Asia eases into the new week

Monday has an orderly look about it after last Friday's US Employment data threw no negative curveballs. Regional markets are drawing a sigh of relief after the Non-Farm payrolls came in at 1.4 million as expected, and pleasingly, the Unemployment Rate shrank to 8.40%, an impressive outperformance. That allowed the US Dollar to hold onto most of its recent gains, and although US yields shot higher, stock markets contained losses. Compared to Thursday's meltdown, US equities closed lower, but not emotionally so. 

The weekend's headlines have been dominated by the Financial Times revealing, amongst others, that Softbank has bought massive amounts of equity call options on US big tech stocks, partially explaining their recent outperformance. That, of course, has drawn in the retail FOMO herd who had a taste of two-way price action last week as big tech stocks sank. In the greater picture, the stock market correction looks just that, a correction. The underlying drivers of the buy everything trade remaining well and truly intact. That said, the correction could quickly move 10-15% more, but still, leave equities well and truly in a bull market.

Geopolitics entered the fray again over the weekend, with news that the US was considering export bans on components for Chinese chipmaker SMIC. Threats of the prohibition on Tencent's WeChat app continuing to percolate in the background. Although SMIC's stock has fallen 15% in Hong Kong this morning, the fallout has been relatively contained. Markets have appeared to be adjusting to the constant US and China tit-for-tat as the new normal and getting on with life despite it.

US Treasury Secretary Mnuchin stated today that an agreement on funding the US Government through to December remains on track, avoiding any shutdowns. Those talks though are separate to the attempts at follow-on fiscal stimulus packages, where both the Republicans and the Democrats remain frustratingly far apart. In all likelihood, the improvement in US data is likely to entrench Republican stubbornness, as they take the view that the US economy may recover of its own volition, without needing more government money. Time will tell on this point, but if US data runs out of steam before the US election in November, there may be a good dose of buyer’s regret running around.

Bank Negara, the Bank of Canada and the European Central Bank all have rate decisions this week, and for the week's data highlights. Bank Negara will likely hold fast despite a higher Ringgit giving welcome breathing space. A decision on whether to keep Malaysian Bonds in the FTSE Russel world bond index, which occurs later in the month, is likely to stay Negara's hand, fearful of negative Ringgit outflows.

The Bank of Canada is unlikely to surprise with rates at an already record low of 0.25%. The impact on the pro-cyclical Canadian Dollar will be negligible, with its direction more closely tied to that of international stock markets and global recovery sentiment, than Canadian monetary policy.

The European Central Bank will probably have the most potential for fireworks. The ECB will keep rates at 0.0%, with the press conference afterwards likely to be of more interest. With the EUR/USD rally stalling for now and recent rumbling about the rise of the Euro by ECB official, Mrs Lagarde may try to help the process along with more direct comments on the rise of the single currency. That has the potential to deepen the EUR/USD correction, although I struggle to see it going any further than the 1.1500/1.1600 zone.

China's Balance of Trade data has just been released. In US Dollar terms the trade balance came in at $59 billion for August, lower than July but well above consensus. Exports rose 9.50%, while imports fell by -2.10%. Although imports fell, the headline export and BoT numbers should reassure investors that China's recovery remains on track with both the domestic and export sectors firing on all cylinders.

Equity markets are quiet in Asia today

Asian markets have weathered the storm of the US market sell-off last week and are mostly trading flat to slightly negative this morning. Wall Street closed lower on Friday, but in an orderly fashion after positive US employment data. The S&P 500 fell 0.82%, the Nasdaq lost 1.27%, and the Dow Jones was down 0.57%.

Today in Asia, Japan is down 0.15% with South Korea climbing 0.70%. In China, the Shanghai Composite has fallen 0.30% with the CSI 300, being more tech-laden, falling 0.70%, with the Hang Seng rising 0.10%. Australia's ASX 200 and All Ordinaries are flat, as are Singapore Taipei, Bangkok and Kuala Lumpur. 

The threat of a SMIC ban by the US appears to be favouring alternatives in South Korea this morning, explaining its outperform. Across the rest of the region, markets seem content to adopt a wait and see approach, breathing a sigh of relief that Thursday's US rout did not maintain the same momentum into Friday's close. 

The US Dollar holds steady on currency markets

Currency markets had a relatively directionless session on Friday, with the US Dollar holding onto its corrective gains after US yields spiked after the US employment data. The dollar index rose just 0.20% to 92.97, while the lack of negative fallout in Asian equity markets today has seen it edge 0.10% lower to 92.87 this morning.

The USD/CNY has edged lower to 6.8410 after the trade data, while the EUR/USD, GBP/USD, USD/JPY and AUD/USD remain ensconced mid-range. The New Zealand Dollar has edged 0.20% lower to 0.6710 after another New Zealand Bank said that the RBNZ could cut rates to negative next year.

If the Friday's spike in US yields retains some longevity, the US Dollar could continue to grind out heavy short positioning over the next few days. Thursday's ECB meeting will assume greater prominence, with the single currency having ed the US Dollar rout in previous months. Comments about the level of the Euro by the ECB could extend the correction to the 1.1500/1.1600 regions, and that will almost certainly see pro-cyclical g-10 and regional Asian currencies extend declines as well. In the bigger picture, though, the recent price action is corrective, with the bearish fundamentals for a lower US Dollar still firmly in place.

Oil capitulates on Friday

The weight of stale long positioning in the speculative oil market finally took its toll on Friday, despite positive US employment data. With futures curves stubbornly in contango suggesting plentiful immediate supplies, the loss of upward price momentum saw both Brent crude and WTI break lower.

Brent crude fell by 3.80% to $42,30 a barrel, and in Asia has continued to fell, edging 15 cents lower to $42.15 a barrel. Brent has critical support at $41.35 a barrel, a double bottom on the charts, and the two-month low. A daily close below that point implies a deeper correction can occur, targeting the 100-day moving average (DMA) at $39.15 a barrel.

WTI fell by 4.50% to $39.45 a barrel, easing by another 15 cents to $49.30 a barrel during the Asia morning. Last Friday's fall saw the support at $41.10, the 200-DMA, fail, in a bearish technical development. WTI now targets its 100-DMA at $36.10 a barrel.

Abundant supplies, fears of loosening OPEC+ compliance, the end of the US driving season and stale long positioning have all combined to erode confidence in oil. Although I do now expect massive falls, with signs of a global recovery continuing to increase, both contracts will now likely settle into new, lower, trading ranges. A structural rally in oil prices will only occur when the dynamics mentioned above, materially adjust.

Gold continues to consolidate

Gold had another sideways day on Friday, finishing the session just 0.15% higher at $1934.00 an ounce. Most pleasingly for gold bulls, the yellow metal weathered the storm of a higher US Dollar and higher US yields. 

Gold has a clearly denoted support zone now between $1900.00 and !920.00 an ounce. What is clear is that gold continues to find plenty of willing buyers on dips to the $1930.00 region, and that investors are content to wait for those price dips, and not chase prices higher. 

Having said that, a deeper correction in gold prices cannot be entirely ruled out, especially if the US Dollar short squeeze on currency markets finds renewed momentum this week. A failure of $1900.00 an ounce targets a retest of the August lows at $1863.00 an ounce, followed by the 100-DMA at $1815.00 an ounce. Daily resistance remains at $2000.00 an ounce.

The fundamentals supporting a much higher gold price remain intact on the longer-term horizon. What is not yet clear, is if the short-term horizon is about to cause investors some mark-to-market pain.