Nervously calm

Inflationary fears continued to abate overnight, with the Philadelphia Fed Manufacturing Index retreating from near fifty-year highs to 31.5, much lower than expected. In Asia this morning, the data has been equally benign. South Korean PPI, MoM for April, fell to 0.60%, Australia’s Markit Composite Flash PMI for May fell to 58.10, led by services, while Preliminary Retail Sales MoM for April eased to 1.10%. Japan’s Inflation Rate MoM for April fell by -0.40%, more negative than expected. The Japan Jibun Bank Composite Flash PMI for May retreated to 48.10, a big undershoot. Services led the fall, but the manufacturing component also fell.

Covid-19 restrictions and fears in Japan and South Korea likely torpedoed the service components, and that may show up in pan-Asia data in the weeks ahead. EU PPIs were equally benign, and since the huge US Non-Farm miss in early May, there has been an undeniable trend of data suggesting that perhaps those inflation concerns are overdone.

That probably goes some way to explaining why the massive jump in this month’s US CPI did not result in US long-dated yields sustaining new highs for the year, and they have continued retreating gently, with no signs of buyer fatigue at the recent bond auctions. So it would appear that the buy-everything bulls are proving themselves correct at the moment. US yields fell overnight, even as equities rose and the US Dollar resumed its retreat. The 7.0% fall in oil prices over the past week won’t help the inflation cause, and with a US/Iran deal seemingly in the offing, oil price fears will be put on the backburner for now.

Inflationista’s like myself will have to beat an orderly retreat for now, and with inflation fears ebbing, equity markets may resume rallying. I, for one, won’t miss the day-to-day, herd-like, mindless tail-chasing we have seen in equity markets and others over the past fortnight. For a start, it’s a nightmare to write about, especially when your modus operandi is to not look for a headline or data point to explain the noise of the day. I do not believe the inflation story is over, but I do accept it may be over for now. It shall return, but of one thing I am sure, we do not yet know if it will be transitory or sticky, for the first time in over 20 years. My gut feeling is the former, but I am open-minded enough to allow for the latter.

The crypto-space continues to grab the headlines and sure enough, the “get back in” mob has pushed Bitcoin back above $40,000 of US fiat backed by taxpayer revenues fiat currency. Bitcoin almost retraced in its entirety, the meltdown from $44,000 at the start of the week, an impressive feat. Notably, it faded ahead of Wednesday’s opening price and the week’s high, and I suspect the hit to its credibility runs deeper than a low liquidity rally.

Given the frenzied reaction to the China story on Wednesday, which caught a nervous market very long and wrong, we should continue monitoring the wires for any crackdown related comments. I say this because the new frontier of finances trade over the weekend, as rust, or bits, sleep for no man. Nerves remained heightened, and I cannot see liquidity being deeper on Saturdays and Sundays than Monday to Friday, especially after the last week. Weekend headline risk could prompt another bout of extended wealth destruction for the weekend warriors. One that even the get-back-in disciples may struggle to reconcile in their blockchain minds.

Asia has, understandably, taken a backwards look at this week and wisely decided that it’s Friday. Especially so with the data calendar now relatively quiet for the rest of the day. French, German, EU and US PMI’s later today may reinforce the not-so-inflationary story, as would a formal announcement of an agreement between the US and Iran. US Existing Home Sales could reinforce that sentiment, and Asia’s caution this week has served it well. As the adage goes, no one ever went broke taking a profit.

Asian equities cautiously mixed

Although Wall Street rallied strongly overnight, with the intra-day momentum tail-chasers continuing to rule the roost, Asia is decidedly more subdued as caution rather than exuberance rules. Having decided that inflation wasn’t a problem yesterday, the S&P 500 rose 1.06%, the Nasdaq leapt by 1.77%, and the Down Jones edged 0.53% higher. Futures on all three have edged up 0.10% in Asian trading.

In Asia, ranges have been small. The picture is more mixed, with local positioning flows driving small ranges with even the retail fast-money hotspots of Japan, South Korea, Australia and Hong Kong having a rest. The Nikkei 225 is 0.56% higher, while the Kospi has edged 0.16% lower. Mainland China’s Shanghai Composite has moved o.45% lower, while the CSI 300 has fallen 0.85%. Hong Kong has drifted 0.38% lower.

Singapore is up just 0.10%, while Taipei has climbed 1.0% as value hunters continue to unwind last week’s sell-off and look for semi-conductor bargains. Malaysia is the regions underperformer, with the KLCI falling 1.25% today. Record Covid-19 cases and the fall in oil prices lie behind the fall, while the massive jump in CPI to 4.70% this morning has sparked inflation fears in one corner of the world. Meanwhile, Australian markets are quiet, the ASX 200 and All Ordinaries down just 0.10%.

European markets are set to open modestly higher as a sense of calm descends on equity markets. Low prints on European and US data today will alleviate inflation nerves even more and likely spark a rally in both centres into the end of the week.

US Dollar sell-off resumes

Benign US data eased inflation nerves overnight, lifting risk sentiment and pushing US yields lower. That was enough to spur a sell-off in the US Dollar as investors moved positioning once again, out of haven greenbacks. The dollar index fell by 0.47% to 89.75, where it remains in Asia. Despite the volatility of the week, the dollar index has traded in a choppy 89.70 to 90.20 range, with plenty of whip-sawing for anyone looking for it. A close below 89.70 for the week will signal the US Dollar sell-off will resume next week.

The EUR/USD and GBP/USD have recouped almost all of their intra-week losses, rising to 1.2230 and 1.4180, respectively, today. If all goes to plan, EUR/USD should overcome resistance at 1.2250, targeting 1.2350 initially. GBP/USD has resistance at 1.4225, opening the road to a more substantial rally to 1.4400. Only a fall through 1.2150 or 1.4000 materially changes the bullish picture.

The Australian and New Zealand Dollars have climbed to 0.7760 and 0.7190 today, but as barometers for global risk sentiment, neither are quite out of the woods yet. AUD/USD needs to hold support at 0.7680, rising through 0.7820 to ease reversal fears. NZD/USD needs to keep support around 0.7150 and remain the more vulnerable of the pair post-budget.

Asian currencies have had a mixed performance, with the Singapore Dollar, Indonesian Rupiah and Malaysian Ringgit losing ground on Covid-19 nerves and falling oil prices. Elsewhere, the Thai Baht, Indian Rupiah and South Korean Won all rallied, likely on a lower dollar index and falling oil prices. The Chinese Yuan remained steady, with USD/CNY continuing to range between 6.4000 and 6.4500.

The mixed picture in Asia reflects local drivers of sentiment, exposure to commodity prices and a correlation to US strength or weakness. While the Euro and Pound have a vaccination premium baked into them, the picture on that front is much more mixed in Asia. An easing of US inflation fears should be a medium-term positive for regional currencies, most of which have some sort of dirty peg to the greenback. But I expect local issues to give a mixed picture in the short term.

Iran weighs on oil prices

Brent crude and WTI have now retreated around 7.0% from their highs at the start of the week as markets with heavy speculative positioning were punished by association with cryptocurrencies mid-week. Notably, oil prices have failed to recover and have continued down, with the spectre of a return of Iranian oil to the international market weighing on a long speculative market.

Overnight, Brent crude another 2.50% to $65.00 a barrel, while WTI fell by 2.20% to $61.95 a barrel. In Asia, some short-covering has lifted prices modestly by 0.40% to $65.25 and $62.20, respectively.

Both contracts are sitting on support at these levels, and the market’s reaction to the US/Iran news suggests the downside remains the weaker side. Even more so, as oil has fallen as the US Dollar has also weakened.

Brent crude has resistance at $67.00, with support nearby at $64.80 and $64.60 a barrel. Failure opens a deeper correction that could extend as far as $62.00 a barrel. WTI’s first resistance is $64.00 a barrel, with support nearby at $61.70 a barrel. Failure opens more profound losses to $60.65 and possibly $58.00 a barrel.

Although oil’s outlook remains favourable, even with the return of Iranian production to international markets, its near-term direction rests with how many weak speculative long positions are remaining in the market. If they have been sufficiently culled, oil prices should stabilise here; otherwise, the risk is that a more aggressive thinning of the herd will follow.

Gold remains firm

Gold has weathered the storms of this week handsomely, and a fall in US yields and the US Dollar overnight lifted it higher by 0.40% to $1877.00 an ounce. Notably, gold fell in early Asia but has quickly recouped those losses and currently sits at $1876.50 an ounce. That suggests that investors are comfortable at these levels, buying gold on any sort of dip.

Assuming tonight’s data reinforces that inflationary fears are overblown for now, gold looks poised to test resistance at $1890.00 an ounce, followed by $1900.00 an ounce. A move through $1900.00 is likely to spur option-related and algorithmic buying, pushing it to $1920.00 an ounce. Support lies at $1965.00 and $1953.00 an ounce. Only a failure of the significant support level and 200-day moving average at $1845.00 an ounce suggests the rally is over for now.