Asia Session: Regional Markets Shuffle Sideways; Oil Rallies, USD Keeps Rising

Holidays in Mainland China and Hong Kong are muting activity once again in Asia, which looks content to watch this session from the sidelines. Yesterday, Elon Musk stole the headlines, announcing with a swipe of his debit card, the purchase of a 9.20% stake in Twitter (NYSE:TWTR) worth $2.90 billion. That was enough to light the fires in the tech space with the NASDAQ booking decent gains, with the Musk feel-good spreading to the US equity space in general. China ADRs also performed well, following the Hong Kong rally after the mainland government appeared to ease audit restrictions, sharply reducing China ADR delisting risks.

Oil markets have also rallied, as calls grow in Europe for wider sanctions from the Eurozone on Russia after evidence of civilian atrocities in Northern Ukraine. The French President has gone further by calling for a ban on Russian oil. Of course, saying and doing are two different things. However, even the slightest chance that Europe might actually do something along those lines was enough to send oil prices 4.0% higher, rallying again in Asia. I believe there is very little chance that Europe will sanction Russian energy, as there is no immediate alternative and the effect would plunge Germany into a recession. It will have to wait for another time.

Threats of Russian energy sanctions by Europe also torpedoed the euro as well, and the re-election of Viktor Orban in Hungary, a noted Putin fan, likely added a European disunity discount to the euro. Short of a Ukraine peace deal, we may have seen the highs for the single currency for a while. Over the other side of the Atlantic, US yields and Fed hiking expectations continue to rise. The US/Europe rate differential may do to the euro, what Vladimir has not.

In Asia, Japanese officials have been on the wires talking about the yen today. The usual watching currency movements closely and with concern were enough to knock USD/JPY down 20 points in early trading, but bang for the buck, the reaction they got today was poor compared to last week. Declining marginal utility. Other comments regarding potential unlimited buying by the BOJ to cap JGB yields offset any impact of currency jawboning. Japan can’t have its cake and eat it as well and once again the yield differential with the US means USD/JPY won’t be back below 120.00 anytime soon.

Japan data was mixed. Jibun Bank Services PMI for March surprised, rising to 49.4, within shouting distance of expansionary. Most of the gains can be put down to an easing of virus restrictions. Elsewhere, the picture was less rosy. Average cash earnings YoY was a measly 1.10%, no great resignation here. Household Spending YOY for February also seriously disappointed, slumping to just 1.10%, with the MoM number tumbling by -2.80%, so we can dismiss baseline effects. A falling yen and soaring energy prices in March won’t help the trend of caution in Japanese consumer confidence. It does, however, somewhat justify Japan’s monetary position.

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In contrast, South Korean inflation YoY for March rose to 4.10%, well above the 3.80% expected. Philippines Inflation YOY Mar also rose to 4.0%, above guestimates. While the Philippines' BSP will put off rate hikes as long as position, the South Korean data should set the scene for a BOK rate hike soon.

Whatever premium China equities were likely to gain after the easing of audit concerns by the government at the weekend, is likely to be eroded when China returns to work tomorrow by the Shanghai lockdown. Officials have apparently finished testing everyone in the city, a feat that has left me seriously impressed. Cases have spiked to 13,000 and the lockdown has been extended indefinitely. That is probably one factor weighing on Asian markets today, China holidays aside. Fears are increasing that China’s COVID-zero policy could lead to wider and more extended shutdowns in the face of Omicron, something that will not only impact China and Asia's growth but have knock-on effects around the world.

Today’s data highlight will be the RBA interest rate decision. It has been analyzed to death down this part of the world this week. Australian markets have already priced in a lot of rate hikes from mid-year through till the end of 2023. They seem primed for the RBA policy statement to roll back some of its uber-stubborn rhetoric, but not to announce a full-scale retreat like the RBNZ. That should be bullish for the AUD and a short-term headwind for equities. With the market so lopsidedly balanced now though, the risk seems to be the RBA changes nothing to its outlook. Any sort of hike would be a massive surprise, but an RBA standing pat could see UAD stage a sharp, if temporary, move lower.

Later today, we get services PMIs from Europe and the UK for March. For obvious reasons, they will most likely not make pretty reading. That could add more pressure to the currencies, especially if the US ISM Non-Manufacturing PMI and sub-indexes show a US economy still firing on all cylinders.

Otherwise, markets will be watching for Ukraine headlines, or European sanctions headlines. If energy is left alone, both European equities and the euro could stage a temporary recovery. We also have the Federal Reserve’s Brainard and Kashkari speaking. So there are plenty of noise generators to come for financial markets today, although I suspect when the dust settles, volatility, and not direction, will be the victor once again.

US equities surged overnight as Elon Musk’s Twitter stake announcement sent it shares 27.0% higher, with Tesla (NASDAQ:TSLA) rallying by over 5.0%. Where Elon goes, the rest of us follow, and the battery-powered billionaire managed to lift all of Wall Street. The S&P 500 rose by 0.81%, theNASDAQ leapt 1.90% higher, while the Dow Jones added 0.30%. Futures on all three have edged 0.10% lower in Asia as fast money books profits.

A mainland China and Hong Kong holiday, with Taiwan also out, has set Asia up for a quiet day. Any bullish overspill from Wall Street is being offset by increasing nerves around China’s COVID situation. Japan’s Nikkei 225 is flat, while South Korea’s KOSPI is down 0.10%. Singapore is 0.35% higher, Kuala Lumpur is down 0.20%, Jakarta is up 0.15%, Manila has lost 0.65%, and Bangkok is 0.25% higher.

Australian markets have risen pre-RBA, expecting zero chance of a rate hike today and content to follow Wall Street's lead from overnight, helped along by the recovery in oil prices. The ASX 200 and All Ordinaries have rallied by 0.60%. Expect some volatility after the RBA policy statement.

European markets rose yesterday, despite energy concerns, as the German Trade Balance rose to EUR 11.4 bio, blowing expectations out of the water. With oil now 5.0% higher than yesterday morning, European markets will struggle to repeat that feat today.

The US dollar rose overnight, notably booking strong gains against the euro. US yields were quiet at the short end, although they eased slightly in the 10-year to 30-year tenor, deepening the 2s-10s inversion. The Dollar Index rose 0.43% to 98.99 where it remains in Asia. The index continues grinding towards resistance at 99.45, while major support is now distant at 97.70.

EUR/USD slumped, falling 0.70% to 1.0970 as concerns mounted that European sanctions on Russian energy were on the way. The fall overnight has left the single currency mid-range between major support/resistance at 1.0800 and 1.1200. A fall through 1.0950 sets EUR/USD for a retest of 1.0900. A firming US yield curve will continue to limit Euro gains from here, even if a Ukraine talks breakthrough occurs.

USD/JPY traded sideways overnight, rising slightly to 122.70 as US bonds had a relatively narrow range. Comments from Japanese officials have pushed USD/JPY slightly lower to 122.50 this morning but have otherwise had a minimal impact. The correction lower has now run its course and the US/Japan rate differential will now continue building upward pressures. Key levels are 121.25 and 123.25.

AUD/USD booked a solid 0.70% gain to 0.7520 overnight as energy prices surged once again. It is now in a holding pattern ahead of the RBA rate decision shortly. A surprise hike and change in policy outlook will see resistance at 0.7550 disappear, and UAD/USD rally towards 0.7700. An unchanged RBA and policy outlook could see a dip back to 0.7450, but it is likely to be short-lived as markets turn their attention to future meetings and a change of tone.

A China holiday today has dampened trading volumes in Asian currencies. The US dollar booked small gains versus Asia FX overnight, mainly due to increasing nerves surrounding China’s COVID situation. Asian currencies overall, are continuing to mark time until China returns tomorrow, or we see another big move in US bond yields.

Oil prices started rallying in Asia yesterday after Europe indicated tighter sanctions on Russia. Fears mounting that Europe would finally target the Russian energy sector, further squeezing supplies. Brent crude finished 3.50% higher at 107.95 a barrel, and WTI rose 4.35% to 103.60.

Early Asian trading saw both contracts gain over 1.25% in holiday-thinned trading, as European sanction nerves continued. However, some calm has returned, and oil has pared its gains. That leaves Brent crude and WTI around 0.80% higher at $108.70 and $104.50 respectively.

Europe sanctioning Russian energy is not my base case and I still expect Brent to trade in a choppy $100.00 to $120.00 range in coming weeks, with WTI bouncing around in a $95.00 to $115.00 a barrel range. The US SPR and monthly OPEC+ production hikes balanced out by geopolitical tensions elsewhere.

Gold appeared to catch some geopolitical haven bids yesterday, defying a stronger US Dollar to rise by 0.39% to $1932.50 an ounce. Despite the gains overnight, gold remains stuck in a roughly $1915.00 to $1950.00 an ounce range, with no signs of a directional breakout yet either way.

The risks are still skewed to the downside for gold, especially if US yields and the US dollar keep climbing. Only a rally through $1970.00 changes that outlook temporarily. Gold has resistance at $1940.00 and $1950.00 an ounce. Meanwhile, a sustained break of the $1880.00 region will probably trigger a capitulation trade, potentially pushing gold down to $1800.00 an ounce.

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Written By: MarketPulse