By Jeffrey Halley
Recessionary concerns continue to hold back the buy-the-dippers in Asia on Monday, with stock markets ignoring the strong rally by US index futures. It is always worth taking the price action with a grain of salt and regional markets are probably placing more emphasis on a flat close by Wall Street, given another day of intra-session histrionics which saw the 3.0% swings intraday.
Reaction to the Labour win in the weekend federal election in Australia was muted.
The new Prime Minister has already stated the obvious that the Australia-China relationship will remain challenging. Labour’s win had been expected and to a certain extent priced in, the only variable being that after the 3 million postal votes have been counted, will Labour have an outright majority, or be forced into a coalition agreement with the independents, the big winners this weekend, or the greens.
The Australian Dollar is higher Monday morning, but that is a US Dollar story, while stocks are unchanged.
China sparked a local equity rally on Friday after the 5-year loan prime rate was cut by 0.25%. That is supportive of the mortgage market and was a boon to an under-pressure housing sector.
Unfortunately, some of that work was undone Monday morning when the PBOC set a surprisingly strong CNY fix.
USD/CNY was fixed at 6.6756 versus market expectations at 6.6934. A stronger Yuan is weighing on Mainland equities, but has been supportive of Asian currencies generally.
China continues to try and support growth by targeted stimulus while keeping the purse strings tight and attempting to deleverage swaths of the economy. Simultaneously, its maintenance of the covid-zero policy has resulted in sweeping lockdowns across the country, including Shanghai and Beijing, increasing supply chain disruption, and also torpedoing domestic economic activity.
Little wonder that Chinese equities continue to play the cautious side, and so is the rest of Asia.
The economic calendar is light in Asia Monday. Most interesting will be Singapore Inflation in the afternoon, and having been there last week, the Red Dot is more expensive than ever.
Inflation YoY in April is expected at 5.50%. A higher print than that will increase the chances of an unscheduled tightening by the MAS, supportive of the Singapore Dollar, but likely to be a negative for local equities.
Germany releases its IFO Business Climate for May Monday afternoon, expected to remain steady at 91.40 as the Ukraine conflict continues to crush confidence.
More important is likely to be the May Services and Manufacturing PMIs from Germany, France and the Eurozone on Tuesday.
For obvious reasons, there is plenty of downside risk in that data. The Euro has staged a semi-decent recovery over the last week, although I put that down to weaker US yields and rising hard-landing fears in the US, than Europe turning a corner.
Ukraine-related risks only have upside for Europe and weak PMI data should confirm the Euro recovery as a bear market rally.
The US releases Durable Goods, expected to be steady at 0.50% on Wednesday.
Second estimate Q1 GDP on Thursday, and on Friday, Personal Income and Expenditure and the PCE index for April.
The data should show the US is maintaining growth and that inflationary pressures are slowing, but not falling. To a certain extent, that is old news now, but I believe the real story will be in the US and the rest of the world, that inflation may be slowing, but it isn’t falling, and could just trade sideways at high levels for the rest of the year.
Don’t put that stagflation definition back in the desk draw just yet. And I’ll say it again, stagflation does not provide fertile conditions for a stock market rally, so no, I don’t think the “worst is over.”
The Asia-Pacific has a frisky week ahead on the central bank front though.
Both the Bank of Korea and Bank Indonesia, as well as my own national embarrassment, the Reserve Bank of New Zealand, all have policy decisions. The Bank of Korea should hike by another 0.25% this week, maintaining a steady course of rate hikes for the months ahead with inflation modest by western standards.
Bank Indonesia may also be tempted to follow the Philippines’ lead from last week and hike another 0.25%. However, BI has been a reluctant hiker and may wish to see if the palm oil export ban has eased food inflation. It could pause this month as it is still very much in a supporting the recovery mode.
The Reserve Bank of New Zealand is in a world of pain of its own making.
Tuesday’s Retail Sales have upside risks despite the soaring cost of living and will add to the pressure on RBNZ to get more aggressive in reeling in inflation. Anything less than 0.50% on Wednesday with guidance suggesting more 0.50% hikes ahead will see the New Zealand Dollar punished.
Having continued maintaining zero per cent interest rates, and unforgivably, maintained QE, even as the economy surged spectacularly, the RBNZ is now in a monetary box canyon. Pain will be necessary to put inflation back in the box in New Zealand and it, and Sri Lanka, are at the top of the list for a hard landing this year.
A quiet day for oil
Oil prices edged higher on Friday in New York, as the persistent squeeze in refined petroleum products in the US, and ever-present Ukraine-Russia risk underpinned prices, with China slowdown and US recession noise limiting gains.
China’s recovery hopes seem to be supporting oil while China’s slowdown hopes were capping gains. I guess it’s not just equity markets that are very confused right now.
Brent crude premium over WTI reasserted itself into the end of the week, so perhaps the worst of the US diesel and gasoline squeeze is passed for now.
Brent rose by 1.10% to $112.55 on Friday, gaining another 0.70% to $113.30 a barrel in Asian trading. WTI rose 0.40% to $110.55 on Friday, gaining another 0.35% to $110.90 Monday. The price action is consistent with a market that is not strongly leaning one way or another at the moment.
Brent has resistance at $116.00 and support at $111.50. WTI has resistance at $113.00 and $116.00, with support at $108.00. Overall, I expect Brent to bounce around in a $111.00 to$117.00 range this week.
Gold prices rose on Friday, climbing just 0.24% to $1844.00 an ounce. In Asia, they gained 0.42% to $1854.00 an ounce. Although gold’s rally has been impressive over the past week, it has yet to be proven that it is not just the result of a weaker US Dollar. The true test of its resolve will be its ability to maintain gains when the US Dollar starts rising again.
Nevertheless, the technical picture is swinging back to a further test of the upside with resistance at $1860.00 and then $1885.00 an ounce, its 100-day moving average. Support is at $1845.00 and $1840.00, followed by $1832.00.
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.