Earnings season keeps on earning

The Fed taper trade has been well and truly kicked to the sidelines for now. Earnings are dominating the headlines and market sentiment, even as bond yields, energy prices, commodities and rate hike expectations around the world continue to creep higher. It is with good reason though, Q3 earnings for the most part in both the US and over in Europe have been very positive. Notably, from my perspective, FMCG giants such as P&G have been able to hike prices to offset rising input costs, something I thought that sector would find very challenging. Tesla delivered overnight as well, showing strong growth in net profit, revenue, and deliveries. Shares eased slightly though in a classic buy-the-rumour, sell-the-fact move. I still struggle with the concept of buying an EV in countries such as China, Singapore, and Indonesia for example, where most of their electricity is generated from fossil fuels. And readers should look up the costs of replacing a tree-hugger friendly battery pack on an older Tesla that is out of factory warranty, it is interesting reading. They do look cool though and have a high “wokeness” index.

Bitcoin had another emperor’s new clothes rally overnight, tracing out new all-time highs around $67,000.00 of tax-payer backed fiat US Dollars before some long-covering saw it retreat back to $64.600.00 in Asia. The crypto-vangellists, after being in hiding for a while, are out in full cry once again. Out trots “mainstream acceptance” thanks to a couple of Bitcoin futures-backed ETF launches this week. Initial impressions are that they are just another playground for speculative day traders without the aggravations of setting up a crypto-account and a wallet to buy the digital-physical. The “inflation hedge” is circulating as well, which begs the question, why are equities where they are then, surely interest rates must rise? Buying US Dollar or a commodity currency is probably the easiest inflation hedge out there. I will fall off my chair if one of the “institutional” experts starts mentioning the future potential of blockchain and Bitcoin in the same sentence, it's original raison d’etre I thought.

It will be interesting to see how the digital Dutch tulip space copes with the unwinding of QE globally in 2022, as well as rate hikes, potential regulatory threats and a group of world central banks who aren’t going to sit by and let cryptos take away their monetary policy lunch. And don’t get me started on (un) stable coins and their supposed, but surprisingly opaque to public scrutiny, dollar for every coin backing.

Still, I won’t stand in front of the price action, which is as powerful as the argument of Bitcoin as a store of wealth because it has a finite supply is not. Cryptos are a tradeable, if not investable asset class for now, and the technical picture remains very bullish. The price action and momentum as everyone tries to get rich quick, I mean invest in the future of money, should be respected. Only a fall through $59,000.00 changes the positive outlook and I continue to target further gains to $80,000.00 of US fiat currency.

Elsewhere, Evergrande and Evergrande Property Services shares have started trading once again in Hong Kong after an attempt to sell the latter by the former fell through. The market has voted with both tumbling by around 10,0% this morning. Evergrande’s 30-day grace period on a missed foreign currency coupon payment expires this Saturday, and could trigger a cross-default on other debt instruments. Following other Chinese developers’ recent defaults, the Evergrande story and the leverage in China’s property development sector could make an overdue return to the front pages this weekend and see markets up for a shaky start on Monday. Comments from Evergrande itself on its financial position, and a 97.0% slump in sales won’t inspire confidence.

An accelerating deterioration in that situation next week could give China’s policymakers a conundrum. Their silence on the issue, apart from some throwaway comments from the PBOC, has been deafening and has frazzled nerves among investors. The important China Communist Party Central Committee meeting occurs from the 8th to the 11th of November and if past form is something to go by, China’s leaders won’t want any economic boat-rocking ahead of it. I expect China’s “national team” to be on the bid in Mainland equity markets at the first sign of trouble, and the PBOC will make sure liquidity is added if needed, and the Yuan remains in Zen-like stability. The government may choose to let Evergrande run if course while supporting markets elsewhere, we shall see.

Asia’s data calendar is, once, again, bereft today. South Korea PPI unexpectedly slipped to 0.20% MoM in September from 0.50% in August. I suspect that it is only a temporary aberration, and more upside pain lies ahead. In that spirit, a few hours earlier, the US 20-year bond auction has a weaker bid-to-cover ratio and saw the 10 and 30-year yields moving higher once again. For once, the US Dollar did not find support from that, drowned out as it is, in the noise of earnings season, interest rates expectations elsewhere and commodity currency outperformance.

Europe’s calendar is similarly dull with US Initial Jobless Claim, a series of Philly Fed indexes and Existing Home Sales the highlights. The US 5-year TIPS auction will make intriguing viewing, but all of this will be swamped with an avalanche of Q3 earnings reports this evening. It is quite a cross-sector group announcing today, and if they follow the pattern thus far, the music will continue playing. Great bottom lines and no concerns clouding the 2022 outlook equals buy everything.

Evergrande secures debt payment extension

As I write financial provider REDD is breaking a story that Evergrande has been granted an extension to its coupon payment due this Saturday. There has been no official announcement as yet and its shares briefly traded down over 10% this morning when trading resumed. The Hang Seng, where it is listed, remains over 1.0% lower for the day despite the news. Mainland China markets, however, have drifted back into the green with the Shanghai Composite 0.05% higher and the CSI is up 0.15%. realistically, ahead of the central committee meeting in early November, I expect China’s “national team” to be on the bid on mainland exchanges should equity prices dip.

Overnight US equities finished mixed although the strong procession of quarterly earnings keeps the bullish fires alive. The S&P 500 finished 0.37% higher but healthcare dragged the Nasdaq to a fall of 0.05%, while the Dow Jones outperformed, rising 0.45%. Momentum has waned in Asia though with futures on all three indexes falling by around 0.20%, adding to what is a sombre mood in Asia generally.

Nerves around Evergrande and the China property sector appear to be weighing on sentiment in Asia today, with a weak Nasdaq performance having a negative impact on the closely correlated North Asia heavyweights. The Nikkei 225 has slumped by 1.90% with concerns increasing about the combination of a weak Yen and rapidly rising energy prices. The ongoing eruption of Mt Aso and election campaigning, with some polls suggesting a close race, also seem to be prompting Japan investors to head to the sidelines. The Kospi is 0.305 lower while Taipei is down 0.05%.

Singapore has edged 0.15% lower with Kuala Lumpur falling 0.45% after yet another glove manufacturer has products seized by US Customs over labour practises. Jakarta is just 0.05% lower with Bangkok creeping 0.10% higher. Australian markets, with one eye on weaker SU futures, Evergrande nerves and easing commodity prices is trading sideways. The ASX 200 and All Ordinaries are hovering near unchanged for the day.

The US Dollar weakens on earnings sentiment

The US Dollar has found the going tough this week and fell once again overnight, despite rising bond yields after a weak 20-year auction. With US earnings season outperforming and knocking the Fed taper story from investors minds, progress on the much slimmed down Biden fiscal packages, and commodity-centric currencies outperforming, the US Dollar remains under pressure. Another driver appears to be rising rate expectations among some trading partners, offsetting the boost from the Fed taper trade. The US Dollar looks set to endure more weakness ahead of the weekend and if Evergrande has secured a debt extension, that will probably be another headwind. The dollar index is floating just above support at 93.50, and a further drop to 93.00 cannot be ruled out.

EUR/USD continued to trade sideways around the 1.1650 mark, but the technical picture suggests a move above 1.1670 could extend gains to 1.1800. GBP/USD remains on fire as markets continue to pour into the Bank of England hike trade. Although there is probably a lot of that priced in now GBP/USD continues to rise and momentum remains GBP/USD is trading at 1.3820 and a close above the nearby triple top at 1.3830 should allow a test of 1.3900 this week. AUD/USD gained 0.50% overnight to 0.7505, boosted by firm prices in the commodity and energy space and expectations the RBA may wind back some of its dovish rhetoric as NSW and Victoria reopen.  It continues to target further gains to 0.7600. NZD/USD has been the star of the show with the RBNZ rate hike frenzy in full swing. Kiwi has risen 0.66% to 0.7195 overnight. 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, USD/KRW is holding steady at 1177.00 today. Meanwhile, the PBOC remains unconcerned about a strengthening Yuan with yet another firm fixing for the CNY at 6.3890. USD/CNY is trading a 6.3940 in Asia having traced out support at 6.3800 yesterday. That continues to support the broader Asia FX space although I expect Evergrande nerves to weigh on regional currencies into the weekend depending on the full implications of the REDD story. Evergrande has another offshore coupon payment grace period deadline next week. I would also note that ever-higher oil prices and China’s moves to cap commodity prices could take the wind out of the Asia FX sails ahead of the weekend but should not be enough to see large scale exits.

The Japanese Yen is seeing haven buying which has accelerated as the Nikkei 225 slumps today.  USD/JPY sliding back to 114.00 in Asian trading. It appears that nerves about Japan’s imported energy bill, election uncertainty, and the Mt Aso eruption are temporarily eroding the rate differential bid in USD/JPY. The series of multi-year highs on each side of 115.00 may also be prompting some export selling of USD/JPY. The yield differential play between the US and Japan remains the main driver though, and USD/JPY remains a medium-term buy on dips play

Oil weakens in Asia

Oil prices have eased in Asia after China’s threat to cap coal prices saw the Mainland coal futures slump limit down once again today. That has unwound some of oil’s gains overnight after Saudi Arabia poured cold water on more OPEC+ production, oil or gas, and US official Crude Inventories, Gasoline and Distillates fell sharply, including crude stocks at the Cushing hub. Brent crude finished 0.85% higher at $85.85 overnight, testing $86.00 intraday. It has retreated by 0.705 to $85.25 a barrel in Asia. WTI jumped 1.33% to $83.50 overnight, testing $84.00 a barrel intraday. In Asia though, it has fallen 0.50% to $83.10 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. China’s ability to control energy and commodity prices as a price taker in international markets is limited. Thus, any China-induced sell-off is a buy-the-dip opportunity as a China buyers strike is never likely to happen.  

Brent crude has resistance at $86.00 still, with support at $83.80 a barrel, followed by $82.00 a barrel. WTI has failed three times at $84.00 a barrel, forming strong initial resistance now. Support is at $80.80 followed by $79.50 a barrel.

Gold defies higher US yields

Gold defied higher long-dated US yields overnight by rising an impressive 0.70% to $1781.50 an ounce, climbing another 0.20% to $1785.50 in Asia. Gold probably owes its strength to a weaker US Dollar and some Evergrande-derived haven buying in Asia today with the move overnight inevitably attracting the fast-money momentum gnomes out of their caves. Once again though, if the tides turn and the US Dollar rises, I expect gold to rapidly unwind all of these 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. In the shorter term, a rising support line, today at $176.850 an ounce, is continuing to support gold’s rally very nicely. The risks remain firmly to the downside unless US yields have a sustained move lower which sinks the US Dollar, but I can no longer rule out entirely, a move back above $1800.00 an ounce.

Gold has support at $1768.50, $1765.00, and $1760.00 an ounce, which is followed by $1745.00; failure signalling a retest of $1720.00 an ounce. Undeniably, gold is forming some decent short-term technical support.  Gold has resistance at $1790.00, followed by the 100 and 200-day moving averages (DMAs), today at $1793.00 and $1794.00 ahead of $1800.00 an ounce.