meeting tomorrow for confirmation.
Looking ahead, Asia’s data calendar is now dead with German Unemployment and UK Nationwide House Prices holding the most interest for markets this afternoon. Overnight, French GDP contracted QoQ for Q1, with inflation rising. Italian GDP narrowly avoided a Q1 contraction, but inflation also rose. It highlights the difficult position the ECB finds itself in as stagflation, exacerbated by the Ukraine conflict, makes its presence felt in Europe. There are no good choices for a central bank in this situation, and although the ECB will probably ramp rates up to errrr… zero per cent, the increasingly dark economic picture is likely to limit EUR/USD gains. One piece of good news though would be if the OPEC Russia exemption story is correct.
Tonight, the US releases May ISM Manufacturing PMI and the JOLTs Job Openings for April. Manufacturing PMI should retreat slightly from April’s 55.4 but remains expansionary. And unless the JOLTs data tumbles massively and prints under 11.0 million jobs (11.4 exp), neither number if likely to move markets. The move higher by US yields, should it continue this evening, is going to have far more impact. Otherwise, US markets, and by default, global markets, will still indulge in schizophrenic swings in market sentiment as the FOMO dip-buyers become increasingly frantic in their attempts to pick a cyclical low in equity markets.
Asian are mostly lower
Weakening Manufacturing PMI data from across the Asia-Pacific, combined with a low close on Wall Street, sees most of Asia trading in the red today, ignoring the bounce in US index futures this morning. Overnight, a rise in US yields saw the S&P 500 finish 0.63% lower, the Nasdaq lost 0.41%, with the Dow Jones easing by 0.57%. In Asia, US futures have rebounded on thin volumes, S&P 500 and Nasdaq futures rising by 0.30%, while Dow Jones futures have unwound overnight losses, rising 0.60% and suggesting month-end flows played their part in the overnight retracement.
With most of Asia in the red, one exception is Japan where the Nikkei 225 has risen by 0.65% today. The rise in US yields overnight inspired a bout of Yen weakness, which notionally, will improve exporter performance. In a similar vein, the Kospi is also 0.60% higher, although the Shanghai reopening may be playing a greater part in that rally.
In China, the contractionary Caixin Manufacturing PMI has drowned out any Shanghai reopening peace dividend, the Shanghai Composite and CSI 300 are both down 0.10%, while Hong Kong is 0.20% lower. Regional markets are also lower, although Singapore has managed to rise by 0.50% today. Elsewhere, Taipei is down by 0.55%, Kuala Lumpur is down 0.80%, Bangkok is 0.20% lower, and Manila has fallen by 0.60%. Jakarta is closed for a holiday. In Australia, the All Ordinaries has eased 0.10%, while the ASX 200 has risen by 0.10%.
A nondescript Asian session will not provide much lead for European markets, which headed lower overnight on stagflationary data and as Russia cut of natural gas supplies to Denmark, the Netherlands, and a small importer in Germany over rouble payments. Today, however, Europe should get a boost from the OPEC Russia production quota exemption story.
US markets, as ever, remain a turkey shoot. Today they might be nervous about US inflation and Fed tightening, or they may not.
Higher US yields lift US Dollar
Currency markets continued to trade in a choppy, but ultimately consolidative range overnight and this morning. Higher US yields overnight allowed the US Dollar to be ascendant, the dollar index rising 0.48% to 101.78, having probed above 102.00 intraday. The dollar index has added 0.14% to 101.93 this morning. It remains in a broad range between support/resistance at 101.00 and 102.50.
EUR/USD fell on a stronger US Dollar and weak data overnight, finishing 0.44% lower at 1.0730. It has eased another 0.13% to 1.0718 in Asia, having dipped below 1.0700 intraday overnight. EUR/USD is struggling to find the momentum to challenge resistance at 1.0800 and 1.0830. The job will become harder if US yields continue climbing, although lower oil prices would be supportive. Support is at 1.0680 and 1.0640
GBP/USD eased by 0.42% to 1.2605 overnight, taking out support at 1.2600 intraday. It has fallen to 1.2595 this morning and has traced out a decent top at 1.2670 for now. The fragile economic situation in the UK likely means we have seen the best of the Sterling rally for now, especially if the US Dollar has bottomed. Support is now at 1.2540 followed by 1.2500.
The overnight price action on USD/JPY highlighted unequivocally that the US/Japan rate differential is the primary driver of USD/JPY price action. Rising US yields overnight provoked an immediate response in USD/JPY, which rallied sharply by 0.85% to 128.70, rising another 0.40% to 129.20 in today’s session. USD/JPY is now well clear of its previous descending trendline resistance at 127.30, and if US yields rise in New York later today, it may well test 130.00.
AUD/USD and NZD/USD both eased slightly overnight, with NZD/USD disproportionately impacted as economic slowdown fears ratchet higher. NZD/USD has lost around 1.0% in the last 24 hours to 0.6490 today. Having traced out a series of tops at 0.6560, support lies at 0.6450. AUD/USD is only modestly lower today, implying a fair amount of AUD/NZD buying is going through the market. It continues to consolidate in a 0.7150 to 0.7200 range.
Nothing much is happening in the USD/Asia space today. Firmer US yields, and thus, a firmer US Dollar, saw Asia currencies reverse most of the previous day’s gains, with the Malaysian Ringgit, once again, a notable underperformer, as was the Thai Bhat yesterday after weak data. With the PBOC setting neutral USD/CNY fixes over the last few sessions, the consolidation of USD/Asia looks set to continue. Weak PMI figures from across the region have seen further weakness today, but it will be the direction of the US bond market that will ultimately dictate whether the Asian currency sell-off is set to resume, or not.
OPEC+ rumours sink crude prices
The announcement of the partial EU ban on Russian crude imports was a mild tailwind yesterday, but by and large, looked to have been already priced into markets. What did surprise markets was a Wall Street Journal article suggesting that OPEC might exempt Russia from the production quota agreement at tomorrow’s OPEC+ meeting. Although its impact on WTI was minimal in context, Brent crude, the internationally traded benchmark, plummeted by 4.50% to close at $116.10 a barrel, while WTI only finished 2.0% lower at $115.25.
The internal politics of OPEC+ makes the Game of Thrones look like a teddy bears picnic, and there are a couple of ways one could interpret the WSJ story. Firstly, it is an eminently sensible move by OPEC given that a sanctioned Russia has no hope of meeting its production commitments anyway, better to let the rest of the group make up the deficit and earn brownie points with the rest of the world. Or, OPEC has become upset with Russia for selling crude oil at massive discounts to India, China and others, undermining OPEC members’ market share. The other variable, if the story is correct, is did Russia agree to it, or was it imposed by OPEC on the plus in OPEC+?
All will be revealed tomorrow at OPEC+’s meeting I suppose. Realistically, only Saudi Arabia, the UAE, and perhaps Iraq, can rapidly increase production, as the rest of the group can’t meet their present quotas, let alone larger redistributed ones. If Russia has agreed to this course of action, it would weigh on oil prices, rebalancing supply, and demand but not enough to send Brent crude back through $100.00 a barrel. If this outcome was imposed on Russia, which disagreed with it, that implies a major fracture in OPEC+ unity. That would be a much more bearish development for oil prices. My belief is that Russia has agreed to this course, or the story is incorrect. Any other outcome appears to mean OPEC shoots itself in the foot.
Either way Brent crude is now eight dollars lower than yesterday’s $124.00 a barrel high, having slipped by 0.30% in Asia through support at $116.00 to $115.90. Failure of $115.00 could see a capitulation to $112.00. WTI tested $120.00 a barrel overnight, before falling five dollars to $115.25. The $120.00 region is a clear resistance level now and failure of $113.00 could see WTI tumble towards $108.00 a barrel.
The next 36 hours in oil markets are looking rather tasty from a volatility point of view, despite already seeing huge overnight session ranges. The OPEC+ meeting, based on the WSJ article, has now transformed from the monthly business-as-usual event, to a potential structural turning point for oil markets.
Gold is in trouble
As I warned yesterday, the real test of gold’s resilience would be if it held firm in the face of US Dollar strength and rising US yields again. On both counts, it failed overnight, as just that situation sent gold 1.0% lower to $1837.50 an ounce. In Asia, gold has eased again as the US Dollar moves higher, falling 0.22% to $1833.50 an ounce. Gold’s inability to weather the most modest US Dollar strength bodes ill and reinforces my fear that its recovery from $1780.00 has been built on sandy foundations.
Gold now has resistance at $1840.00, previous support and the 200-day moving average. (DMA) That is followed by $1860.00 and $1870.00 an ounce. If US Dollar strength persists, and US yields continue rising, gold is increasingly at risk a retest of $1800.00 and then $1780.00 an ounce. Failure of $1780.00 signals a deeper, and possibly disorderly fall to $1700.00 an ounce.