Asia wrap: Minor mood swings – Pessimistic to hopeful

Markets

Over the next few months, inflation data will influence the markets more than growth as investors evaluate whether the Fed will halt its rate hikes. Despite US 10-year yields recentering a bit higher this morning, investors are feeling more positive as they anticipate a further decline in this week's US CPI report. So the mood has shifted from pessimistic to mildly hopeful. However, investors will monitor US yields closely, as a rise could harm global stocks, particularly if this week's US CPI numbers exceed projections.

One of the other concerns gnawing at investor sentiment is the amount of debt that needs to be rolled over at higher rates. The Fed's tightening cycle has pushed higher marginal funding costs for businesses over the past few years, with yields jumping almost 5pp for high-yield bonds. If interest rates remain high, companies must devote a more significant share of their revenue to cover higher interest expenses as they refinance their debt at higher rates, which is flat-out bad for earnings.

Forex

Last week, we witnessed the three main factors contributing to the belief in the 'Shallow Dollar Depreciation' view. These include the resilience of US growth, lack of aid from foreign monetary policies, and weak prospects for capital return in competing countries. Our analysis indicates that recent fluctuations in the Dollar reflect a careful assessment of the delicate balance between healthy economic activity and significant government spending, with lower inflation expectations. We have previously highlighted the risk of the economy overheating rather than cooling down. And this may help explain why yields and the Dollar could remain stable to higher despite progress toward a better inflation vs growth balance. We strongly advise cautious monitoring of the current situation before making any aggressive purchases or sales of the US dollar.

Oil

The significant drop in Russia's crude seaborne exports in July, with a particularly sizable slide in Russian exports to India, hint's that OPEC+ coordination likely drives much of Russia's increased compliance, in tandem with the extra 1mb/d Saudi cut in July. The simultaneous timing of various Russia, Saudi, and OPEC supply announcements last week should continue to shape markets over the short term.

Last week, there was a significant increase of 30mb in Managed Money for Oil Products, which now stands at the 66th percentile. This puts it on the verge of being overbought according to our trading radar. The speed at which this buy-in occurred is astonishing, and it may be slightly exaggerated due to the thinner August markets. However, only time can confirm this.