Paying up

China state-backed media is reporting that Evergrande has wired its $83.52 million overdue offshore bond coupon payment today, just ahead of the end of the 30-day grace period tomorrow. Given that it is state media, who don’t say anything without government approval, I am inclined to believe it. That should give a temporary reprieve to the China financial system contagion fears although I note that Evergrande has another grace period payment due on the 29th of October of $45.17 million. Still, if they’ve managed to scrape together the funds for this one, it is reasonable to surmise that next weeks will also be met. That should provide some relief to China equities, especially Hong Kong, into the end of the week.

Elsewhere, Nasdaq futures are falling in Asia this morning after Snap sank 24% in aftermarket trading on the back of poor earnings. The blame was laid squarely at Apple's door and their new privacy rules stopping advertisers from following you around the internet and slurping up your data. My heart bleeds. Snap’s results have seen investors mark down fellow Caligula’s of privacy, Facebook, or as the new “holding company” may be known, Faceplant, and Twitter amongst others. Intel also produced less than stellar results. Shorting big-tech has been a good way to lose money in the past two years, and I expect only a temporary aberration. Still, it may lead to a sombre mood into the end of the week in New York.

US Initial Jobless Claims fell under 300,000 jobs overnight to 290,000 overnight. Existing Home Sales soared to 6.29 million and while the Philly Fed Manufacturing Index for October fell to 23.80, the other sub-indexes such as Business Conditions, Employment, Prices Paid and New Orders all recorded strong gains. When taken in totality, the US data was quite positive and bought the Fed-taper trade back out of cold storage. The US Dollar unwound some losses, US yields rose, and stocks tempered gains.

The change in direction was more a gentle drive around the roundabout, as opposed to a handbrake turn in a cloud of smoke. Although I believe the Fed taper will define Q4 once we get earnings out of the way, US earnings season will continue to dominate sentiment and rightly so. Thus, the overnight moves do not represent a shift in momentum; yet. President Biden continues to make progress on his spending plans allegedly, and this will also be supportive of equities, particularly the inhabitants of the Dow Jones. US equities in general will like that a vicious corporate tax hike appears to be no longer on the table.

Possibly the easiest trade of 2021, short Turkish Lira, got another boost overnight. Under the auspices of Erdogan-omics, i.e., cut rates or be unemployed, the Turkish Central Bank cut rates by 2.0% overnight, despite rocketing inflation. The USD/TRY-my-patience rose by 3.30% to 9.5250 and a 10.0000 handle seems only a matter of time. The strongman leader (its always a man) is alive and well in the world and I feel sad for Turkey, one of the most wonderful countries I have visited. Still, like the Firestarter in Brazil, he was voted in, and you reap the marginally democratic populist seeds you sow.

In Asia, Japan markets will be boosted by the Jibun Bank flash PMIs for October. Manufacturing and Services PMIs climbed to 53.0 and 50.7, expansionary territory. Even official Inflation and Core-Inflation rose into positive territory to 0.20% and 0.10% respectively. Not bad for 30-years work, or is it 20 years? What’s a decade between friends? However, a reality check is given but inflation ex-food and energy prices, which came in at -0.50%. Don’t break out the end of deflation champagne yet. Still, it should put a smile on Japan equities after the Nikkei experienced a mysteriously torrid session yesterday.

Later today, Malaysian inflation should remain a benign 2.0% as the country reopens. The Thailand Balance of Trade and Philippines Budget Balance won’t make pretty reading. A Malaysian official said today that the country could reopen to international tourism next month. I believe that the reopening story will continue to dominate ASEAN short-term sentiment with a slew of similar announcements over the past two weeks. Thailand will be a major beneficiary, especially if the Northern hemisphere winter is a really cold one. Malaysia and Indonesia will also continue to find support from the commodity space.

The United Kingdom (sort of) will release Retail Sales and PMI data this afternoon. I soft retail sales print might take the heat out of the Bank of England hiking trade. There seems to be a feeding frenzy developing in this space and the street might be getting ahead of itself on this one. Australia’s RBA delivered a similar dose of reality to markets this morning by intervening to cap the rise in 3-year bond rates. Softness in the UK data might see some long-covering in the Sterling which has become a crowded trade.

European countries and the US also release Markit Manufacturing, Services and Composite PMIs. With the Fed taper trade rearing its head again last night, higher PMI prints may temporarily give the tightening trade more momentum into the end of the week, especially as US earnings today features a B-list of celebrities. I expect the earnings story to regain its hold on markets next week, but there may be more two-way volatility in the buy-everything reactions, especially if giants such as Facebook report similar difficulties like Snap and the Apple stuck in its throat.

I was going to talk about Bitcoin, but Elon Musk has tweeted overnight. The primary driver of the emperor’s new clothes, mainstream financial asset, institutional money is pouring in, inflation hedge, deflation hedge, stagflation hedge, store of value, insert perpetually bullish comment here ……, digital coin has spoken. I'm still looking for $80,000 of US taxpayer-backed fiat currency, though.

Evergrande payment boosts Asian equities

Evergrande’s offshore coupon payment, just ahead of the default deadline, has boosted Asian equity markets today, sending the China financial contagion story off the front pages for now and removing a key weekend risk. That has helped the Northern Asia heavyweights fend of the sharp fall in Nasdaq futures in Asia after poor results from Snap post the US close.

Overnight, the return of Fed taper nerves after positive US data took the edge of the intra-day rally in New York. The S&P 500 closed 0.30% higher, the Nasdaq finished 0.64% higher, while the Dow Jones sank to a loss of 0.02%. The snap result has caused a mini tech-tantrum, with Nasdaq futures falling by 0.44%, wiping almost all of its overnight gains out, with Dow futures rising 0.15% and S&P minis unchanged.

Asia is sailing on an Evergrande tailwind though. The Nikkei 225 is 0.67% higher after a torrid day yesterday for reasons I am still at a loss to explain. The Kospi has risen by 0.30%, with Nasdaq nerves capping gains while Taipei is suffering a similar fate, rising just 0.05% today.

Mainland China is performing strongly though, the Shanghai Composite has risen by just 0.10%, but the narrower financial-heavy Shanghai 50 has jumped by 1.20%. The CSI 300 is also enjoying a good day, rising by 0.90%. Hong Kong, meanwhile, has risen by 0.30%.

Singapore is 0.30% higher along with Bangkok, but Kuala Lumpur and Manila have fallen by 0.45% with Jakarta unchanged. All three may be suffering some negative pressures as commodity prices continued to ease overnight, notably coal and gas. Australian markets seem content to run the week out on a quiet note, with the Melbourne reopening today probably thinning the ranks of traders there. The pubs are busy though. The ASX 200 and All Ordinaries are unchanged on the day.

European equities would likely have risen this afternoon on the Wall Street lead, and the Evergrande payment may modestly support sentiment. However, with an avalanche of PMIs due and with Nasdaq futures being heavily sold in Asia, European investors may hit the pause button.

US data lifts greenback

The US Dollar has found the going tough this week, but positive US data gave it some Fed taper legs overnight, lifting the dollar index 0.17% higher to 93.75. The US earnings season will continue to dominate proceedings in the short term, which means that the dollar index will struggle to recapture the 94.00 region, assuming earnings stay stellar. Another driver appears to be rising rate expectations among some trading partners, offsetting the boost from the Fed taper trade. The Evergrande payment has had no noticeable impact on forex markets this morning. The dollar index looks set to continue trading in a 93.50 to 94.00 range with a spike lower to 93.00 entirely possible.

EUR/USD has edged lower to 1.1630, but the technical picture suggests a move above 1.1670 could extend gains to 1.1800. It likely has a binary outcome on the performance of the pan-Europe PMIs this afternoon. GBP/USD fell 0.20% to 1.3795 but the Bank of England hike trade is alive and well if now looking a little crowded. A soft PMI could spark some profit-taking. Otherwise, a close above the nearby triple top at 1.3830 should allow a test of 1.3900 next week. AUD/USD and NZD/USD both fell by 0.65% to 0.7465 and 0.7155 overnight, where they remain today. A rise in Fed taper risk sentiment post the US data was behind the fall and if anything, else, highlights that international risk sentiment is the primary directional driver for both still.

In Asia, the PBOC said that the Yuan is fairly priced leaving USD/CNY trading almost unchanged at 6.3970 in Asia having traced out support at 6.3800 Wednesday. That continues to support the broader Asia FX space and the Evergrande news appears to be giving Asian currencies a very modest boost today as financial contagion fears ease.

Oil weakens in Asia

Oil prices eased overnight and that has continued in Asia. Weaker industrial metals and natural gas and coal prices appear to be dragging oil lower as well in the short-term, although oils medium-term fundamentals remain as robust as ever. Brent crude fell by 1.30% to $84.75 overnight, easing another 0.65% lower to $84.30 a barrel in Asia. WTI has a volatile session, finishing 1.0% lower at $82.55 before easing another 0.40% lower to $82.25 a barrel in Asia. Regional buyers appear content to await better levels to buy once again, in sharp contrast to the price chasing earlier this week.

Brent crude has drifted to the lower end of its $83.80 to $86.00 range which forms initial support/resistance. That is followed by the two-month trendline support, today at $82.70 a barrel.  WTI has failed three times at $84.00 a barrel, forming strong initial resistance now. It has traced out a double bottom at $80.80 followed by trendline support at $80.00 a barrel.

A few more days of range-trading will bring the overbought relative strength index (RSIs) technical indicators firmly back into neutral territory. That will likely set the stage for another leg of the rally to occur later next week. The corrective spike lower I have been writing about could still occur but is now increasingly unlikely.

Gold defies higher US yields

Gold defied higher long-dated US yields once again overnight and a rising US dollar. Gold rose a modest 0.06% to $1783.00 an ounce but its resilience in the face of higher US yields and the US Dollar is an undeniably bullish development. Also comforting bullish investors is that gold continues to trace out a series of higher daily lows and the slow by steady gain is not dominated by fast-money momentum traders, who run away at the first sign of trouble. Gold has risen 0.20% to $1787.00 an ounce in Asia as the usual weekend risk-hedging buyers load up. Notably, the Evergrande payment story has not weighed on gold, another short-term indicator of bullish price action.

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, the rising one-month support line is at $1769.500 an ounce today followed by support at $1760.00 and $1745.00 an ounce. Resistance is at $1790.00 followed by the 100 and 200-day moving averages at $1792.00 and $1794.00 an ounce, and then $1800.00.