Asia Session: China PPI And Property Test Regional Nerves; USD Unwind Continues

  • Market Overview

Asian equity markets are on the back foot today after China’s PPI release printed at a record high of 13.50% YoY for October, with officials blaming weather, material and energy costs. That overshadowed the Inflation Data , released at the same time, which came in elevated, but on target at 1.50% YoY for October. The PPI should retreat into the end of the year, thanks to falling iron ore prices, now at one-year lows, and coal prices. Still, Asia is on inflation alert, fearing future costs of inputs from goods sourced from the Mainland.

To be sure, some risks remain regarding China itself. Its COVID-zero policy means that if cases in the current outbreak spread, to say port cities, mass closures could result if its previous go-to strategy is anything to go by. That would have a knock-on disruption that would be felt across the globe. The state grid operator has already said electricity supply and demand are finely balanced into the winter months recently, and a colder than usual winter will definitely bring those stresses to the front of investor thinking again. Oil prices continued climbing yesterday, and despite their success in crushing the coal price rally, natural gas prices have remained robust.

Perhaps the main driver weighing on Asian sentiment today is China’s property sector. Evergrande (HK: 3333 ) faces a final deadline today for around $148.0 million in offshore coupon payments. It raised a similar amount by selling a stake in another business earlier this week, but whether that cash makes its way offshore is yet to be confirmed.

It is not alone though, Fantasia (HK: 1777 ) stock returned from suspension today, and promptly fell by 50% in Hong Kong. Kaisa (HK: 1638 ) faces offshore payments this week, as do other developers. The silence from the Chinese government on how it will manage this situation, exacerbated by the Communist Party Plenum in progress at the moment, continues to be deafening. Fears of defaults and disorderly collapses within the China property sector, and potential financial contagion, continue to stalk Asian investor sentiment.

In the US yesterday, PPI and Core PPI rose to 8.60% and 6.60% respectively YoY for October. Eyewatering, but right on market expectations. Combined with some hawkish Fed-speak, it was enough to prompt a modest correction lower in equity markets, after a long winning streak. Notably, the US dollar and US yields ticked lower as well, reinforcing to me, that sentiment and positioning in individual asset classes is what is driving price action in markets now. Given how wed US markets are to the post-taper lower-for-longer-rates story, US core and headline inflation data later today would need to print well above 5.0% and 6.0% YoY respectively, to cause an inflation stampede for the door.

Elsewhere in Asia, Japan’s Reuters Tankan eased slightly to 13 on fears over rising energy and material costs etc, while South Korean Unemployment edged slightly higher to 3.20%. That shouldn’t be enough to distract the Bank of Korea from hiking rates into the year-end. Australian Westpac Consumer Confidence climbed to 105.3 for November, reflecting an easing of restrictions in Victoria and New South Wales.

German and Norwegian inflation will show elevated readings but are unlikely to be market-moving. Markets seem to be showing herd immunity to uncomfortable inflation prints, and who can blame them? Central banks continue to fence sit and, in some cases, quantitatively ease into those inflationary environments. As long as they keep saying one thing, only to wimp out or pour petrol on the fire, markets will have little incentive other than to keep the disco inferno of asset price appreciation going. This week is noisy, but unless US Inflation later today slaps the Federal Reserve with a dead fish hard enough to draw blood, I can’t see much reason for the music to not keep on playing.

China PPI and property sector nerves send equities lower

An elevated PPI print from China this morning, and China property sector nerves has seen Asian stock markets fall mostly into the red today after Wall Street finally saw a modest correction low after a multi-day rally. Overnight, the S&P 500 fell by 0.35%, the NASDAQ lost 0.60% and the Dow Jones eased by 0.31% after multi-year highs in US PPI spurred profit-taking. In Asia, futures on all three indexes have lost another 0.40%, deepening the negative sentiment in regional markets.

The Nikkei 225 is 0.70% lower, while South Korea’s KOSPI has dropped by 0.90%. China equity markets are being hit hard with the Shanghai Composite retreating 1.20% with the narrower Shanghai 50 now 1.80% lower. The CSI 300 has fallen by 0.75%, while the Hang Seng has retreated by 1.30%.

In regional markets, Singapore is 0.55% lower and Kuala Lumpur has fallen by 0.35%. Taipei is outperforming relatively, unchanged on the day. Jakarta is 0.20% lower with Bangkok and Manila down 0.45%. Australian markets are slightly lower as well, the ASX 200 falling 0.33% and the ASX All Ordinaries easing by 0.20%.

The broad weakness that has flowed from Wall Street into Asia today is likely to lead to a lower opening for European stocks. It seems that investors are keen to lower exposure into the US CPI data later today. If that passes without incident, though, it would not surprise me in the least to see the equity rally resume.

US dollar unwind continues

The US dollar eased once again overnight, led by strength in the low yielder space, notably the Japanese yen and the Swiss franc . With asset classes running their own races this week, it seems that the pre-FOMC long US dollar trade is continuing to unwind. The Dollar Index fell by 0.08% to 93.98 overnight, although a sharp deterioration in equity sentiment today in Asia has seen it rise back to 94.04. The risks remain to the downside for the Dollar Index as disappointed US bulls continue to unwind strategic long positions after a fence-sitting performance by the FOMC. 93.80 remains initial support and failure targets 93.50. On the upside, resistance above 94.50 has become a formidable barrier.  

A weaker US dollar passed the euro and sterling by, with both almost unchanged at 1.1585 and 1.3555. Both continue to be weighed down by dovish central bankers and Brexit/Northern Ireland nerves. EUR/USD has resistance at 1.1625 and support at 1.1515. GBP/USD has resistance at 1.3600 and support at 1.3525.

The Japanese yen was the chief beneficiary of US dollar weakness as US yields edged lower once again across the curve. USD/JPY has fallen to 112.85 and a washout of stale long positioning could see the cross trade as low as 112.00 in the coming days. However, if US yields were to rise meaningfully on US inflation data today, the sell-off will be stopped in its tracks. AUD/USD and NZD/USD retreated overnight with US stocks. If sentiment remains heavy, AUD/USD could test nearby support at 0.7360 and potentially fall below 0.7300. NZD/USD is hovering above support at 0.7100 and could retreat to 0.7050.

Asian currencies remain calm today, remaining near yesterday’s levels and maintaining recent gains versus the greenback. Another neutral USD/CNY fix from China today has added a supportive note, although the weakness in Asian stock markets has led to some very gentle weakness in Asian currencies this morning. Regional currency markets look to be in wait-and-see mode once again, ahead of US inflation data later.

Oil's recovery continues

Oil prices shot higher once again overnight, aided by a large drop of 2.50 million barrels by US API Crude Inventories . The Biden/SPR story appears to be losing momentum leaving markets to focus on oil’s strong physical fundamentals once again. Regarding the US SPR releases, President Biden’s hands are somewhat tied here. A large release can only be authorized if supplies are disrupted, not if prices rise.

It would be hard to spin the former argument as a supply disruption emergency. A tactical release authorized by the President, is limited to 30 million barrels over a 60 day period, certainly not enough to cap oil’s rally.

Brent crude finished 1.75% higher at $85.10 a barrel, and WTI leapt 2.80% higher to $84.50 a barrel. Long-covering from the overnight rally has pushed both contracts slightly lower in Asia, to $85.05 and $84.20 respectively.

Brent crude has resistance at $86.00 and $86.70, with support at $83.30 and $82.50 a barrel. WTI has resistance at $85.00 and $85.50, with support quite distant at $82.00 a barrel after the impressive overnight rally.

Gold prepares to test major resistance

A weaker US dollar and lower US yields once again saw gold move slightly higher overnight. It flirted with the base of its major resistance zone between $1832.00 and $1835.00 an ounce, before easing but still finishing 0.40% higher at $1831.50 an ounce. In Asia, weaker sentiment has lifted the US dollar and yields slightly, forcing gold 0.25% lower to $1827.00 an ounce.

Gold’s story still looks one inversely correlated to US yield and the US dollar, and if the inflation story held water, then surely US yields would be higher. Nevertheless, gold’s price action remains constructive, and it has managed to hold onto its gains just below the major zone of longer-term resistance at $1832.00 to $1835.00 an ounce.

If gold can break and hold above $1835.00 an ounce on a daily closing basis, it will trigger an inverse head-and-shoulders pattern that would target a return to $2000.00 an ounce. Support is at $1800.00 and $1785.00 an ounce, although I suspect that a fall through $1810.00 will be enough to trigger nervous longs to exit.

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