By Jeffrey Halley
Asian markets are mostly positive Monday morning as Shanghai announced a raft of stimulus measures and both Shanghai and Beijing eased Covid-19 restrictions.
The devil is in the detail of course, and corkers in both cities still face challenges either going to work, or even being allowed to leave the house.
Asia is pricing in peak virus in China and a recovery in growth.
Another tailwind was the strong performance by Wall Street on Friday, which closed out a banner week prompting the usual “maybe this is the bottom” response from the financial press and FOMO investors.
That was assisted by US data on Friday. Personal Income and Expenditure for April were still robust, but eased from March numbers, and Michigan Consumer Sentiment retreated from 65.2 in April to a still-healthy 58.4 for May.
Lower data equals reduced need for Fed tightening, equals buy everything.
Simple really. Although, I’m struggling to see how a slowing US economy is good for equities.
Another negative headwind ignored by markets is oil prices.
Brent crude edged above $120.00 a barrel Monday morning as the European Union continues its efforts to get Hungary on board for a proposed EU-wide ban on Russian crude imports.
The underlying driver, though, is the massive squeeze on refined products around the world, which is lifting the base ingredient for diesel and petrol that has got very expensive. The world would have been flapping and wringing its hands about the end of days if we had said Brent crude above $120.00 a barrel a month or two or three ago, but now it is being ignored.
By the way, if China recovers, oil prices will as well; just saying.
Also being ignored by markets in Non-Farm Payroll week is that the Federal Reserve starts quantitative tightening this week. The Fed will start to sell $47.50 billion of bonds and MBS’ per month, scaling up to $95 billion per month by September.
Meanwhile, the ECB, is still quantitatively easing while talking about hiking rates to errrr, zero per cent. And there is a war in Eastern Europe. Long EUR/USD above 1.0800 anybody?
The week ahead
Look at what the week ahead brings, Asia’s calendar is dead on Monday with the week’s highlights being China’s Official and Caixin PMIs coming out Tuesday and Wednesday.
Wednesday and Thursday also see a swath of manufacturing and services PMIs from the rest of Asia, while Australia releases its April Trade Balance on Thursday.
China’s data will have a binary impact this week if peak-covid is here. Soft data will likely ramp up fears of a slowdown, with a decent showing likely to see hot money flowing in looking for the bottom.
Holidays will play their part this week. US markets are closed for Memorial Day on Monday, although electronic trading is open in Asia. Indonesia is closed Wednesday while Mainland China and Hong Kong and Taiwan are closed on Friday for the International Dragon Boat Festival.
Thursday and Friday see U.K. markets closed for a bank holiday and Her Majesty’s Platinum Jubilee. Activity in Asia will likely be muted from Thursday.
Monday features German May Inflation with Eurozone, French and Italian Inflation on Tuesday.
High prints will likely increase the hiking noise around the ECB and could extend the Euro’s recent gains. The ECB should probably stop quantitatively easing first though.
Eurozone and US Manufacturing PMIs are released on Wednesday, along with US ADPO Employment that forecasters will pointlessly use to extrapolate Friday’s data.
We also have a Bank of Canada policy decision which should feature a 0.50% hike.
Finally, on Friday, we will see May’s US Non-Farm Payrolls data. Market expectations are a moving target this week, but as of Monday, markets are expecting a fall from 428,000 in April to a still robust 320,000 for May.
Trading the data in the hour after its release has always been a sure-fire way to lose money.
If pushed, I would say a lower number will have the market pricing in less Fed tightening, while a higher number might dish out a cold dose of reality to the bottom-fishers in equity, bond, and currency markets ahead of the mid-month FOMC meeting.
Improving risk sentiment sends US Dollar lower
The US Dollar declined once again on Friday as improving risk sentiment continues to unwind the 2022 US Dollar rally. That spilt over into Asian markets Monday, with regional currencies booking decent gains versus the greenback in the morning.
On Friday, the dollar index edged 0.12% lower to 101.64, losing another 0.13% to 101.50 in Asia. Support remains at 101.00, with resistance at 102.50.
EUR/USD held steady on Friday, closing almost unchanged at 1.0735, with US Dollar weakness being reflected in EMFX and the commonwealth currencies. It has gained 0.20% to 1.0755 in Asia, but overall, seems locked in a 1.0700 to 1.0800 range.
Oil’s rally may temper single currency gains, with the multi-decade breakout line, today at 1.0830, still a formidable barrier.
GBP/USD closed 0.20% higher at 1.2630 on Friday, adding another 0.14% to 1.2640 in Asia. GBP/USD looks set to trade in a noisy 1.2600 to 1.2700 range as the week gets underway. The government’s cost of living package may prompt faster BOE tightening, supporting the downside, while the economic slowdown continues to slow upside progress.
USD/JPY is trading sideways, ranging each side of 127.00 as US yields trade in narrow ranges. That is likely to continue with US bond markets closed on Monday.
Gold trades sideways
Gold seems determined to bore traders to death after another inconclusive overnight range-trading session. It finished Friday 0.13% lower at $1853.00 an ounce, before gaining 0.44% to $186.75 in Asia Monday. Gold’s price action continues to suggest caution, with the US Dollar sell-off not translating to any meaningful gold strength. If risk sentiment turns lower, gold could quickly follow.
Gold has nearby support at $1840.00, followed by $1836.00. Failure sees the possibility of a mini-capitulation by longs that could reach as far as $1780.00. Gold has resistance here at $1862.00, then $1870.00, followed by $1886.00 an ounce, its 100-day moving average.
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.