Stocks Markets are a “Team” Game

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA, 

A few stories are circulating in Asia today to pique the market’s interest. Strong PMIs from the US and Europe overnight saw the cyclical rotation trade reappear in equities, with the tech-heavy Nasdaq tumbling 2.0%. Mainland China and Hong Kong tech listings opened much lower as well, with additional headwinds over a proposal for a joint venture with tech giants to jointly “oversee” consumer data.

The aggressive falls have suddenly mysteriously reversed, just as the Shanghai Composite approached its 200day moving average. (DMA) From over 2.0% down, the Shanghai Composite, CSI 300 and Hang Seng are now in modest positive territory, sparking speculation that China’s “national team” of government-linked investment funds are buying. Indeed, the price action suggests that “smoothing” is underway.

Secondly, it is being reported that the giant container ship blocking the Suez Canal has been refloated, although I have not seen it officially reported on any news wires. Oil prices have immediately dropped by over 1.0% in Asia, suggesting some truth to the story. Oil rallied spectacularly overnight on the Suez Canal story and robust US PMI data, and I would expect at least part of that premium to unwound.

Thirdly, Reuters is exclusively reporting that the US SEC is launching an inquiry into the SPAC IPO frenzy. I am not sure of the story’s ramifications as yet, but I felt that reports this week that WeWork was preparing to list via a SPAC at a $9 billion valuation, must surely represent “peak SPAC.” You remember, it’s the serviced office company with ping pong tables that all those clever finance people thought was worth $50 billion less than two years ago. Perhaps the SEC agrees with me? 30+ years of gnarled existence as a pilot fish in the financial markets has imbued an “if it’s too good to be true, it always is” mindset on me. SPAC-mania fits that bill nicely. Mind you, if someone is prepared to pay $60 million for a non-fungible jpeg, then anything is possible. I do acknowledge that in the central bank-powered times of 2020/21, things can be too good to be true for longer.

Overnight, the US 5-year note auction was well received, with a 7-year auction to come tonight. Notably, even as yields fell, the US Dollar continued to power higher, suggesting that those yield differential plays are now becoming good old safe-haven plays. The global risk appetite indicating Australian and New Zealand Dollars have fallen deeper into downward correction territory. The Canadian Dollar is very close to doing the same. Similarly, the S&P 500 is testing long-term support, with the Nasdaq having broken its longer-term support on the first day of March. The same picture is reflected across China indexes and the Nikkei 225, and I know I have missed a few.

Trouble is brewing, I suspect, and when looking for a spark, my eyes turn to US President Biden. The President is due to announce a preliminary outline of his follow-on $3 trillion remake America package next week. Although taxes will rise on wealthy and business, bond issuance will surely expand once again as well. That could be enough to spike US long yields once again, which may move equity markets out of marking-time mode and finally into downside correction mode. To be sure, it will be a bull-market correction, although it may be an emotional one. But worry not, the central banks have still got everybody’s back.

The Asian data calendar cupboard is bare today, with attention focused on US Initial Jobless Claims. After the surprise rise in US PMI’s overnight, a fall in Jobless Claims below 700,000 might just give the process outlined above a bit of a nudge.

Asian equities whipsaw early.

Early Asian trading headed directly to jail, with a North Korean missile launch sinking the Nikkei 225 and Kospi, while tech-sector jitters saw Mainland and Hong Kong markets drop over 2.0%. Rumours of quasi-government intervention in China markets and the rumoured refloating of the Suez Canal container ship have abruptly changed the direction of all of the above.

The Nikkei 225 is now 0.75% higher, with the Kospi rising by 0.55%. The Shanghai Composite, CSI 300 and Hang Seng are all unchanged, having been deep in the red earlier. US futures on the Nasdaq, S&P 500 and Dow Jones have risen modestly after the Nasdaq fell 2.0% overnight.

In ASEAN, Singapore and Bangkok are 0.20% higher, Kuala Lumpur is 0.20% lower, and Jakarta is down 0.60%. Manilla is outperforming, rising 1.50%, as the central bank is expected to keep rates unchanged this afternoon. Cyclical ASEAN markets performance is roughly in line with the unchanged Dow Jones overnight. Australia’s ASX 200 and All Ordinaries are also both unchanged.

Attention seems very much focused on the North Asian markets today for obvious reasons. If the Suez Canal story is proven correct, Asian markets should derive a slight lift, as will European markets later on this afternoon.

The US Dollar grinds higher overnight.

After some significant moves on Tuesday, currency markets had a more consolidative look about them overnight, although the US Dollar continued grinding higher. The dollar index rose 0.21% to 92.52 and is now testing its 200-DMA, signalling further potential gains to 93.00 initially.

Amongst the majors, the British Pound continues to suffer AstraZeneca fallout, slipping 0.47% to 1.3700 as of this morning. It targets 1.3600 initially, and if EUR/USD fails at 1.1800, its next target will be 1.1600 in the week ahead. The AUD/USD has closed below its 100-DMA, at 0.7608 today, adding another bearish headline to a cloudy technical picture. Likewise, NZD/USD closed under important support at 0.7000 and faces more losses to 0.6800 in the near-term.

The PBOC has set the USD/CNY fix slightly higher at 6.5282 today, and the CNY continues to outperform relative to the G-10 currencies. That has spared the rest of Asia’s blushes, although regional Asian currencies retreated overnight versus the greenback and have eased again today. USD/IDR is approaching 14,500.00, and a rise through that level will weigh on Indonesian assets and almost certainly spur intervention by the central bank. USD/THB is also on the move and faces a test of significant resistance around 6.5500, but the rest of Asia is content to track the CNY, with the Indian Rupee showing surprising strength. The Philippine Peso may face renewed selling pressure if, as expected, the central bank leaves rates unchanged at 2.0% this afternoon.

Although Asian EM is holding up well in the face of Dollar strength, a move hires in bond yields next week after President Biden releases his infrastructure package details will ramp up the pressure on local currencies.

The US Dollar strength in general, coming even as US yields ease lower, is indicative of safe-haven flows and reflects a nervousness in international markets that is not yet wholly apparent in other asset classes.

Oil eases on Suez Canal hopes.

Oil markets charged higher overnight, unwinding all of their previous day’s slump. Oil’s rally was powered by impressive PMI data from Europe and the United States and the Suez Canal blockage through which nearly 10% of seaborne oil passes typically.

Brent crude rose by 6.20% to $64.15 overnight, and WTI rose 6.0% to $60.80 a barrel overnight. Prices in Asia have fallen, with both Brent and WTI easing 1.10% lower today. The reason for the fall is stories circulating (unconfirmed), that the container ship blocking the Suez Canal has been refloated and is being moved.

If true, oil should continue falling, but given the positive PMI data overnight, I do not believe we will see a complete unwinding of the overnight rally. A roughly 50% retracement to around $62.00 and $59.00 a barrel, respectively, sounds more reasonable. Oil markets are unlikely to renew their upward momentum aggressively until OPEC+’s next meeting in early April, which should leave production cuts unchanged.

Brent crude has support at $60.30 and $60.00 a barrel. Failure opens deeper losses to $57.50 a barrel. Resistance is at $65.00 a barrel. WTI has a triple bottom at $57.35, and failure sets the scene for deeper losses to $55.00 a barrel. Resistance is at $62.50 a barrel.

Gold ranges quietly.

Gold appears to be off most investors’ radars at the moment, but despite US Dollar strength overnight, it rose slightly by 0.40% to $1734.00 an ounce. It has edged slightly higher to $1736.00 an ounce in another moribund Asian session.

Gold looks set to continue ranging between $1720.00 and $1750.00 an ounce, part of a broader, longer-term bottoming pattern. Gold’soverall price action remains construction, though, and the yellow metal is attempting to form a longer-term base, between its 61.80% and 50.0% Fibonacci retracements, setting the scene for a move back above $1800.00 an ounce if all goes to plan.

Gold has support at $1720.00 and $1700.00 an ounce, followed by the 61.80%retracement in the $1685.00 area. It has initial resistance at $1755.00 an ounce, followed by the 50.0% retracement at $1760.00 an ounce.