Where to start?

That is what is running through my mind this morning after an emotional overnight session. The calming effect of a suitably dovish and inflationary nonchalant FOMC lasted less than 24 hours. The US/Europe crossover session saw US long-end bond yields explode higher on inflation fears.

The straw that broke the camel’s back appears to be the Philadelphia Fed Manufacturing Index, which exploded from 23.1 to 51.8 for March, a 50-year high. That telegraphs input cost rises are coming as much as anything and was all an edgy market needed to hit the sell button on US bonds. The US 10-year rose to 1.72%, trading at 1.75% intra-day. The 30-year rose to 2.47% as the US curve continued to steepen.

The results followed the playbook of previous sessions; the US Dollar rallied, the Nasdaq was crushed, and the other major indices were also suffering. Gold retreated, but only slightly, continuing to hint that its inflation-hedging mojo is returning. Commodities eased, but not markedly so except for oil. Black gold looked like black lead as both Brent and WTI plummeted by over 7.0%. I had mentioned that both were threatening a modest downside breakout/correction, but clearly, there was a lot more speculative long positioning waiting to be culled then even I envisaged.

The geo-political front provided no solace. The US-China meeting in Alaska started with both sides exchanging insults. Maybe its the weather. Presidents Biden and Putin called each other killers. And the US threatened to sanction everyone involved with Nordstream 2, the new gas pipeline between Russia and Germany, bypassing those inconvenient Ukrainians. The US has a point. Russia doesn’t have good form on accidentally turning off gas pipes. Tying your energy security to them as dumb a strategic move as the West allowing China to control almost all rare earth element refining because of global nimby-ism.

Covid-19 is doing Europe no favours at the moment. Although Germany, Spain, France and Italy have reversed course on their halting of AstraZeneca vaccinations, parts of Europe return to lockdowns. With the well-telegraphed vaccine distribution problems in Europe already weighing on the Bloc’s markets, the news that France is placing over 30% of its population in complete lockdown again played no small part in oil’s demise. When compared against the recoveries in Asia and the United States, and even the UK, I am surprised that European assets are not more unloved.

While Asia digests the implications of the overnight developments, most likely heading for the exit door themselves, today’s data calendar is strictly second tier and low impact, leaving markets at the tender mercies of flow-driven momentum and headlines. Japan’s Inflation data, released this morning, showed that it still does not have any, maintaining the operations normal of the last 25 years.

The one exception will be today’s Bank of Japan rate decision; with market speculation building, it will widen the trading bank it will tolerate for JGB’s. I am 50/50 on this as US yields, for example, have now only risen back to around pre-Covid levels when the BOJ had the same monetary policies in place. It may also “tweak” its ETF buying policy which means they want to buy less of them. If both of those moves happen, the effect on USD/JPY is a little hard to read; one can make a bullish or bearish case. However, USD/JPY has traced out a number of recent daily highs around 109.30 despite US yields rising. If the BoJ indulges in some tapering QE chicanery, the path of least resistance for USD/JPY is likely to be lower, potentially quite quickly.

Asian markets can expect no solace from the US-China meeting either. I mentioned above that the talks got off to a rocky start, and more comments are now hitting the wires in China state media. To summarise, “China isn’t happy,” so business as usual. Any improved trade premium has vanished from Mainland China stock markets today, and reproachment between the two superpowers looks as distant as ever.

I prefer to look on the bright side. Growing up, I and the rest of the world lived under the threat of nuclear Armageddon, because the United States and Russia couldn’t share the toys. In the 2020s, the United States and China are swapping insults over a table in Alaska, but no nukes have been harmed in the process. It’s sometimes hard to believe, but the world is getting better. Happy Friday.

Asian equities rotate cyclically

The rise in inflation, fears and the resulting spike in US bond yields, returned overnight after a brief hiatus, crushing the previous day’s rally on Wall Street, notably in the tech space. The Nasdaq plummeted by 3.02%, the more mixed S&P 500 fell 1.48%, while the cyclical-heavy Dow Jones retreated by only 0.42%. The playbook remains very clear now; a rise in the US yields sparks a rapid retreat from global indices heavy in 2020 darlings. With that money moving into cyclical-recovery-heavy markets, inflation being a function of the global economic recovery.

US futures are holding steady in Asia, but regional markets are mostly lower to varying degrees. The Nikkei 225 and Kospi are down just 0.90%, but China markets are having a torrid day. The Shanghai Composite and CSI 300 have plummeted by 1.70%, with Hong Kong falling 1.60%. Taiwan is also 1.60% lower, but the fallout in more cyclical ASEAN markets is more limited.

Singapore has edged higher by 0.20%, continuing its recent outperformance. Kuala Lumpur has fallen just 0.25%, with Bangkok down 0.50% and Jakarta only 0.20% lower. In Australia, the ASX 200 and All Ordinaries are also holding their own, down just 0.45%.

With commodities ex-oil holding up despite a stronger US Dollar and steeper yield curves positive for banking sector profitability, ASEAN and Australian markets, to a lesser extent, should continue to outperform, their markets being heavy in both sectors with a high beta to the recovery in the real economy. With markets highly susceptible to large scale retail flows and dominated by technology behemoths, North Asian markets remain more vulnerable.

The US Dollar rises a yield tailwind

The US Dollar powered higher overnight as the US sold off aggressively. The dollar index rose 0.46% to 91.86, near the top of its weekly range. The dollar index now threatens 92.00, with a weekly close above signaling further gains to 92.60 next week. However, the US Dollar is moving solely on the back of directional moves in US yields at the moment, and it is that market that will determine its direction.

Major currencies were in full retreat overnight except the Japanese Yen. EUR/USD fell to support at 1.1900, with the single currencies outlook clouded by a darkening COvid-19 landscape once again. A fall through 1.1800 next week signals that a substantial downward correction has started.

As ever, the US Dollar strength manifested itself most notably in the APAC Dollar currencies. Both the AUD and NZD fell sharply by 0.65% and 1.05%, respectively. Notably, both rallied to their breakout levels this week, but failed ahead of them, a bearish technical development. AUD/USD has support at 0.7700, and NZD/USD at 0.7150. A weekly close below those levels signals more losses next week. Both continue to be an Asian proxy to higher US yields and the inflation fears, with most of the rest of Asia running dirty pegs to the greenback.

On that note, Asian currencies retreated overnight and have edged lower today. The scale of the fallout has been limited as USD/CNY remains ensconced around the 6.5000 level. The ever-present threat of intervention limits volatility in the spot market, even as the US bond sell-off continues. The Indonesian Rupiah and Indian Rupee remain Asia’s most vulnerable currencies, but a move higher by USD/CNY through 6.5500 next week may shake investor resolve across the rest of the regional market.

Oil stabilises in Asia

Oil prices suffered a mini collapse overnight, both Brent crude and WTI falling over 7.0% to $62.90 and $59.60 a barrel, respectively. The scale of the tumbles caught me by surprise, in all honesty, and it appears that the level of speculative long positioning out there was much higher than I thought.

As expected, Asian physical buyers have leapt at the chance to load up on cheap oil, and both Brent and WTI have rallied by 1.0% to $63.50 and $60.10, respectively. Europe aside, nothing has fundamentally changed in the oil markets. Assumptions that OPEC+ will increase supply next month are just that, dangerous assumptions, especially if prices were to remain at these levels.

More than likely, now that a culling of the herd has happened, oils bullish underlying case will reassert itself, and I do not expect prices to remain down here for very long.

Brent crude has initial support at $61.50; it’s overnight low, followed by $60.00 a barrel. I will acknowledge that the failure of the latter may flush more stop-loss selling out of hiding. Resistance is distant at $66.50 a barrel. WTI has support at $58.50 and $57.50 a barrel, with resistance at $63.00 a barrel.

Gold eases, but only modestly

Gold beat a fighting retreat overnight, tactically withdrawing ahead of higher US yields and a firmer greenback. The retreat was modest, though, with gold falling $9.0 an ounce to 1734.00 an ounce. That performance is all the more impressive compared to the scale of previous falls this year when US yields have spiked.

Gold is slightly lower at $1733.00 an ounce in quiet Asian trading. Most importantly, it remains higher on the week, and the technical picture clearly shows that gold is attempting to trace out a long-term bottom in prices between its 50.0% and 61.8% Fibonacci retracement levels.

Gold has support at $1720.00 and $1700.00 an ounce, followed by the 61.80% in the $1685.00 area. It has initial resistance at $1755.00 an ounce, followed by the %).0% retracement at $1760.00 an ounce. Gold will likely range between $1720.00 and $1740.00 an ounce through Europe as we await bond market developments in the US this evening.