China property nerves continue stalking Asia

China property developer, Modern Land (China) Co Ltd, become the fourth China property developer to default on an overseas debt obligation yesterday. Although the amount is small, relatively, ongoing concerns about the property sector in China appear to be weighing on sentiment in Asia today. Evergrande, the centre of the China property storm, has another grace period payment due this week on 29 October, and nerves will be taut until it does, or does not, make payment.

That has rather subsumed the noise from Wall Street overnight where Tesla hit a $1 trillion valuation after its shares closed 12.60% higher after announcing a 100,000 vehicle sale to Hertz. The $4.4 billion sale added over a $100 billion in market cap to Tesla as investors voted with their wallets over who will win the EV race. The embattled Facebook also rose, despite Q3 revenue missing slightly at $29 billion and a slight downgrade to Q4 projections. Money talks despite its travails elsewhere in the public domain and it seems a lot of bad news was priced into its stock. Fellow tech heavyweights, Apple, Alphabet and Twitter all announce this afternoon, in what is peak earnings week for the US.

South Korean GDP missed slightly this morning at 0.30% Adv Q3, with weakness showing up in domestic consumption thanks to Covid-19 restrictions. However, strong results from semiconductor supplier SK Hynix, and a 6-month cut in fuel taxes by the government, seem to have limited the fallout with the Kospi in positive territory. Like, the Nikkei, also on fire today, both have a lesser correlation to China’s property sector nerves than ASEAN markets. A new poll released today, suggesting the ruling LDP will maintain a majority in the Lower House at this Sunday’s elections, has also boosted Japanese markets, although the Nikkei 225 seems to be joined at the hip with the US Nasdaq’s directional movements at the moment.

Singapore Industrial Production, a volatile data series at the best of times, is expected to retreat to just 0.30% MoM for September from 5.70% in August. As long as the positive trend stays in place, any fallout should be limited. Europe’s calendar is also quiet with just 7-year Bund and 5-year Gilt auctions to grab investors interest. Most interest will be on the bid-to-cover ratios for the German and UK bonds with the ECB to meet on Thursday and the BoE rate hike trade still in full swing in the UK.

US New Home Sales, the Case-Shiller House Price Index and the Richmond Fed Manufacturing Index will be of passing interest to markets, especially if they further highlight inflationary pressures (US CPI calculations do include housing costs), and supply chain challenges. In all likelihood though, it will be the Q3 results from Apple, Alphabet and Twitter that will drive directional volatility on Wall Street this afternoon.

In China, the PBOC added another big chunk of liquidity today, injecting CNY 190 billion via the reverse-repo market. Although I still expect a RRR cut in November, it probably won’t happen until after the Central Committee meeting, held between 8-11 November. The PBOC seems content to calm markets this way, for now, claiming it is helping to cover local government debt issuance and quarterly tax payments. Who am I to disagree? Meanwhile, its top economic planning organ, the NDRC, has said it is studying ways to “guide” coal prices which rose powerfully yesterday once again. It was also studying “index providers” in the same space. Unless it raises production incredibly quickly, China’s role as a price-taker in the global energy market leaves it limited room to manoeuvre.

As a final note, readers should keep an eye on the Covid-19 situation there which is rapidly evolving. The arrival of delta in Covid-zero countries in other parts of the world suggests challenges ahead, even for China. If it spreads rapidly, some severe lockdowns could follow. That would complicate an already nightmarish scenario for global supply chains under stress from China’s energy consumption cuts and the other usual suspects.

Asian equities mixed after a big night on Wall Street

The Dow Jones and S&P 500 closed at record highs overnight, with the Nasdaq pretty close to it. The huge order from Hertz lifted Tesla stock 12.60% higher into the $1 trillion club, and Facebook’s earnings and outlook weren’t as gloomy as had been expected. Supply chain and privacy issues may impact Apple, Alphabet and Twitter tonight, but you wouldn’t bet against the first two anyway, delivering impressive results. That left the S&P 500 0.47% higher overnight, with the Nasdaq jumping by 0.90% and the Dow Jones climbing 0.18% as tech dominated proceedings. The music continues playing in Asia, with Nasdaq futures rallying by 0.43%, while S&P 500 minis have risen 0.25% and Dow futures are up 0.13%.

All of this was music to the ears of Japan and South Korean markets, which are showing a much higher correlation to Wall Street, rather than China of late. Strong polling results in Japan, and the SK Hynix results, and a temporary fuel price cut in South Korea are also lifting sentiment. The Nikkei 225 has leapt 1.80% higher, while the Kospi is up 0.65% today.

The Modern Land missed debt payment has seen property sector nerves return to China markets though, and that cloud is tempering optimism across ASEAN today as well. The Shanghai Composite is unchanged with the narrower top 50 down 0.50%. The CSI 300 is also unchanged while the Hang Seng has edged 0.35% lower. China’s national team will probably ensure China equity markets are relatively steady ahead of the central committee meeting, but market nerves will be on edge until Evergrande makes, or doesn’t make, another due payment on the 29th.

Singapore is down 0.25% along with Kuala Lumpur, while Bangkok is unchanged, and Manila is down 0.30%. Jakarta has edged 0.50% higher as coal and natural gas prices soared yesterday. While Taipei has bucked the trend and moved 1.0% higher, riding the semiconductor wave. Australian markets are also struggling to shake off the China nerves, with the ASX 200 and All Ordinaries both struggling to a modest 0.10% gain.

The US dollar stages a selective rally

Despite US yields easing overnight, the dollar index staged a sharp rebound, rising 0.23% to 93.82, before climbing to 93.90 in Asian trading. A look under the bonnet though, reveals the US Dollar rally was very much tilted to the lower interest rates forever currencies, namely, the Euro, Swiss Franc, and Japanese Yen. Sterling and the Australasians held steady overnight. The dollar index is likely to struggle above 94.00 this week, especially if big-tech earnings outperform. For now, it looks like the index will trade in a 93.50 to 94.20 range ahead of next weeks FOMC.

The EUR/USD has sunk back to 1.1600 today, but its exile in the broader 1.1550 to 1.1560 range will continue into the ECB on Thursday. An ECB that maintains its dovish longer-term inflation projections on Thursday will likely be the catalyst for another sell-off. Sterling is trading at 1.3765 today and has run into some serious headwinds ahead of 1.3850. The BoE hike trade becoming very crowded and perhaps overdone Nevertheless, only a close below 1.3700 changes the bullish outlook.

AUD/USD and NZD/USD shrugged of US Dollar strength elsewhere to remain steady at 0.7695 and 0.7165 overnight, before gaining 15 points each this morning. China’s property nerves have had zero impact on the Australasians whose fate is very much tied to a global sentiment that is Wall Street-centric. If US earnings continue to provide good news, their downside is limited, although data releases tomorrow could see some intra-day volatility.

Asian currencies remain quiet with the PBOC anchoring volatility with another neutral US/CNY fixing today. Like the Australasians, Asia FX is riding the US earnings sentiment wave and that is unlikely to change ahead of next week’s FOMC.

With over 1000 companies announcing earnings this week in the US, we should be past peak earnings by Friday. I expect to see that sentiment ease into next week and for the US Dollar rally to resume with vigour, as the FOMC meeting approaches mid-week and the reality of the start of the Fed taper bites once again.

Oil consolidates at the highs

Oil markets probed the upside overnight, helped along by another large spike in natural gas prices. However, oil lacked the momentum to maintain those intra-day highs as the US Dollar started strengthening. With a lack of new headline drivers to sustain the moves. Brent crude finished 0.28% higher at $85.95 and WTI finished 0.50% lower at $83.75 a barrel, having traded as high at $85.35 intra-day. Asia has adopted a wait-and-see approach this morning, possibly on China nerves, leaving both contracts almost unchanged.

The US API Crude Inventories will be oil’s next volatility point, with a low print likely to lead to more price gains. However, the price action overnight does suggest that short-term upward momentum is waning as the trade gets ultra-crowded and the RSI indicators on both contracts remain overbought. Another 3 million barrel jump in inventories could spur some short-term long covering and see oil’s long-predicted sharp move lower finally occur to wash out some of the weak speculative longs. Once again though, I will reiterate that the overall environment for oil remains very constructive and any sharp sell-off is likely to see an equally sharp recovery. Of the two, WTI looks more vulnerable as it is more heavily traded by specs and Brent crude is more aligned to the international physical market.

The overnight highs at $86.70 and $85.40 a barrel for Brent and WTI form initial resistance. Trendline support at $83.40 and $79.70 a barrel should be the limit for any downside correction. Only a daily close below those levels suggest a deeper correction is possible.

Gold’s price action remains constructive

Gold staged another impressive rally overnight and there is no doubt that its price action is becoming more constructive towards further gains. Gold rose 0.85% to $1807.80 an ounce before some long-covering saw it fall 0.25% to $1803.20 an ounce in Asia. The rally is made more impressive by the fact that the US Dollar has continued strengthening against the major currencies overnight. In contrast, US bond yields eased across the curve, and it looks like gold is taking its cues from them for now.

Gold has now recorded a daily close above $1800.00, and more importantly, the 100 and 200-day moving averages at $1793.50 and $1790.25 an ounce. One must respect the price action in these circumstances, especially when it appears not to be driven by fast-money gnomes. Therefore, gold has formed a nice layer of support between $1790.00 and $1800.00 now followed by $1780.00 an ounce. Initial resistance is at $1814.00 followed by the formidable zone of daily highs between $1832.00 and $1835.00 an ounce.

Gold continues to slowly but surely, form what appears to be the second shoulder of a longer-term inverse head and shoulders pattern. 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.