A soggy start for Asia

Equity markets are front and centre in Asia this morning, as increasing nerves about the delta-variant Covid-19 are sapping recovery hopes across the Asia-Pacific. Of course, you can choose your poison on that front globally, with the US, Europe, and the UK also experiencing rises in cases with populations pushing back on restrictions that seem to increase by the day in APAC.

China has muddied the water more by erecting barriers for China tech IPOs in the US, which appears to be an ongoing process. It's Hong Kong or bust for your IPO from now on, it seems. Even Treasury Secretary Janet Yellen's comments in a WSJ article that the US-China trade deal hadn't been beneficial to American consumers has failed to lift the malaise.

US equities finished on a weak note on Friday despite blockbuster US Retail Sales showing Americans were out shopping. Like the earnings season thus far, last week seemed to be a buy the rumour, sell the fact sort of market. Underlying the weakness, though, are the nagging Covid-19 doubts. For context, given how inclined markets are in this day and age to schizophrenically change direction and sentiment on a 24-hour rolling basis, US equities remain near all-time highs, so let's all just calm down a bit. Even a ten percent pullback would change the underlying trend, and the Fed has your back.

In other news, OPEC+ seems to have reached an agreement to increase oil production by 400,000 barrels a day per month until the end of the year. Higher production baselines were given heavyweights, the UAE, Saudi Arabia, Russia, Kuwait and Iraq, and the entire OPEC+ agreement was extended until the end of 2022. On the one hand, increased production is bearish in the short-term for oil prices, as Covid-19 demand concerns coincide with a speculative market that has filled its boots limit-long. On the other, it is a longer-term positive, as OPEC+ cohesion remains intact, without worries of a member's production free-for-all. OPEC+ has once again demonstrated the ability to resolves its differences and stay on target.

The week's data calendar is relatively light, notably in the US, with only weekly Initial Jobless Claims to pique interest. Most attention will be on Covid/inflation/growth concerns so that we can expect plenty of day-trader's paradise type markets in Wall Street this week. The ECB announces its latest policy decision on Thursday, and for once, I will be watching the outcome. We should gain some more clarity as to whether the ECB's new strategy entrenches a 2.0% inflation target, which, given they haven't been there for well over a decade, should be a dovish outcome. Rising virus cases are clouding the demand picture there once again, and I would say that a dovish ECB will be reflected by a weak Euro versus everything.

The United Kingdom fully reopens today as well, with all restrictions dropped. Unless you have been pinged by the NHS tracer app and told to isolate. The Prime Minister has asked everyone to show some social discipline, but having lived in London for years, that's as likely to happen as inflation in Japan. The reopening is occurring as delta-variant cases explode in the UK, and I expect nerves over whether this is the dumbest post-pandemic policy decision ever to cap gains in Sterling this week.

The week's calendar sees China's latest one and three-year Loan Prime Rate decisions tomorrow in Asia. Despite the recent RRR cut and MLF rollovers, I see no change to the LPR's although I am now wavering on whether they will be hiked in Q4. Indonesia announces its latest policy decision on Thursday. Bank Indonesia has a slight problem this time around with the country of Virus lockdowns and a never-ending delta wave, of which Mrs Halley and I have been recipients. There is room for a rate cut with inflation on the floor, but with ASEAN currencies, including the Rupiah, fighting a Covid-19 retreat, I expect BI to remain unchanged to support the currency.

Australian PMIs on Wednesday should remain strong, but with sweeping lockdowns in NSW and Melbourne, any signs of viral infection will not be kind to the AUD or local equities. Some forecasters are now downgrading the growth outlook for the lucky country, and it almost certainly justifies the RBA's ultra-dovish position. The lucky country will remain lucky, just not as fortunate for now, meaning that the Australian Dollar, which is a risk-barometer for Asia anyway, will remain unloved this week.

Holidays will play a part in Asia this week. Much of South-East Asia is closed tomorrow for Eid Al Adha/Hari Raya Haji, including Singapore. Japan markets are closed on Thursday and Friday.

We do have some other data from around the region but in all honesty, the calendar this week is relatively light globally ex the ECB. Day-to-day sentiment will be dominated by news flow across asset classes. In the case of this week, that is dominated by Covid-19, especially in Asia, and its potential impact on the global recovery and inflation. Stand by for some wild swings in intra-day volatility across the world this week.

Asian equities do not pass go

Asian equity markets are a sea of red today, including US futures, as Covid-19 fears hollow out investor sentiment after a weak finish by Wall Street on Friday night. On Friday, despite strong US Retail Sales, the S&P 500 fell 0.75%, the Nasdaq by 0.80%, and the Dow Jones by 0.86%. 

US equities appear to have run out of momentum for now, despite US long-dated bond yields remaining stubbornly offered as the bond market refuses to buy into the inflation story. The loss of momentum seems more corrective than structural, with vast amounts of good news baked into stock prices. With the delta surge globally, the certainty of the recovery story is hit and has been enough to swing momentum for now. 

Of the three leading indices, the S&P 500 is looking the most vulnerable, lying just above its ascending March 2020 support line, today at 4300.00. Picking the top in the S&P 500 hasn't treated me well, though, so readers should take my observation with a grain of salt.

Dow futures are 0.50% lower in Asia, with the S&P 500 e-mini and Nasdaq futures down 0.25%. Across Asia, though, the picture is ugly, with regional investors clamouring to move into cash on the side-lines. The Nikkei 225 has fallen 1.30%, having traded lower intra-day after some athletes tested positive in the Olympic Village. The Kospi is down by 1.0%, while Taipei has fallen by 0.75%.

In China, the Shanghai Composite is 0.35% lower, with the CSI 300 down 0.75%. In Hong Kong, heavy with Mainland tech and property companies, the Hang Seng has plummeted by 1.80%. 

Renewed restrictions in Singapore sees local markets fall 0.85% today, with Jakarta down 0.55%. Weekend protests see Bangkok 1.20 lower today while Kuala Lumpur bucks the trend, rising 0.40%. Widening lockdowns in Australia see the ASX 200 and All Ordinaries both 0.90% lower.

With a dearth of tier-1 data this week, equity markets will be left to the tender mercies of the armies of fast-money FOMO-gnomes. The virus evolution will dominate intra-day panic/schizophrenia. Longer-term investors might choose this week to watch from the side-lines and spare their blood pressure. 

The US Dollar remains firm

The US Dollar remained firm once again on Friday, as US Retail Sales kept the inflation story alive, in currency markets at least. The disconnect between US bond yields and the US Dollar continued blissfully forward. The US Dollar may also now be receiving an element of haven-buying support as concerns over the delta variant virus ratcheted higher.

The dollar index rose 0.16% to 92.72 on Friday, where it remains in Asia today. EUR/USD and GBP/USD continue to trade on the weak side. EUR/USD is at 1.1805 today, not far from support at 1.170. A dovish potentially ECB on Thursday is capping the single currency, and risks are still weighted towards a fall below 1.1700 before the ECB meeting. A much deeper correction could occur if the ECB goes with a fixed 2.0% inflation target as this would imply more easing to throw on the BOJ-like 15 years of easing so far.

GBP/USD is looking very vulnerable this morning, having fallen 0.50% to 1.3755 on Friday, where it remains today. Rocketing delta-variant cases, just as the UK prepares to reopen today fully, have spooked markets. GBP/USD has support at 1.3740 and then the 200-day moving average (DMA) at 1.3695. The charts suggest a substantial fall to 1.3400 is possible if PM Johnson has moved too quickly. What could go wrong?

AUD/USD sits at 7-month lows today at 0.7390, increasing virus restrictions in New South Wales and Victoria spook markets locally. The Australian Dollar's role as a risk barometer for Asia, in general, is also not helping sentiment today. The AUD/USD can potentially extend losses to near 0.7200, but bears may find short AUD/NZD positions better to play AUD weakness. AUD/NZD staged a massive head and shoulders breakout below 1.0650 on Friday.

USD/Asia has risen by around 0.25% today ex Yuan and Yen. That is unsurprisingly given the weakening of risk sentiment over the weekend on virus and growth fears. I expect USD/Asia to remain bid this week. Still, the deteriorating confidence is more likely to be reflected here by softening local equities and AUD and NZD weakness as proxies.

Oil falls on OPEC+ deal

OPEC+ reached an agreement over the weekend to extend the groupings production deal to the end of 2022 while simultaneously lifting daily production and raising baseline quotas for the group's heavyweights. Oil prices had edged lower on Friday on virus-driven growth concerns, despite US data, OPEC+ break-up fears. The announcement to increase supply has pushed prices down this morning for most of the morning session.

On Friday, Brent crude fell 0.20% to $73.10 a barrel while WTI fell 0.10% to $71.45 a barrel. After both fell over 0.50% today after the weekend OPEC+ announcement, both have steadied back to almost unchanged at $73.05 and $71.25 a barrel, respectively.

As I stated earlier above, although the intention to increase production is a short-term negative for oil prices, particularly as it coincides with growth fears sweeping markets this week, in the longer run, the ability of OPEC+ once again to overcome their difference is a positive for prices. If demand falls short of expectations, OPEC+ more than likely has the discipline to modify production targets to support prices as well now, as necessary.

I do not rule out more weakness in the short term, but overall, I believe the worst of oil's price pullback is now over. On Brent crude, failure of support at $72.00 could see a spike to $70.00 a barrel. Similarly, a loss of $70.00 a barrel by WTI could see it briefly spike to $68.00 a barrel. 

Gold wobbles

Gold prices fell on Friday as US Retail Sales failed to move US bond yields higher but did strengthen the US Dollar. The US Dollar appears to be catching a safe-haven bid as well, as virus/growth fears rise, which is also capping gold's gains.

Gold retreated 0.95% to $1812.50 an ounce on Friday and came very close to staging an outside reversal day, which would have been a powerful negative technical indicator. The loss of upside momentum has shifted the risks for gold to the downside. For now, though, and despite the noisy price action, gold remains hemmed in by its 100 and 200 DMAs at $1792.00 and $1826.00 an ounce, respectively.

A daily close below $1790.00 an ounce would signal a deeper correction targeting $1750.00. Some short-covering has seen gold rise slightly to $1813.00 an ounce in Asia, with investors’ minds regionally clearly focused more on equity markets. However, this is a week for patience, and with momentum shifting on sentiment, investors should respect the 100-and 200-DMAs and avoid getting caught out by whipsaw price action.