A busy week ahead

There has been a fair bit of catching up to do after the past week spent outside of the financial market’s matrix. The biggest takeaways appear to be that the US Dollar rally has run its course for now and that the US bond market refuses to taper tantrums. In fact, US bond yields have turned about-face and headed South.

The latter appears to be vexing the minds of inflationists everywhere. As Pantheon Macroeconomics notes, Federal Reserve buying has run ahead of US government issuance in Q2, and the end of the US debt ceiling suspension looms at the end of the month. Throw in a relentless ocean of capital looking for a home in a zero percent world, and the answer to the bond market rally and consequent fall of the US Dollar and rally in stock markets is likely right in front of our faces.

One thing is for sure, the debt ceiling won't be resolved by July 31st is past years are anything to go buy, meaning new issuance will be constrained. Given the Fed won't stop buying Treasuries and mortgage back securities either, the underlying bid in the bond market will remain. One could wring one's hands at the illogical nature of it all, and let's face it, what's been logical since March 2020? A less stressful strategy is to accept the momentum for what it is and run with it. That likely means capped US yields, a lower US Dollar, higher stocks (off course), and a solid bid on commodities and precious metals. The momentum will be what it will be until it isn't.

That doesn't mean that everything is well in the state of Denmark though. The Asia Pacific remains down a Covid-19 rabbit hole and if the situation that I have experienced first-hand in Jakarta last week is anything to go by, some downward revisions of growth are inevitable for the region. Similarly, cases are rising in the US, the UK, and Europe, even as those regions ease restrictions on their fresh mRNA vaccinated populations. Time will tell on how that bet will work out. 

It is easy to look at the Northern hemisphere big three and their summer holiday Instagram photos and assume the world is saved. However, the rest of the world remains mostly in a very different place. One thing that is noticeable is the waning momentum in the global reflation/recovery trade as the haves have, and the have nots (most of us) have not. China sprung a surprise RRR cut on markets late Friday, which to my mind is a strong signal from Beijing that they are nervous about the fading momentum. I had penciled in one and five-year loan prime rate hikes for Q4 in China; I am now reassessing that.

Of course, China may have shot itself in the foot with its ever-expanding technology company and foreign IPO clampdown. Restricted lending to the property sector won't have helped, and it's quiet but relentless, withdrawal of liquidity via the MTF and repo market may have proven premature. Throw in the constant head-butting on trade and geopolitics, a strong Yuan, stubbornly high energy, and commodity prices, and perhaps it’s not such a surprise the PBOC has blinked. It should all be wonderful news for Mainland equities though, and those countries in its nearby event horizon.

The world suddenly looks like October 2020 again, pre-Pfizer BioNTech announcing they had saved the world, as long as you were American or European. At this stage, I really can't tell you if we are temporarily back to the future or a colder reality about the global recovery looms. Either way, though, it should be good for the FOMO gnomes of the stock market.

The picture will muddy further this week if US core inflation YoY climbs above 4.0%. That may increase the taper talk again, and Federal Reserve Chairman Powell also gives semi-annual testimony in Congress this week. Further hints on a tapering schedule could appear during this address, potentially signaling the US could be moving out of monetary policy sync with the rest of the world. Fed QE buying and the debt ceiling expiry mean that the US bond market is unlikely to react, but emerging markets, notably in Asia, may not fare so well. DM is likely to outperform EM this week.

That disquiet may deepen if China's Trade Balance, Industrial Output, Retail Sales, and GDP data released this week show a slowing down of the pace of the China recovery. Singapore GDP, Malaysian Industrial Output, Indonesia Trade, and India Industrial Output and Trade Balance may tell a similar story. Asian FX is likely to fade at the expense of DM currencies, and the post-China RRR cut rally we are seeing in Northern Asian equities today, could quickly fade.

We have a few central bank policy decisions in the mix as well this week. The Bank of Canada will buck the trend by further tapering its bond-buying. Along with firm commodity and oil prices, that should see the Canadian Dollar outperform this week. The Bank of Japan and Bank of Korea will remain unchanged, especially after the China RRR cut and the ongoing pandemic woes at home and across the region. Those same factors, along with the extended Sydney lockdown, will also stay in the Reserve Bank of New Zealand's hands. 

China RRR cut boosts Asian equities

Asian equities are higher today after a surprise RRR cut by China on Friday and an upbeat Wall Street session lifted sentiment. The Nikkei 225 has raced 2.20% higher, while the Kospi has rallied by 1.0%. Notably, China's Mainland markets and its nearby neighbors are outperforming. China's Shanghai Composite is 1.0% higher, with the CSI 300 leaping by 1.60%.

US index futures have eased slightly by around 0.20% this morning, but the move looks corrective after a powerful Wall Street session on Friday. The S&P 500, Nasdaq, and Dow Jones all hit record highs on Friday. The S&P 500 rose 1.13%, the Nasdaq climbed 0.98%, and the Dow Jones rose 1.30%.

Across regional Asia, stocks are also higher, although less so than in Northern Asia. The expanding China tech-clampdown has muted sentiment in Hing Kong, which is just 0.40% higher. Singapore is 0.25% higher, with Taipei climbing 0.85%. Jakarta has risen 0.80% on commodity prices and IPO fever, but Kuala Lumpur has fallen by 0.40%, with politics and Covid-19 cases weighing on sentiment. Australian markets are shrugging off the Sydney lockdown for now, following US markets and the China RRR rally higher. The ASX 200 has risen 0.80%, while the All Ordinaries has climbed higher by 0.70%.

Northern Asian markets with high beta and geographic location to China are outperforming today. However, that rally may run out of steam as the week progresses if China's tier-1 data releases suggest the pace of the recovery there is slowing. It would inevitably weigh on sentiment across the rest of the region, with the Asia-Pacific as a whole-ex China, grappling with the cold hard realities of Covid-19. Additionally, a 4.0% plus US Core CPI this week is likely to see EM outflows increase, and DM markets outperform, notably the Northern hemisphere heavyweights.

Fading sentiment, fading US dollar

The US Dollar underperformed last week as US bond yields continued to fall. Notably, US Yields staged a corrective jump on Friday, the first in eight sessions, yet the US Dollar continued to move lower. That suggests that Friday's US yield jump is temporary, and that momentum has well and truly turned for now for the firmer US Dollar trade. Fading expectations about the pace of the global reflation trade appear to be the main culprit, although I suspect technical issues in the US bond market, capping yields, are also playing their part.

Having topped out just above 92.80 last week, the dollar index has fallen to 92.17 as of this morning in Asia, falling by 0.27% on Friday. The 91.50 level looms as the critical support/pivot point for the index now. A daily close below 91.50 and its 100 and 200-day moving averages (DMAs) just below will signal an extended period of Dollar weakness that would target 90.00. That said, nerves ahead of the US CPI data tomorrow should limit the downside for the greenback for now. An EM equity washout this week would also limit losses there, with the greenback most likely to feel the pressure versus the major currency space.

EUR/USD still languishes at 1.1870 today, ahead of inflation data tomorrow as well. EUR/USD needs to close above 1.1900 to regain upward momentum. GBP/USD looks more constructive at 1.3890 today, with UK data expected to be positive this week. A close above 1.3900 this evening sets the scene for a test of its main pivot level at 1.4000 later this week.

Although Asian currencies have regained some lost ground versus the US Dollar over the last week, they face data-related challenges in the coming week. Suppose China, India, Malaysian, Singapore, and Indonesian data suggest that the regional recovery pace is slowing or has halted. In that case, the AFX space is likely to retreats versus the greenback as investors rotate into the DM space. Similarly, a US Core CPI print above 4.0% will increase concerns that US monetary policy, and Asian monetary policy, will soon diverge in their respective tracks. Again, that risks AFX underperformance versus the greenback.

Oil prices remain firm

Markets can't seem to decide what the OPEC+ standoff between the UAE and Saudi Arabia means for oil prices. On the one hand, a fracturing of OPEC+ unity could lead to an open the pumps free-for-all, an obvious price negative. On the other hand, OPEC+'s present agreement remains in force with the grouping in compliance. And OPEC+ usually manages to overcome intra-group disagreements, eventually. That expectation has supported prices.

The net result seems to have locked Brent and WTI into range trading mode for now, albeit a relatively wide and volatile one. Brent crude rose 1.65% to $75.55 a barrel on Friday, easing to $75.25 in Asia, with virus fears eroding recovery confidence. Brent crude looks supported under 73.00 a barrel in the bigger picture but capped at $78.00 a barrel for now.

WTI spiked 1.95% higher to $74.65 a barrel on Friday before easing to $74.30 a barrel in Asia this morning. WTI looks supported on dips to $71.00 a barrel, while prices looked capped ahead of $77.00 a barrel.

Looking at the ranges and volatility in oil markets last week, it is clear that much positioning culling and tail-chasing is going on. Oil's fundamentals remain positive, albeit perhaps slightly less so than last month, as Covid-19 keeps on giving. That all makes for a great day traders’ market at the moment, but a less appealing one for investors. Until we get OPEC+ clarity, I expect the wide-ranging chop-fest day trading frenzy to continue. Unless one has an appetite for tail-chasing intra-day risk, patiently waiting for the whipsaw dips, or just watching the fun and games from the sidelines, might be the most intelligent strategy at the moment.

Gold awaits US dollar developments

Gold has managed to reclaim $1800.00 an ounce over the last week, but it looks very much like a function of US Dollar weakness instead of bright new dawn for gold as an asset class. The fact that gold has spent the last five sessions quietly ranging between $1800.00 to $1820.00 an ounce after its initial spike suggests that gold is in a holding pattern, waiting for events to transpire elsewhere.

Gold has fallen 0.40% to $1801.00 an ounce today, giving up all of its range-trading gains from Friday. Until the US Dollar breaks higher or lower emphatically, this status quo is likely to continue. Broadly speaking, I expect gold to remain contained this week, bound by support at its 100-DMA at 1791.00 an ounce, and its 200-DMA above at $1828.00 an ounce.