Asia Session: Indices Drift As Sentiment Rules; Dollar Slumps; Oil Rises

  • Market Overview

With this week's global data calendar looking more parched than the Australian outback, markets have been left to their own devices thus far, drifting on the tides of sentiment swings and rent-a-comment from central bank officials. Yesterday, the Fed's semi-annual Stability Report highlighted risks from China's real estate sector and inflation that becomes persistent, not transitory, although you can spin that term however you want.

It noted the dangers of inflated asset prices and potentially ugly corrections, which begs the question as to why so many central banks, including the Fed, are quantitatively easing into it? We also had a plethora of central bank speakers, including Bank of England Governor Baily, who might hike if inflation is sticky, and the Fed's Bullard, Clarida and Evans , who were three, two, one, lift-off, I mean zero for rate hikes in 2022. The see-saw remains as balanced in the monetary playground as ever.

With nothing of note to sink its teeth into, the Street continued moving back into its happy place, interest rates lower for longer, buy-everything except for the US dollar. The FOMO gnomes of Wall Street managed to push equities slightly higher to yet another record close; bond yields drifted a little higher after falling on Friday.

Still, it was probably most clearly seen in currency markets, where the US dollar retreated overnight. Even gold rallied once again overnight, after holding on to its rise through $1800.00 on Friday.

Through the US dollar rally, currency markets have probably most strongly reflected the Fed-taper and its future implications, having refused to budge from its highs even as the perpetual motion mega-bulls regained ascendency in the equity and bond markets. As a result, it likely has the furthest to retreat this week unless we get a shocker from US inflation data tomorrow. Even if inflation explodes higher, I am struggling to see it as an inflexion point for the QE determination of the central banks of the world to make the human race as economically unequal as possible in the shortest amount of time. 

In Asia today, what scraps of data there are, have been modestly positive. New Zealand Credit Card Spending rebounded in October, while Australia's NAB Business Confidence jumped to 21 in October as New South Wales, Victoria, and the international border reopening. QoQ GDP for Q3 in the Philippines outperformed as well, rising by 3.80%. I would say that after a long and arduous road, the light at the end of the tunnel beckons for the Philippines, but I don't want to hex it.

Malaysian Industrial Production and Unemployment should show similar green shoots later today, as will Indonesian Retail Sales with life back to normal here in Jakarta, including the traffic and daily COVID cases in the low 100's across the archipelago. I even went back to rugby training the weekend before last, where I promptly pulled a tendon in my calf once again. It's like I never left. 

This afternoon, Germany's ZEW Index will be of marginal interest, with more concern in Europe likely focused on surging virus cases and possible restrictions returning, thanks to stalled vaccination programs across the continent. US PPI later today is likely to climb to 0.60% MoM, but it will be tomorrow's headline inflation data that grabs the headlines. The most volatility is likely to be generated by central bank officials, with the BOE's Baily, the ECB's Schnabel and the Fed's Powell , Daly , and Kashkari all speaking. Apologies if I missed anyone.

Watch also for the possibility that President Biden announces SPR releases to take the edge of surging gasoline prices. Otherwise, I believe today will be one of range trading with occasional snaps of volatility generated by intra-session news headline tickers.

The crypto-space looks to be the only "asset class" moving today. Both digital Dutch tulips, Bitcoin and Ether , have hit record highs this morning as the Street continues to buy on a positive technical picture, a lower dollar, and Elon Musk's Twitter account. I am girding myself for more "institutional experts" appearing on the news wires droning on about becoming "mainstream assets." Whoever bought the Squid Games tokens probably isn't feeling the same way. These experts usually only appear when cryptos rally, and I have a pile of Panadol ready to take the edge of my headache. 

Asian stocks mixed after modest rally on Wall Street

Wall Street crawled to another record close overnight, with the lower rates for longer, buy-everything FOMO gnomes firmly in control. The session being most notable for Alphabet (NASDAQ: GOOGL ) touching the $2 trillion market cap mark, joining Apple (NASDAQ: AAPL ) and Microsoft (NASDAQ: MSFT ). The S&P 500 closed 0.09% higher, the NASDAQ edged 0.07% higher, with the Dow Jones climbing by 0.29%. Once again, momentum has waned in Asia, with futures on all three indexes falling by around 0.20%. 

With no thematic momentum one way or the other from Wall Street, Asian markets have been freed to set their own course today, leading to a mixed day across the region. The Nikkei 225 has risen just 0.10%, with South Korea's KOSPI falling by 0.15%. China is equally uninspiring, with the Shanghai Composite and CSI 300 almost unchanged thus far. Hong Kong has edged 0.15% higher.

Regionally, Singapore and Bangkok are trading each side of unchanged while Taipei is outperforming, rising by 0.70%, perhaps receiving an Alphabet tailwind. Kuala Lumpur has fallen by 0.60%, while Jakarta is 0.30% higher along with Manila. In Australia, markets are slightly higher, and the ASX 200 and All Ordinaries are rising by around 0.15%.

US dollar falls as momentum stalls

As the last hold-out of the FOMC taper-trade, it looks as if the US dollar is finally capitulating to the lower for longer theme as well, the Dollar Index retreating 0.17% to 94.05 overnight. With central bankers talking down rate hikes across the globe, risk sentiment has risen, leading to a momentum stall for the greenback's rally. The 94.50 region has now established itself as a formidable zone of resistance, and it will take a substantial momentum shift to erode it. Attention now turns to the downside, where the failure of 93.80 should see the index retest 93.50.

A weaker US dollar granted the euro and sterling a reprieve overnight, with both being weighed down by dovish central bankers and Brexit/Northern Ireland nerves. EUR/USD has edged higher to 1.1585 but needs to break above 1.1625 to signal an upside breakout. GBP/USD jumped 0.50% to 1.3560, although the technical picture suggests it won't be out of the woods until it can reclaim 1.3700. The Japanese yen was the big winner, USD/JPY falling from 113.50 overnight to 112.95 this morning. A washout of stale long positioning could see the cross trade as low as 112.00 in the coming days, although if US yields rise meaningfully, the sell-off will be stopped in its tracks.

AUD/USD and NZD/USD rose overnight led by the Kiwi, boosted by new Auckland reopening measures being announced. The technical picture suggests that 0.7200 could be retested this week and the prospects of steeper yield curves and positive global risk sentiment should continue to support both currencies.

The recovery of global risk sentiment is also playing out well for regional Asian currencies. The Korean won , Philippine peso , Indonesian rupiah and Thai baht have all booked decent gains in Asia this morning as rate-hike fears in the US fade further into the background. Unless US inflation data tomorrow springs a massive upside surprise, regional Asian currencies should continue to rally through the rest of the week. China also set a strong yuan fix today at 6.3903, which will further support regional currencies.

Oil's recovery continues

Oil prices held on to their Asian gains overnight, after Saudi Aramco (SE: 2222 ) signalled rising oil prices to Asian customers over the weekend. The general perception is that despite the noise from the White House, there is very little that President Biden can do to arrest oil price rises, even if he authorises releases from the SPR. 

Brent crude finished 1.60% higher at $83.60 a barrel, and WTI finished 1.05% higher at $82.20 a barrel. Some short-term long-covering has pushed both contracts 30 cents lower in Asia, but otherwise, Asian prices are as lethargic as those seen in other asset classes this morning. 

Brent crude has resistance at $84.50, $85.25, and $86.00 with support at $82.50 and $82.00 a barrel. WTI has resistance at $83.50 and $85.00, with support at $81.00 and $80.00 a barrel.

Gold holds on to Friday gains

A lower US dollar overnight helped gold advance slightly higher, enabling it to hold on to its substantial gains from the Friday session. Gold finished 0.33% higher at $1824.20 an ounce, before easing slightly to $1822.75 an ounce in a moribund Asian session. With US bond yields trading on the heavy side and seemingly set to range in the days ahead, and with a downside US dollar correction underway, gold now has a realistic chance of advancing further still in the days ahead. 

If gold can break and hold above its well-defined resistance zone between $1832.00 and $1835.00 an ounce, 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 a mad, fast-money dash for the exit door.

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