By Jeffrey Halley
With most of Europe, as well as Hong Kong, Australia and New Zealand on holiday on Monday, the focus has been on the tier-1 data releases from China.
China GDP YoY for Q1 beat expectations, rising by 4.80% (4.50% exp), and rising 1.30% QoQ (0.60% exp), industrial production in March fell to 5.0% YoY from 7.50% in February, while retail sales had a big miss, slumping to -3.50% YoY (-1.60% exp.) in March from 6.70% in February.
Meanwhile, unemployment in March rose to 5.80% from 5.50% previously, and capacity utilisation fell to 75.80% from 77.40% previously.
Overall, the data suggest that China started the year well, but as the quarter has moved on, the headwinds have gotten stronger.
A slowing property market, sweeping Covid restrictions, the Ukraine invasion and Mariupol’s brave defenders pushing up base commodity and energy prices, and a central bank still intent on deleveraging sectors of the economy, have all combined to weigh on China’s growth. About the only thing missing is a meaningful rise in inflation, which is some small sliver of comfort.
It is little surprise, therefore, that mainland equities are heading south Monday, despite China’s PBOC cutting the RRR by 0.25% on Friday, allowing banks to lend more, with agricultural banks’ RRR being trimmed by 0.50%.
Markets were disappointed that the 1-year MTF was not also cut on Friday and China’s “have your cake and eat it” approach seems to be facing more challenges by the day. China will have a second bite of the cherry on Wednesday, when it announces its latest 1 and 5-year Loan Prime Rate decisions.
Virus restrictions across China appear to be heading the wrong way, even as Hong Kong cases plummet.
Markets are already seeing the impact on production and trade from the Shanghai lockdowns, and if these start spreading, the picture for China dims considerably, even without the downstream impact from the Russian invasion of Ukraine.
China’s official 5.50% GDP target becomes more challenging by the day as consumer sentiment plummets, production costs rise and Covid policies threaten to wreak havoc with production and logistics. Eventually, this will weigh on other Asian markets as well.
Light week on data front
US Housing Starts on Tuesday and Markit PMIs on Friday are the highlights. In Europe, we get Eurozone Industrial Production on Wednesday and Markit and Eurozone PMIs for the bloc on Friday. I would suggest all the European data has downside risk.
In Asia, apart from trade balances and China’s LPRs, we see India release March WPIs for food, manufacturing, and inflation. Upside prints will increase the noise around the pace of the RBI’s move to a tightening bias and will probably be a headwind for the Sensex.
Japan releases Industrial Production on Tuesday, and the trade balance on Wednesday, both of which have downside risks. It releases inflation on Friday, but I haven’t looked at that for 20 years and nor should you. We already know the answer.
Apart from being another reason to be long USD/JPY, the main volatility this week from Japan will come from officials speaking about the Yen and “watching markets closely” as the Yen continues to be crushed by the US Dollar.
Asia markets tumble
Equity markets finished weaker in the US on Thursday as investors took risk of the table ahead of the long weekend, and Fed rate hike fears pushed US yields sharply higher. The same fears are permeating US markets Monday as futures trading commenced in Asia. S&P 500 and Dow futures are 0.50% lower, while Nasdaq futures have fallen by 0.90%.
In Asia, the ever-increasing sweep of covid lockdowns in China, and mixed data from the mainland have combined with weak US price action to push Asian markets lower. Japan’s Nikkei 225 has tumbled by 1.50%, while South Korea’s Kospi has edged just 0.20% lower, helped by a weakening currency.
Mainland China is deep in the red, with the Shanghai Composite down 0.80%, with narrower Shanghai 50 retreating by 1.65%. The CSI 300 has fallen by 0.95%.
Around Asia, Singapore is down by 0.65%, Kuala Lumpur is 0.30% lower, while Jakarta bucks the trend, climbing 0.50%. Taipei has fallen by 0.65%, with Bangkok unchanged and Manila rising by 0.25%.
Dollar soars on Fed tightening
The dollar index rose slightly on Friday and has gained 0.20% to 100.70 in Asia on Monday. Resistance at 100.90 is within sight, and a move through 101.00 would signal more gains targeting the 2020 pandemic-panic highs at 103.00. Support is between 99.40 and 99.55.
The ECB policy decision, where it signalled little to no intention of increasing the pace of tightening or removing QE earlier, saw EUR/USD sold heavily on Thursday. The single currency eased slightly on Friday before moving 0.20% lower to 1.0785 in Asia Monday. The Euro is now facing a serious test of the multi-decade support line at 1.0800.
Ukraine and energy fears and a dovish ECB make a sustainable rally in Euro challenging now. Only a sudden narrowing of the US/Core-Europe rate differential will likely change the outlook.
Sterling is holding above 1.3000 for now at 1.3030, as markets price in hikes by the BOE in May, and heavy EUR/GBP selling supports GBP/USD.
Libya nerves lift oil prices
Oil prices are 1.0% higher Monday in Asia as trading resumes after the Good Friday holiday. In thin trading, oil closed modestly higher on Thursday, and on Monday, Brent crude has risen to $112.75 a barrel, and WTI to $108.00 a barrel.
There are a few reasons behind this rise. OPEC reported that production rose only 57,000 bpd in March, not even climbing by the agreed 253,000 bpd. The IEA said 3 million bpd of Russian production would be impacted by sanctions by May, and the Russian Interfax agency said Russian production slipped by 7.50% in the first half of March.
Finally, over the weekend, protestors appear to have shut down a small Libyan oil field, and disrupted loading at a major coastal terminal. Although only 75,000 bpd of production has been taken offline, with global supplies now so tight, even the most minor disruption is likely to have an outsized impact on prices.
Overall, expect Brent to remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. Brent crude has further support at $96.00, and WTI at $93.00 a barrel.
Gold rally continues
Gold booked a modest retreat on Thursday as US yields and the US Dollar climbed noticeably higher. Gold fell 0.22% to $1973.50 an ounce. In Asia on Monday, gold has resumed its rally, despite the US Dollar also strengthening. Gold has risen by 0.54% to $1984.00 an ounce.
Gold’s price action remains constructive. It is managing to maintain gains on US Dollar strength, while also grinding higher even as US yields and the greenback both strengthen. Gold has initial resistance at $2000.00 an ounce, although option-related selling will be a strong initial barrier. If that is cleared, gold could gap higher to $2020.00 quite quickly and potentially, a retest of $2080.00.
Jeffrey Halley is Senior Market Analyst, Asia Pacific at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.