Get out there and shop

Americans got out there and answered that shopping call overnight, as US Retail Sales for August surprised to the upside, climbing 0.70% versus an expected fall of -0.70%. Markets ignored the 0.70% adjustment to the July numbers concentrating on the August headline and the steep climb of the Philadelphia Fed Manufacturing Index to 30.7. And, admittedly, all of the regional manufacturing indexes have outperformed this week.

Off course the Retail Sales does not encompass the leisure side of the consumer equation, where the delta variant has probably wrought havoc. But in a week where sentiment has flip-flopped on a daily basis, that mattered not. The Fed taper was front and centre once again, with equities finishing mixed, the US Dollar rallying powerfully and US yields creeping higher. Next week’s FOMC is the key inflection point for the taper trade now. Markets will be looking for a signal that the November meeting will be live for the announcement of the taper.

I am still not ruling out a taper-tantrum, as having got the world addicted to bottomless amounts of zero percent money, the world’s central banks will struggle to put that genie back in the bottle. Notably, Asia’s monetary policy is still in life-support mode and totally out of sync with the US, and to a lesser extent, Europe. Most importantly, nobody seems to be considering the possibility of a taper-tantrum, a warning signal it could happen if any. Q4 could be a torrid one for Asian currencies.

We do have conflicting signals internationally though. Iron ore tanked again last night and has nearly halved in price since the start of August. Amazingly, the Australian resources sector equity prices have yet to link on that, perhaps illustrating the power of the global QE money wave.  Recent data out of China, regional Asia and even the US has been softer on the consumer side, even as Manufacturing PPIs continue climbing skyward, as do input costs. Stagflation is starting to be mentioned more widely, but I don’t believe this is a done deal.

In Asia, China property giant Evergrande’s shares, and bonds have tumbled once again today. With $300 billion in debts, a collapse by Evergrande might be enough to even stay the Fed’s hand, such are the wider shockwaves it would cause. I continue to believe that China will engineer some sort of bailout with the mother of all debt/equity swaps occurring. The fallout if the wider property sector, along with the ongoing regulatory interventions across a swath of China industries will keep China equities on the back foot. China injected a net CNY 90 billion through the repo market today. Ostensibly ahead of the China holidays next week, but no doubt, also to calm nerves. Evergrande appears to be reaching an endgame and readers should watch weekend developments closely.

Singapore’s Non-Oil Exports has disappointed today, falling by 3.60% MoM in August, led by falls in Pharmaceuticals. Electronics held up though, and admittedly, the data is a volatile series. Concerns that Singapore’s recovery might be slowing, a club that seems to get bigger by the week, is weighing on local equities, offsetting any positivity from the announcement of a governmental package to encourage Singapore unicorns to list on the SGX, instead of seeking the IPO riches of Wall Street.

The data calendar is now empty in Asia today with Eurozone Inflation and Core-Inflation data to come this afternoon. The ECB denied a story circulating overnight that it models indicated its 2.0% inflation target would be reached in 2025. That caused a flurry in European fixed interest markets, but I don’t know why, three years may as well be a lifetime these days. While taking three years to reach 2.0% inflation would probably impress the Japanese, I doubt it would anybody else. It is perhaps a measure of how much Eurozone sovereign debt they have monetised. Italy and Greece being able to raise money near zero percent never sat right with me.

Next week will be dominated by global central bank decisions, headlined by the Federal Reserve, but also including the likes of Norway, Japan, the UK, and Switzerland. EM heavyweights Brazil, South Africa and Turkey also announce policy decisions and the list is by no means exhaustive. The FOMC will be the one ring to rule them all of course, but don’t rule out hikes from Norway, Brazil and possibly South Africa and Turkey. Asia markets will be heavily distorted by national holidays. Regional heavyweights, Mainland China, Hong Kong, Japan, and South Korea are all pencilling in a couple of days holiday across the week next week. That will reduce liquidity substantially in Asian markets and if Evergrande finally goes down next week, that could exacerbate any reactions in asset markets. Canada also slips in a federal election on Monday which could see some sharp moves in USD/CAD in Asia on Tuesday where liquidity is never overly special.

Asian equities mixed to finish the week

Wall Street had a volatile intra-day session overnight, with the US Retail Sales jump unwinding the intra-day recovery as Fed tapering prospects were priced in leaving a very mixed finish for the major indices. The S&P 500 fell by 0.15%, the Nasdaq rose by 0.13%, and the Dow Jones fell by 0.18%. More ominously, futures have continued South today. The S&P 500 e-minis are 0.20% lower, the Dow futures have fallen 0.33% while the Nasdaq futures are unchanged. Like overnight markets, US investors appear to be rotating into the apparent safety of tech.

Asia is a mixed bag, with the Nikkei 225 seeing dip-buyers lifting it 0.55% higher. The Kospi is ignoring North Korea uranium enrichment headlines, rising a modest 0.15%. China markets are mixed as Evergrande, and regulatory nerves were balanced by the PBOC injected CNY 90 bio via the 7-day and 14-day repos. The Shanghai Composite has fallen by 0.58% mirroring the Dow, while the CSI 300 has climbed 0.27% and Hong Kong is 0.38% higher.

Regionally, Singapore is down 0.15% with Taipei and Jakarta falling 0.45%, while Jakarta holds at unchanged. Another fall in iron ore overnight, along with heightened tensions with China (again), is weighing on Australian markets today. The ASX 200 is 0.90% lower, while the All Ordinaries is down 0.80%. European markets are likely to open unchanged to slightly down this afternoon after a nervous US close and a mixed day in Asia.

US Retail Sales give US Dollar a taper boost

The US Dollar roared back to life overnight as the much higher retail sales data put the Fed taper back in the centre of attention. The dollar index 0.42% to 92.87 before edging s lower in Asia to 92.84. Unless European inflation data contains a mighty upside surprise, it is hard to see the US Dollar retreating far, and a test of resistance at 93.00 and 93.20 looks most likely.

EUR/USD fell 0.40% overnight to 1.1770 where it remains in Asia. Having tested 1.1750 overnight, this is initial support today with rallies likely limited to 1.1800. GBP/USD has fallen to 1.3800 and has support at 1.3760, while resistance is not formidable at 1.3900 after multiple failures. The highly correlated to risk sentiment AUD and NZD retreated overnight. AUD/USD is hovering at support at 0.7300 this morning, while NZD/USD is just shy of support at 0.7070. If Fed tapering nerves continue into the New York session – not a given after a flip-flop week- both Antipodeans could potentially fall another 70-100 points into the close of business.

Unsurprisingly, regional Asian currencies fell heavily versus the US Dollar overnight, with Asia perhaps the most sensitive region on the planet to the prospects of a Fed taper starting at the end of the year. The Korean Won has tumbled by nearly 1.0% over the past 24 hours to 1178.00 this morning, the taper-nerves exacerbated by a tough couple of days on the North Korean front. A further rise towards 1185.00 is likely to bring the Bank of Korea out to sell dollars. USD/MYR also broke higher overnight to 4.1700, clearing previous resistance at 4.1600 easily. It now targets further moves higher to 4.2000. USD/CNY fell to 6.4300 overnight before sharply reversing higher to 6.4500 after the PBOC set a neutral fix at 6.4527. It seems that with public holidays next week, and golden week at the start of October, the PBOC is determined to mute any tapering, Evergrande or policy-induced volatility in the currency.

Oil maintains its gains

Oil managed to hold onto all its recent gains overnight, despite a surge by the US Dollar. Sky-high natural gas prices and 40% of US Gulf of Mexico oil industry still being offline post-Ida continues to support prices. Brent crude rose just 0.15% to $75.60, and WTI was almost unchanged at $72.50 a barrel. Both remain around those levels in a quiet Asian session today. With natural gas prices continuing to rise, substituting oil for power and heating generation will become more appealing and that should continue to support prices, even at these levels.

Brent crude has resistance nearby at $76.00 and if that gives way, Brent crude should target the $78.00 a barrel area. Support remains at $74.00 a barrel, with failure signalling a deeper retreat to the $72.00 region. WTI has support at $71.00 a barrel while resistance remains just above at $73.00 a barrel, followed by $74.00 and $76.00 a barrel.

Gold finally collapses overnight

Gold prices finally collapsed overnight after the surge in US Retail Sales saw a strong rally by the US Dollar. Gold fell by 2.25% to %1753.50 an ounce, a $40 loss for the session. Support held at $1750.00, and some shot covering has lifted the metal by 0.40% to $1760.00 an ounce in Asia, but gold remains on fragile ground.

Gold faces another test of $1750.00 if the US Dollar remains firm today. It is clear a lot of speculative long positioning was culled overnight, and the question is, how much is still out there. Looking at the price action overnight, I would say quite a lot.

If support at $1750.00 fails, gold could target the $1715.00 area, potentially testing longer-term support around $1675.00 an ounce. Gold’s nearest resistance is now the overnight breakout point at $1780.00 an ounce.