Asia Session: Markets Stay Boostered, But Sentiment Remains Fragile

Another sign that we may need to wait for next week’s FOMC meeting to climb aboard the taper trade again comes from currency and bond markets. The Australian dollar, the risk sentiment indicator to rule them all, rallied powerfully overnight. Even the euro managed to recover, and the US dollar generally, had a tough day at the office. That came as US 10-year yields rose back above 1.50% to 1.53%.

The divergence in price action is a warning sign for Friday's US CPI. It suggests that the street is positioned for a “risk-off” taper move. With the US 10-year rising around 20 basis points over the last few sessions, reversing recent losses, there may not be much juice in the tank at a 7.0% CPI print. Quid pro quo, US dollar selling and equity buying hint that a 7.0% CPI is increasingly priced in. We likely need to see a print much higher than 7.0% to revive the taper trade in the near term and it wouldn’t surprise me if an on expectation CPI release sees US yields fall, the US dollar fall, and equities jump once again. Remember what I said about V for Volatility and whipsaw price action?

Helping things along, although with a gentler market impact, were comments from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) suggesting a third shoot would do the job against Omicron. Given that the US and Europe can’t even get 65% of their populations to have even two shots, let alone a third, we can assume two things. Omicron will yet have a role to play in surging cases over the winter, and vaccine hoarding by rich countries will continue until 35% of their populations stop taking advice from social media and saying me, me, me, instead of we, we, we. That means that the poor in the rest of the world will be waiting longer, thus allowing a higher chance of more nasty variants to arise. And thus, the cycle continues. Sigh…

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Today’s data calendar in Asia is thin. New Zealand Manufacturing Sales in Q3 fell a dismal 6.20%, suffering from the Auckland COVID lockdown hangover. You can’t buy anything in New Zealand these days anyway, it's either too expensive thanks to the RBNZ, or there’s none of it left thanks to COVID-19. The New Zealand dollar continues to underperform its Australian cousin, thanks to being another 2,250 kilometres (1,400 statute miles for non-decimal dinosaurs) east of Australia, and the RBNZ hitting the W for Wimp button at its last policy meeting.

On a brighter note, Japan’s Large Manufacturing Index QoQ for Q4 outperformed, rising by 7.90%. Some Q3 baseline effects are in there, but overall, it bodes well for next week’s Tankan survey and suggests that Japan is recovering after it Q3 Delta wave. Services may have a more difficult time as the country shut its borders to Johnny Foreigner again this month.

China’s Inflation data has proved benign as well, giving regional markets a small sigh of relief. YoY Inflation for November rose to 2.30% (2.50% exp), while MoM Inflation rose by 0.40% (0.70% exp), giving markets a nil-all draw. That should provide more relief to local equity markets which despite the bad news pouring in from the property developer space this week, is taking their pleas for debt restructuring as meaning the government will facilitate “something.” At least Kaisa suspended trading of their stock in Hong Kong, I’m surprised Evergrande (HK:3333) still hasn't. A debt restructuring is not usually good for stock prices, even if they have already fallen by 90%.

The rest of the day’s calendar globally is second-tier. Some regional inflation measures from Europe and Germany’s Balance of Trade. The focus will be on US Initial Jobless Claims with markets hoping for sub-200k prints to resume. Yesterday, US JOLTs Job Openings for October jumped to 11 million unfilled jobs. That doesn’t really compute with US Nonfarms falling to 210,000, or even a Household Survey suggesting 1.1 million jobs, or unemployment falling to 4.20% with a 61.80% participation rate.

The Federal Reserve may have shot itself in the foot with its unlimited free money we’ll backstop the dumbest investment decisions monetary stimulus which should have been a short term “shock and awe,” and not a monetary Vietnam. Macroeconomics is a beautiful thing when the orchestra all plays in tune, but too often, sticking your finger in one leak sees another pop up nearby. By enriching substantially, any American who owns a home, crypto, a meme or any other stock, they have created a situation where people don’t have to go back to work or have retired. The inflation trade may waver this week, but don’t put it to bed just yet. If James Bond can return from his most diverse and politically correct movie ever (the end credits said he would), inflation sure can as well.

On Wednesday, US equities continued to rally, although the gains were modest compared to the fast-money FOMO stampede of the day before. Comments from pharmaceutical heavyweights that boosters were the answer kept the Omicron-is-mild trade alive. The S&P 500 rose 0.31%, with the NASDAQ rising by 0.64% as the growth rebound continued, while the Dow Jones eked out a minuscule 0.09% gain. In Asia, futures on all three indexes have climbed by around 0.10%.

The solid, if an unspectacular day on Wall Street yesterday, has bolstered sentiment in Asia, where regional investors are also buying into the China property developer debt-restructuring story. Japan is seeing profit-taking after the rally yesterday with eh Nikkei 225 unchanged. The KOSPI is 0.55% higher. In Mainland China, benign inflation, property sector restructuring, and stimulus hopes continue to drive gains. The Shanghai Composite and CSI 300 have rallied 0.90% today and Hong Kong has recovered its poise to rally by 1.10%.

Regionally, Singapore is 0.30% higher, with Kuala Lumpur rising 0.20%, and Taipei by 0.10%. Jakarta is 0.40% higher, with Bangkok adding 0.70%, with Manila unchanged. After some impressive gains this week, Australian markets are taking a breather today, perhaps watching the Ashes cricket. The All Ordinaries and ASX 200 have moved 0.15% higher.

European equities should open higher today after a positive session on Wednesday. I expect gains to be limited though, as Eurozone and UK markets are crimped by the specter of tighter COVID-19 restrictions, Omicron or not.

The US dollar continued moving lower overnight, despite longer-dated US yields firming once again, a sign that short-term upward momentum is fading. The Dollar Index fell by 0.35% to 95.96, climbing modestly in Asia to 96.03. The fall overnight was led by gains in EUR/USD, which rose 0.65% to 1.1330, another warning sign that US dollar momentum is fading as crowded positions are trimmed into tomorrow’s US CPI release. A 7.0% print is looking priced in now, and the index could trade as low as 95.50 on an on expectation print.

EUR/USD is steady at 1.1330 today and could retest the top of its range at 1.1375 into the US CPI. The single currency is likely to struggle at that level though, as European equities show signs of virus nerves. Sterling sank to 1.3205 overnight after the government reinstated work-from-home guidance. Given the caseloads in major Eurozone countries now, it is hard to see the Euro avoiding the same fate.

USD/JPY rose slightly with US yields to 113.70 overnight and seems to be back to its interest rate differential business-as-usual best. AUD/USD rode sentiment 0.75% higher to 0.7165, and I don’t discount further gains to 0.7250+ into the US CPI data. NZD/USD has risen much more sedately, trading at 0.6810 today, and continues to be weighed down by inflationary pressures and a central bank sitting like a possum in the headlights.

Asian currencies mostly recorded decent gains overnight on recovering sentiment. That has continued this morning with CNH, MYR, SGD, THB, TWD, and INR all rising versus the US dollar. Only the Indian rupee has remained unchanged, after the Reserve Bank of India policy meeting yesterday. The RBI quashed any rate hike expectations and reinforced that it remains focused on supporting India's post-Delta recovery.

The price action in US bonds and by the US dollar suggests that the Fed taper trade has become a little crowded, helped along by Omicron fears receding rapidly. It will probably take a print well north of 7.0% to jar nerves into the end of the week and I can see the US dollar retreat continuing in the week’s end. But the sentiment remains fragile, and I would caution about picking the top of the US dollar with complacency into the FOMC meeting appearing to be rising.

Oil prices rose once again overnight, albeit at a much more modest pace in line with the price action seen in equity markets. Unlike the equity rally, oil's recovery is backed by sound supply and demand fundamentals in addition to diminishing Omicron concerns. A potential Russia/Ukraine supply crunch is also supportive even if Europe heads back into deeper virus restrictions through the winter.

Brent crude rose by 1.15% to $76.00 overnight, achieving my end of week target early. It has gained another 0.30% to $76.20 a barrel in Asia. WTI leapt 1.30% higher to $72.60 a barrel, gaining another 0.25% to $72.90 in Asia, just short of my target for the week.

Both contracts have recovered above their respective 200-day moving averages (DMAs) at $73.00 and $70.30 respectively, which should provide support on pullbacks. The 100-DMAs at $77.00 and $74.00 form initial resistance, although a weaker US CPI tomorrow could see both contracts rise higher with ease. I continue to believe that the lows of last week will be the lows for possibly all of 2022.

Gold attempted to rise overnight as sentiment continued to attract previously burnt bullish investors back to precious metals. It failed to overcome the clustered 50,100 and 200 DMAs however and ended the session almost unchanged at $1782.80 an ounce. In Asia, it has risen an asthmatic 0.15% to $1785.75 an ounce in moribund trading.

Although I am not ruling out further gains as Omicron fears recede and a 7.0% US CPI print is priced into markets, gold’s topside failure overnight is a warning that bullishness is very fragile and that selling will resume at the first sign of trouble. The downside continues to be very clearly, the path of least resistance.

In the bigger picture, gold still looks confined to a $1770.00 to $1800.00 range this week, unable to sustain momentum above or below those levels. The 50,100 and 200-day moving averages (DMAs), clustered between $1790.30 and $1795.50 are capping gains. $1800.00 and $1810.00 will prove equally formidable. Support lies at $1770.00 and $1760.00.

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Written By: MarketPulse