China holds loan prime rates

China held its one and five-year Loan Prime Rates steady for the 18th month in a row this morning in a completely expected outcome. Easing from the PBOC is more likely to come in the form of more MLF’s or via a RRR cut for Mainland banks. Far more attention is being focused on the commodity and property space instead. China threatened to intervene in onshore coal markets yesterday to cap prices which sent Mainland coal futures plummeting by a limit-down 10%. Hong Kong coal futures have dived by 8.50% so far today. Oil prices have reacted only modestly though, and like its threats in other commodity spaces, as a price taker and importer, its rhetoric is likely to only have a passing effect.

Evergrande and the China property developer sector have fallen off the radar in the past week or so, but the issues there have not gone away. We may see more Evergrande headlines weighing on China markets into the end of the week as the first 30-day grace period on unpaid offshore bonds approaches. This Saturday is D-Day for the first grace period to expire which I assume will trigger a formal default if no funds appear. That will be followed by another due date early next week. The silence from Evergrande and the government is deafening, and as other developers default or struggle to pay offshore debts, this story may make its way back to the front pages.

Elsewhere though, market sentiment remains decidedly positive, despite an ominous rise in long-dated US yields overnight. That sentiment is being supported on several fronts. US earnings continue to perform very well with very little in the way of downbeat 2022 forecasts. Progress appears to be being made on President Biden’s double-header multi-trillion-dollar in Washington DC, amongst the Democrats at least. The social spending side looks to be going on a severe diet though which was not entirely unexpected. Lastly, tightening monetary policy expectations are rising in a number of developed economies around the world, which is taking the heat out of the Fed taper trade. A plethora of Fed officials were on the hawkish side of the taper last night, and I expect many of tonight’s list to be of the same mind. We haven’t heard the last of the Fed taper trade by any means.

Another risk point is the rise in energy and commodity prices as well as the ongoing supply chain challenges around the world. Japan’s trade balance deteriorated today to JPY 622.8 billion. Although exports were healthy, including those to China. Imports rose sharply. Much of that increase was due to material costs and most especially, a 105% jump in energy costs. Transitional versus embedded inflation is like having a vaxxer/anti-vaxxer conversation. Both parties are left with a headache and no discernible progress. But either way, with most of the worlds international commerce priced and transacted in US Dollars, it's hard to see the Dollar falling materially in an environment of constantly rising input prices.

The data calendar is a blank slate in Asia now, leaving markets to happily ride the optimism wave washing in from New York. In fact, Asia’s calendar for the rest of the week is lightweight. German PPI and UK PPI and CPI will probably reveal the challenges the Japan trade balance hinted at earlier today. Noises around inflation and trimming the ECB’s ultra-easy QE forever monetary policy are rising, despite some officials trying to dampen it. K markets are already on a trigger happy hiking watch from the BOE next month. A high print from the CPI and PPI will add to that noise and probably see another jump by Sterling. Likewise, a firm German PPI could have a similar, if more sedate, effect on the Euro.

The US calendar is a sleeper as well, with only crude inventories to relieve the monotony. US markets will continue to be driven by US earnings, which will drown out another round of multi-character Fed-speak this evening. The recovery trade probably has another few days in the sun.

Lastly, Bitcoin’s rally continues as trading started in the first Bitcoin futures ETF overnight. A dig under the bonnet shows that most of the very healthy volume on its first day came from legalised front-runners, I mean high-frequency traders (HFTs), and retail punters, I mean retail investors. Institutional volume was thin on the ground. Although a regulated ETF based on regulated futures does fit nicely into the mandates of many in the institutional space, I suspect they may wait a while before dipping their toes in the water.

For one, they probably want to see what the liquidity is like when Bitcoin aggressively retraces, as it will do at some stage in the future. (don’t hate me crypto-nista’s, I’m not dissing your “mainstream asset” story. It's just that markets go up and down, that physical nature.) Secondly, as Reuters rightly observed, Bitcoin futures markets trade on a contango curve. That is longer-dated contracts are more expensive than the front month. That means you lose money rolling expiring contracts into the new front month. They probably want to see an orderly roll with decent two-way liquidity and a shallower contango.

I can’t believe I am into a third paragraph on cryptos, but life is funny in 2021. Directionally, in the spirit of it being a tradeable versus an investible asset, and with the launch of the first exchanged-traded hype-fund (EThF sounds very “DeFi,” yes?), Bitcoin remains a bull market very much. From a technical perspective, a series of higher daily lows, and a 4.5% gain overnight to $64,000.00, has left the crypto Dutch tulip poised to test all-time highs around $64.900.00. A close above $65,000.00 opens the road to $80,000.00. I respect the momentum and the price action, not the concept readers. Only a fall through $56,500.00 implies the mindless hype of the emperor’s new clothes, I mean the Bitcoin as a mainstream investible asset class, rally, is over for now. On that note, I am off to buy a used car with genuine low mileage and three previous lady doctor owners.

Equities in Asia give back early gains

Equities in Asia, except for China, were higher across the board earlier today, but a combination of factors, notably a soft China session, has seen most of those early gains unwound. Overnight, US earnings and recovery package hopes kept the music playing on Wall Street, which shook of higher US yields and posited another positive finish. The S&P 500 rose 0.74%, the Nasdaq climbed by 0.71%, with the Dow Jones finishing 0.57% higher.

Mainland China markets are hovering in negative territory, despite the PBOC adding liquid via the repo today. That hasn’t stopped the Yuan rallying to 5-month highs versus the US Dollar, or 5½ year highs on a trade-weighted basis, weighing on exporters. But most importantly, China state media said this morning that expectations for a RRR cut in Q4 have fallen. That is not my base case, but it appears to have been enough to take the wind from the sails of local markets. The Shanghai Composite is 0.25% lower, while the CSI 300 is down 0.20%. None of this has affected Hong Kong though, with the Hang Seng leaping 1.45% higher today. The rally has been led by a 7.0% rise in Ali Baba shares after it was announced Jack Ma had been allowed to travel to Europe, raising hopes the tech clampdown was easing.

In Japan, the eruption of Mt Aso has tempered earlier gains, leaving the Nikkei 225 up just 0.15% now. In South Korea, the Kospi has moved back to unchanged. Singapore and Taipei are up just 0.10% now with Kuala Lumpur falling 0.15% while Bangkok is 0.30% higher. Indonesia is closed today. Australian markets, though, continue to hold their early gains with both the ASX 200 and All Ordinaries content to follow New York 0.70% higher today.

European equity markets will take their cue from New York as usual given the lack of Eurozone data today. That should mean a positive start to trading. US earnings will continue to drive sentiment globally ex-China, and as long as they remain upbeat, so should equity markets this week.

The US Dollar gets a bond boost

The US Dollar found support overnight, after trading lower early in yesterday’s session, as long-dated US bond yields resumed their upward climb, notably in the 30-year tenor. The dollar index tumbled to test support at 93.50 overnight, but the rise in US yields reversed the sell-off, leaving the index 0.17% lower at 93.78, before moving slightly lower to 93.72 in Asia.

EUR/USD continued to trade sideways just below 1.1650 overnight but it was the reflation trade favourites that outperformed. GBP/USD rose 0.50% to 1.3800 and remains on track to retest 1.3900 this week. AUD/USD has risen 1.0% in the last 24 hours to 0.7485 and continues to target further gains to 0.7600. NZD/USD has been the star of the show, Kiwi gaining 1.20% in the last 24 hours to 0.7170 this morning. With the frenzy around a potential 0.50% RBNZ rate hike rising to deafening levels, Kiwi should continue to outperform if global risk sentiment remains firm. NZD/USD could test 0.7300 in the next few days in that scenario.

In Asia, the South Korean Won rallied 0.85% overnight for much the same reasons, USD/KRW falling to 1174.50 this morning. The Singapore Dollar also gained 0.30% while the Indonesian Rupiah consolidated this week’s 1.30% gain after the Bank of Indonesia left policy rates unchanged yesterday. USD/MYR could test support at 4.1500 today after being on holiday yesterday as oil and commodity prices remain in space. The entire Asia FX space continues to receive support from the Chinese Yuan, with USD/CNY falling to multi-month lows near 6.3800 earlier and hitting multi-year highs on a TWI basis.

The Japanese Yen is seeing haven buying today after falling earlier, USD/JPY sliding back to 114.50 in Asian trading. The Yen has surged after Mt Aso erupted in Japan. The gains are modest though, and USD/JPY rose as high as 114.70 intra-day reflecting the strong rise in long-dated US yields overnight. That highlights once again the US/Japan rate differential is the key driver of USD/JPY direction, with occasional bouts of haven buying bringing some two-way price action. USD/JPY is approaching a series of highs on each side of 115.00 which date back to 2017. It will likely encounter more offers into this area from options and exporters but remains a steadfast buy on dips.

Except for the reflation GBP, AUD and NZD darlings, another moves higher in US yields as we saw overnight, is unlikely to be ignored this time around. With speculative long US Dollar positioning now reduced, and with US yields on the move higher once again in the long-dated tenors, the greenback could be approaching its nadir for now. It will take a combination of strong US earnings and a material retreat by US yields to cause a downside breakout through 93.50 in the dollar index now.

Oil weakens on China coal slump

Mainland coal futures slumped limit-down yesterday after the government threatened to intervene in the coal market to control prices. Hong Kong futures have fallen by 8.55% this morning and combined with another easing in natural gas prices, oil has modestly retreated in Asia. That has seen Brent crude give back half of its 1.0% overnight gains, falling by 0.55% to $84.65 a barrel this morning. WTI, closed nearly unchanged overnight after US API crude inventories recorded a sharp increase. WTI in Asia is 0.55% lower as well, at $82.00 a barrel.

With coal and gas prices easing and with the relative strength index (RSI) technical indicators still in overbought territory, the odds of a sharp, but material fall in oil prices are rising. Brent crude could fall to $82.00 and WTI to $78.50 a barrel, and still comfortably remain in a strong bull market. A culling of speculative longs would be no bad thing for the overall uptrend, and more headlines on price controls from China, or a higher than expected official US Crude Inventories number this evening could be the nudge markets require.

Even if oil was to stage a $5.0 pullback, I continue to believe that it will be short in duration. With OPEC+ at 115% compliance and unable to rapidly increase production, US shale increasing only slowly, and energy shortages all over the Northern hemisphere, any material fall in prices will see buyers flood in to buy the dip.

Brent crude has resistance at $86.00 and support at $83.80 a barrel, followed by $82.00 a barrel. WTI has failed twice ahead of $84.00 a barrel, forming initial resistance. Support nearby at $81.80 is in danger of being tested. A loss of $81.80 leaves an empty hole until $79.50 a barrel.

Gold rally capped by US yields

Widespread US Dollar weakness earlier in yesterday’s session saw gold rallying impressively, climbing 20.0 dollars to $1785.00 at one stage. However, a renewed rise in US long-dated yields torpedoed the rally, with the resulting US Dollar strength pushing gold back to a close at $1767.50 an ounce, a modest 0.27% gain for the day. In Asia, a slight fall in the greenback has lifted gold 0.25% to $1774.00 an ounce in a quiet session. Gold’s fate remains inextricably linked to the direction of the US Dollar with US yields roving once again, to be a headwind to sustained price gains.

That said, gold is slowly but surely forming what appears to be the second shoulder of an inverse head and shoulders pattern through a series of higher daily lows. In the bigger picture, a rise through $1835.00 an ounce, would trigger the multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive, targeting a move back above $2000.00 an ounce. Still, the risks remain firmly to the downside unless US yields have a sustained move lower which sinks the US Dollar.

Gold has nearby support at $1765.00 and $1760.00 an ounce, which is followed by $1745.00; failure signalling a retest of $1720.00 an ounce. Gold has resistance at $1785.00, followed by the 100 and 200-day moving averages (DMAs), today at $1793.85 and $1794.50, which remain formidable resistance.