Asia Market: Stocks kick off the week at record highs

Market highlights 

• With a light smattering of data, and the Fed in the communications blackout period, the economic calendar offers a bit of a hiatus
• Stocks kick off the week at record highs, with investors digesting the recovery despite mounting concerns about new Covid-19 variants
• Robust data from China and the US have buoyed investor sentiment in oil
• A textbook case of USD weakness as the pieces slowly fall into place for a dollar selling trend to resume
• Gold back in demand from both paper and physical markets where Asia is now running with the golden baton

Markets

US equities closed higher Friday, the S&P up 0.4% on the day, 1.4% for the week and at yet another record high. US10Y yields were unchanged Friday at 1.58%, down 7bps for the week.

Stocks will kick off the week at record highs, with investors digesting the recovery despite mounting concerns about new Covid-19 variants. But with Covid never far from the conversation, investors could tread cautiously to start the week. 

Following the miss on US consumer sentiment in April – up just 0.6pts, with outperformance in current conditions – expectations remain steady. With long-term inflation, expectations slipped back down to 2.7% from the six-year high recorded in March.

China's recovery slowed sharply in Q1, more than Yi Xiong expected, and Yi has revised down his 2021 real GDP growth forecast by 0.5ppt to 9.5% and, with that, now expects the PBOC will hold its policy rates unchanged in 2021. The first MLF rate hike will likely be in the first half of 2022.

With only a light smattering of data and the US Federal Reserve in the communications blackout period ahead of the April 28 FOMC meeting, the economic calendar will provide market participants with a bit of a hiatus this week, leaving investors to their own devices. However, the aggressive market extension on both price and positioning will need further growth acceleration beyond the lofty expectations in the price. The market is now turning more consensus by the day that the next recovery spurt should be relatively short-lived and are now deferring to the Fed's "broad-based and inclusive" labour market progress to satisfy its maximum employment objective.

But it's remarkable how well the shifts in sentiment seem to be mapping to turns in the calendar. Q2, so far, resembles a lot more like Q4 of last year, rather than just carrying over from Q1. Fed pricing is off the boil, rates volatility is moderating, and the US fixed-income markets prove relatively resilient (or exhausted?) to the reflation narrative.

Asia is, not surprisingly, showing a relatively low beta to the risk move versus the rest of EM, both because it never fell off the deep end quite as excessively in the first quarter when the US dollar strengthened on the back of US yields ripping higher, and given that China's post-Covid growth rebound is no longer quite as 'exceptional' as back in Q4.

Oil Markets

Robust data from China and the US have buoyed investor sentiment and offset pressure from concerns that rising cases of Covid-19 in parts of the world threaten a patchy recovery from the demand-exhausting pandemic.

The energy markets have found support from industry agency outlooks, and the latest round of inventory draws point to a healthy recovery from the pandemic, as both gasoline and jet fuels remain in catch up mode.

At the same time, traders are eyeing tensions between the US and Iran, and Russia, which could impact crude markets. But with a softening in the Chinese credit impulse and a resurgence of virus cases in India and Japan, topside ambitions continue to run into walls of profit-taking. 

Currency Markets

It looks very much like a textbook case of US dollar weakness as the pieces are slowly falling into place for a dollar selling trend to resume. A deteriorating US trade deficit, a retracement in Fed pricing, a significant upturn in European vaccination rates and upcoming growth acceleration support the view.

Given the solid beta to a batch of historical moves lower in the USD and positioning basis over the past year, both the SGD and KRW should be in demand, given their highest beta to USD downside and low relative positioning. The combination of very low equity positioning in Korea amidst a strong export upturn as the world reopens should make the Won the market darling.

April is typically a big month for a dividend payout in Asia, "with on average an estimated $4.6bn paid out to foreign investors over the last ten years" (D.B.). And year's payout will be no exception with a particularly sizable outflow due to the strong performance of Asian tech companies; last week alone, the two most prominent tech companies in Asia paid a total of just under $12bn in dividend to their shareholders. An estimated $7bn+ accrued to foreign investors. (D.B.)

History suggests that KRW, in particular, tends to strengthen (on average 0.6% since 2010) in H2 of April following the payout of dividends. This is likely as the dividend hedging flow (selling KRW), which is concentrated before the actual payment day to avoid FX risk, abates.

US rates volatility has been dropping, and with the velocity of the US yields rise abating the ringgit has found more breathing room. But with the Fed in the communications blackout period ahead of the April 28 FOMC meeting and no policy guidance to steer the policy ship this week, local FX traders will be left to their volitions, eyeing a patchy oil recovery amid China’s waning credit impulse. All of which suggests range trading biases will be the order of the day with the street growing more concerned with the possibility of new Covid variants coming onshore. 

Gold Markets

With rates volatility falling like a stone as the Fed pricing is off the boil and the dollar looking posed to weaken further, gold has been back in demand from both paper and physical markets where Asia is now running with the golden baton.

With China permitting domestic and international banks to import large amounts of gold into the country, five sources familiar with the matter said, it potentially helps to support gold prices after a months-long decline, Reuters reports. After all, China is the world's biggest gold consumer.