Asian markets were handed a Wall Street hospital pass this morning as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) both missed quarterly earnings expectations in after-market announcements. Rising labour costs, rising input costs, supply chain disruptions, semi-conductor disruptions were all rolled out as the usual suspects. Starbucks (NASDAQ:SBUX) left investors underwhelmed as well, and the company has quickly announced a giant stock buy-back to placate those choking on their free-trade lattes.
That capped a tough session for US data with Adv Q3 GDP disappointing. A look under the bonnet reveals the same reasons as above plus the recent delta wave for the downside miss, but consumer spending is holding up nicely and most forecasters are picking Q4 to rebound. It should not be enough to knock the FOMC of their tapering announcement next week. US Initial Jobless Claims also fell once again to 281,000, and the trend is raising hopes that the US labor squeeze will alleviate in the coming months. President Biden’s spending negotiations within his own party remains a dog’s breakfast, but progress is being made allegedly and in totality, was enough to move Wall Street higher until the after-market kidney punches from Apple and Amazon.
It was a rather odd night with US yields across the curve rising along with stocks, although the latter was on expectations of strong results from Apple and Amazon. The US Dollar took a bath though and this time the blame can be laid at the door of the European Central Bank. The ECB sought to dampen rate-hiking concerns post its policy meeting but did finally admit that inflation is looking transitory for longer. That wasn’t enough to dampen hiking expectations and Eurozone yields moved higher and the EUR/USD rallied strongly. That was enough to spark a run for the exit door by US Dollar longs across the G-10 space.
Another central bank that is struggling a little on the credibility front is the Reserve Bank of Australia. Their target rate for April 2024 Commonwealth Government Bonds is 0.10%, but it declined to intervene yesterday as rates hit 0.50%. And have not done a special auction today either resulting in the yield racing higher to 0.74% this morning. Monday is its next scheduled operation and markets down under will be on tenterhooks. In the meantime, they are gleefully pricing in an about-face from the RBA on its ultra-dovish guidance and that should keep the Australian Dollar a favourite into the weekend. Their rate-hiking position isn’t being helped by Reserve Bank of New Zealand Governor Orr stating the obvious that monetary policy easing globally had done what it could and run its course.
My main takeout is that far from being just a US FOMC story now, a winding down of the ham-fisted QE largesse is quickly spreading to other parts of the developed world with EM heavyweights Brazil and Russia already well ahead of the game, having started hiking rates already. Markets have already priced in a 15bps hike by the Bank of England next month. My base case is that markets continue to under-price the Fed taper, and that higher US yields and US Dollars are on the way, it just may not be the one-way traffic I previously envisaged.
China’s state planner continued to talk down coal prices today, saying they had more room to fall. A story is also circulating from an energy research house called Energy Intelligence, that OPEC+ might see room to move on increasing production at its meeting next week. Energy prices remain rock solid today though, and that doesn’t bode well for the longevity of China’s attempt to talk down coal prices. I’m sure Scott Morrison would take that call from Beijing.
South Korean Industrial Production and Manufacturing disappointed as they fell into negative territory today. The same supply chain/pandemic issues assailing the rest of the world are likely to blame but pleasingly, Retail Sales MoM for September recovered to 2.50%, suggesting the worst of the virus woes are behind them for now. Japan Industrial Production MoM for Sep plummeted to -5.40% and it seems to be a trend amongst major industrialised nations that pandemic/supply-chain/semiconductor/rising material costs are eroding the pace of the recovery. Thankfully, markets and consumers seem forgiving of all of the above as out of their control, and consumers seem happy to pay rising prices. Tokyo CPI rose just 0.10% YOY in October, and we can be assured that the BOJ and ECB will be QE-ing for years to come in monetary policy mediocrity, long after the rest of the world has moved on. Neither of them got out of that rabbit hole after the GFC, and they’re not going to now. Try not to get bullish Euros and Yen on a longer-term horizon.
Eurozone Flash Inflation data this afternoon will have been subsumed by the ECB commentary yesterday, although with markets having rate-hike itchy trigger fingers, a print above 3.50% YoY for Oct could spur another round of Euro strength. Even after the Eurozone bond sell-off yesterday, Greece and Italy can still fund in the 10-year tenor at 1.0%. The prosecution rests.
US Personal Income and Spending, Employment Cost Index and Michigan Consumer Sentiment will carry rather more weight with markets. High prints may see the Fed taper trade priced into the end of the week, with stocks lower and a higher US Dollar, especially above the one-two punch from Apple and Amazon. Still, depending on your point of view, you could interpret it bullishly or bearishly, as intra-day sentiment and the risk appetite of the FOMO gnomes of Wall Street continue to rule intra-day volatility. Some actual concrete progress on the US spending bills instead of empty rhetoric could give a pleasant boost to markets in the end of the week as well.
Otherwise, the key events to watch out for in the coming week are the FOMC, the Bank of England, and let’s not forget OPEC+ on the 4 November.
Asian equities do the North/South split
Wall Street enjoyed a positive session overnight, led by big-tech in anticipation of strong Apple and Amazon earnings. The S&P 500 rallied 0.98% higher, with the Nasdaq leaping 1.39% higher, and the Dow jones booking a 0.68% gain. Disappointing results from both titans after the close slammed the door on the rally with Nasdaq futures tumbling by 0.70%, S&P 500 futures falling 0.35%, while Dow Futures have edged just 0.05% lower. The initial reaction is rather less bad than I would have expected, and the perpetual bulls of Wall Street may be looking for to a potential rebound in Q4 already.
In Asia, it is the North Asia heavyweights that are taking the heat, and in price action we have seen rather often of late, those sellers appear to be rotating into ASEAN markets defensively rather than exiting altogether. It is no coincidence that markets heavy with Apple suppliers are falling the most. Taipei is down 0.60% and South Korea’s Kospi is 0.70% lower. Japan was sold heavily initially but has since recovered to be only 0.10% lower. Gains should be limited from here as Japan heads into Lower House elections on Sunday.
With the state planner talking down coal prices and Evergrande making its offshore coupon payment just ahead of today’s final deadline, sentiment is more positive in China. That was assisted by another giant CNY 100 billion liquidity injection by the PBOC via the repo market today. The Shanghai Composite is 0.05% higher with the narrower Shanghai 50, heavy with banks, rinsing by 0.35%. The CSI 300 is up 0.20% while Hong Kong can’t quite shake of the tech-funk, falling 0.55%.
In ASEAN, the picture is more solid as investors rotate South. Singapore is 0.70% higher while Jakarta is up 0.75% and Kuala Lumpur is unchanged. Bangkok has risen by 0.15% but Manila have fallen by 0.90% today.
Australian markets have taken fright at the huge jump of the 3-year CGB yields to 0.75% this morning, and the absence of the RBA whose target is just 0.10%. Markets are pricing in a change of monetary stance from the RBA who are now looking at a rapidly developing credibility issue. That has left the ASX 200 lower by 0.80%, while the All Ordinaries has fallen by 0.60%.
The fallout from the Apple and Amazon results has been relatively muted in the bigger picture. Supply change blockages and shortages also appear to be being accepted as a fact of life by markets. With the ECB out of the way as well, there should be no reason for European stocks not to rally modestly this afternoon. The picture in US markets is rather cloudier, but once again, it would not surprise me if they took the Apple and Amazon results in their stride and rallied, especially if the OPEC+ story gains credence and we see a concrete breakthrough on democrat spending plans.
The US Dollar crushed under ECB stampede
The US Dollar was in full retreat overnight as the ECB did not do enough to dampen hiking expectations at its overnight policy meeting. That led to a powerful rally by EUR/USD which spilt over into the other G-7’s and the wider currency space despite US yields rising across the curve once again. The dollar index fell by 0.53% to 93.36 before edging higher to 93.39 in moribund Asian trading. The dollar index has smashed through support at 93.50 which becomes resistance and could well target 93.00 if sentiment remains the same when Europe arrives this afternoon.
EUR/USD has risen by 0.75% to 1.1680, breaking resistance at 1.1670 leaving its next upside target at 1.1750. GBP/USD has risen 0.35% to 1.3795 but must break strong resistance ahead of 1.3835 to decisively swing the picture back to bullish with a BOE hike next week seemingly fully priced in. USD/JPY has eased 0.20% to 113.60 with support at 113.25. USD/JPY is likely near its lows at these levels as US yields continue to move higher, widening the US/Japan rate differential. An election in Japan this weekend will also temper Yen gains today.
The US Dollar fall overnight boosted the commodity currency space although USD/Cad and NZD/USD are still locked in range-trading mode. The spike in Australian 3-year rates is an additional supportive factor along with greenback weakness. AUD/USD has risen 0.35% to resistance at 0.7550, and a close above that tonight signals further gains above 0.7600. All eyes will be on the RBA on Monday morning and could lead to some large intra-day volatility.
Asian currencies booked only patchy gains versus the US Dollar overnight, suggesting that Chi9an growth and US yields remain a concern across the region. The Indian Rupee and Malaysian Ringgit while the Korean Won and Chinese Yuan held steady. The PBOC once again, set another neutral USD/CNY fixing, limited Asian FX gain versus the US Dollar. The central bank has a clear preference for now to maintain currency strength while adding liquidity directly to the domestic system instead, likely with one eye on its imported energy bill.
Oil steady in Asia
The oil sell-off that continued in Asia yesterday hit a brick wall and abruptly reversed as soon as Europe walked into the office. Although I expected a rapid recovery, the pace caught me by surprise and really speaks volumes about the pent-up demand lying in wait in the physical oil market now. A lower US Dollar in the New York session gave oil a gentle nudge and both Brent crude and WTI recorded small gains for the day. Brent crude finishing 0.40% higher at $84.50, and WTI climbing an impressive 1.10% to $83.05 a barrel. Asia has decided to sit on its hands today after getting it so wrong yesterday, with both contracts steady near their New York close.
The potential restart of nuclear talks with Iran, and the potential return of Iranian crude to markets legally, seem to have run their course with US traders more concerned about the large rundown in available stocks at the Cushing distribution hub. Nevertheless, oil still faces some downside risk over the weekend and into next week's OPEC+ meeting on 4 November. Energy Intelligence is running story suggesting that OPEC+ may be comfortable raising production by more than its present targets. With compliance at 115%, I am not sure how that would happen, but if OPEC+ does spring a surprise, oil could once again see an abrupt correction lower. And this time, it may linger for longer.
Brent crude has regained the trendline support at, today at $84.40 a barrel, although it has not managed to move clear of it. It has traced out at double bottom after yesterday’s sell-off at $82.25 a barrel and price action remain constructive unless this is broken on a closing basis. Resistance is distant at $86.00 a barrel. WTI held its trendline support at $80.75 a barrel and has traced out a triple bottom at that level. Only failure signals deeper losses now. A rise above $83.20 a barrel signals a retest of $84.00 a barrel. Notably, the relative strength indexes (RSIs) on both contracts have fallen into neutral territory, removing another technical signal that would limit gains.
Lower dollar boosts gold
Gold prices rose again overnight despite US 10-year yields rising across the US yield curve. Gold has a general sell-off of the US Dollar to thank and that lifted it to a 0.10% gain to $1799.00 an ounce overnight. In Asia, a rising US Dollar has seen gold retrace slightly, falling by 0.25% to $1794.00 an ounce. Ominously, gold’s rally extended to $1810.50 intra-day overnight, but for the fourth time in one week, it failed in that area and gave back most of its gains. That is in keeping with my predicted $1780.00 to $1820.00 pre-FOMC range next week.
In the near-term, if the trendline support, today at $1790.00, as well as $1780.00 an ounce hold, gold’s price action remains constructive. Gold has a well-defined resistance area in the $1810.00 region, followed by the formidable resistance zone between $1832.00 and $1835.00 an ounce.
A move above $1835.00 would be a powerful bullish technical signal though, but my base case is that golds retreat resumes into next week after the FOMC. Failure of $1780.00 therefore, likely signals deeper losses targeting $1750.00 in the first instance. Conversely, if gold overcomes formidable resistance into $1835.00, it will signal further gains to $1900.00 and possibly $2000.00 in the coming weeks, as the break would trigger an inverse head-and-shoulders formation.