Asia, you are cleared to enter the holding pattern

Asian markets have opened with a positive tone today, after a relatively quiet news weekend. That is a broad continuation of the positive tone with which Wall Street closed out the week on Friday. Asia itself appears to content to climb out and enter the holding pattern, circling there for an extended period today, waiting for landing slots to open in London and New York.

Earnings season for Q2 in the US kicks off this week, with the largest banks reporting across the week. I expect that trading revenues will outperform once again as market volatility continues. More attention is likely to be given; however, to the big banks' forward guidance on the global economy, and the level of bad debt provisioning. Depending on whom you talk to, S&P 500 earnings are forecast to broadly fall by 30% to 40% YoY, although within that, there will be apparent winners and losers. 

Geopolitics had a most welcome, relatively quiet weekend. US President Trump stated that he hadn't even considered a Phase 2 trade agreement with China. That should be of a surprise to precisely nobody on planet Earth, given the trade and political conflicts with China since it's signing, and will not impact markets.

Alongside earnings data, this week will see a slew of Q2 GDP prints. Concentrating on Asia, China releases its 2Q GDP on Thursday. GDP YoY is expected to recover from its 6.8% fall in Q1, with the consensus being an increase of 2.1%. That, in my mind, is far too optimistic a number. China's Balance of Trade on Tuesday may force a reassessment of those bullish forecasts. Either way, a number still in negative territory on Thursday could introduce some long-overdue two-way volatility into Mainland and regional equity markets, as well as halting the relentless rise of the Yuan in the short-term.

Singapore releases Advance Q2 GDP on Tuesday, with the figure expected to show a lockdown induced collapse of around 35% YoY. The fallout should be limited in local markets, as it is a known known. Singapore's domestic consumption was weak before the pandemic, and the national lockdown has exacerbated this trend. Singapore's data is unlikely to improve materially until Q4, and that assumes that world trade continues rebounding, and the pandemic is controlled. 

India posts June CPI today at 2000 SGT, with the headline expected to remain elevated at 5.30% YoY. Although an improvement of May, India continues to be in a world of pain. Rising food prices, and a weakening currency have created a stagflationary environment in India. With the pandemic flatlining growth, deteriorating credit quality weighing down the banking sector, Government finances in a box canyon, and a relentless fall by the Indian Rupee. 

I am surprised India is not flashing louder danger signals to investors. USD/IDR has bottomed twice in the past three months at 74.00 and has climbed back to 74.95, just below its 100-day moving average. Given the fiscal and monetary constraints in India, the stagflationary environment and the ruption of growth from the pandemic, more weakness in the currency almost certainly lies ahead. India looks set to spend the rest of 2020 in the economic naughty corner.

We have three major central bank rate decisions in Asia this week. The Bank of Japan on Wednesday, and South Korea and Indonesia on Thursday. Of the three, Indonesia will be the most interesting. Both Japan and South Korea will remain unchanged, but there is a genuine possibility that the Bank of Indonesia may choose to trim rates by 25bp to 4.0%. Although the currency has weakened slightly, it remains one of Asia's best performers in Q2.

Similarly, the finance ministry and the Bank of Indonesia (BI) have got away with directly monetising newly issues sovereign bonds without a penalty. A poor showing on Wednesday from the Indonesia trade balance could be enough to tip the BI's hand. However, in that context, the 14,000-level seen in early June could make the nadir for any Rupiah strength for the foreseeable future.

Thursday is likely to be Asia's highlight also, because, in addition to China GDP, China also releases retail sales, unemployment and industrial production. The data should give a comprehensive snapshot of the progress of the Mainland's recovery. Will Covid-19 still rampaging its way through the United States, a positive set of data will be imperative to keep fuelling the global market's equity rally in the near-term.

 

Asian equities are positive today.

Wall Street finished the week strongly on Friday, and that sentiment has spilt into the Asia-Pacific region this morning. Except for Singapore, the region's stock markets are recording strong gains to start the week.

Gilead Sciences Inc led Wall Street higher, following the positive results from its latest Remdesivir trial on Covid-19 patients. That sparked a wave of peak-virus optimism in stock markets, although I note that the trial was only 318 people with no control group. Still, why let science get in the way of a good story. The S&P 500 rose 1.05%, the Nasdaq made yet another record high close, climbing by 0.66%, and the Dow Jones jumped by 1.43%. 

In Asia, the Nikkei and Kospi have started brightly, rising 0.90% and 1.45% respectively. Continuing profit-taking in financial market stocks has been offset by a rally in industrials in Mainland China today. The Shanghai Composite and CSI 300 are both up around 1.0%, with the Hang Seng climbing 0.90%. 

Across South East Asia, the picture is much the same except for Singapore. Although the PAP returned to power on Friday's election, their total share of the popular vote was the lowest on record. That is hanging over the Straits Times today ahead of data this week. The index is down 0.15% thus far today.

Australian stock markets are higher, but the Victoria State lockdown and the prospect of deeper lockdowns for Melbourne, are limiting gains. The All Ordinaries is up 0.85%, with the ASX 200 up 0.75%.

Friday and today's rallies are built on hope versus reality. We have been here many times before, though, and fighting the short-term momentum is a pointless exercise. Either stay on the side-lines, or tactically join in the party. But leave your finger over the sell-button for the first sign of trouble. The sentiment is likely to ensure that European stocks open higher this afternoon as well. 

 

Positive sentiment weakens the US Dollar in Asia.

The positive start by Asian equity markets has flowed into currency markets this morning, with the US Dollar gently easing versus both major and regional currencies. The dollar index has fallen by 0.25% to 96.44 today. 

The Euro, British Pound and Australian Dollar are all 0.30% higher versus the greenback after a quiet news weekend gave markets no reason to unwind the bullish expectations of Friday. How long this will last is some conjecture, given the Gilead's drug doesn't cure Covid-19, merely weakens its destructive capacity. I also note that Covid-19 cases continue to explode across the US sunbelt. 

To confirm the US Dollar bear market is resuming, EUR/USD needs to rise above 1.1400. Similarly, the AUD/USD would need to close above 0.7000. GBP/USD has outperformed today, rising to 1.2650. But it faces resistance just above, at 1.2690, its 200-day moving average. We could be at the start of a new US Dollar down-leg, or we could be moving to the lower end of the range, neither outcome has been confirmed as yet.

The PBOC set the USD/CNY fix at an almost unchanged 6.9965 this morning, bringing the recent multi-day CNY rally to a temporary halt. The PBOC seems content, for now, to allow USD/CNY to range between 6.9800 and 7.0200. We will need the major currencies in the CNY basket to strengthen notably versus the greenback for more robust fixings to resume. 

The Indonesian Rupiah is outperforming this morning, USD/IDR dropping by 0.90% to 14,365.00, even as President Jokowi calls for mass tasting for Covid-19 in eight provinces. Something that as I sit in Jakarta, should probably have happened months ago. The Bank of Indonesia may well be selling Dollars in the market, with the Governor vociferous in saying it is undervalued. Either way, a strengthening Rupiah this week raises the odds of another BI rate cut on Thursday.

For now, markets are back to seeing what they want, which is reopening economies and a possible treatment for Covid-19—ignoring exploding cases in the US, as well as new outbreaks across Asia, Australia and parts of Europe. Some may call it "forward-looking", others herd-like mass stupidity. Regardless of which, the momentum seems undeniable, and we expect US Dollar weakness to continue into the European and New York sessions. 

 

OPEC+ concerns weigh on oil markets.

The peak-virus positivity of Friday saw both Brent and WTI record 2.0% gains in the New York session. That was assisted by the International Energy Agency raising its global oil consumption forecast during Wall Street's session. That optimism has faded this morning as various press outlets highlighted the "taper-tantrum" risk this week from OPEC+.

Brent crude and WTI have faded by 1.0% in Asia to $42.90 a barrel and $40.30 a barrel respectively. Despite the noise, all both contracts have done is now ease back nearer the middle of their one-month ranges. That is $40.00 to $44.00 a barrel for Brent crude, and $38.00 to $42.00 a barrel for WTI. Neither contract is displaying the momentum to challenge the upside boundaries for now, and choppy range trading is set to continue in the first half of the week.

The reason that oil has not joined the peak-virus party today is OPEC+'s impressively titled Joint Ministerial Monitoring Committee (JMMC). As readers may recall, OPEC+'s headline 9.6 million barrel a day cut was extended until the end of July. After that, the agreement has the member countries tapering the production cut figure in the months ahead. The JMMC will meet on Wednesday to decide whether to extend the headline cut or proceed with the arrangement as previously agreed. Much has been made of a possible oil market "taper-tantrum" if production cuts are eased. However, I am 50/50 on the decision, with persuasive arguments to be made for either course of action. Expect oil to remain in choppy range trading until the JMMC's recommendations are made public.

 

Gold prices remain sturdy.

The bullish sentiment sweeping equity markets on Friday had little effect on gold prices, leading to a steady finish. Gold was supported by a weaker US Dollar, edging lower by only 0.20% to close at $1799.00 an ounce.

In Asia, gold is showing real strength today. Despite strong equity markets, a weaker US Dollar is again lifting prices, gold climbing 0.30% to $1803.50 an ounce. Gold's price action will be pleasing for bullish traders, with the yellow metal showing strong resilience to hold $1800.00 an ounce, even if it lacks the momentum to grind higher.

Gold has support between $1780.00 and $1790.00 an ounce, with resistance at $1819.00 an ounce. Only a fall below $1760.00 an ounce changes the bullish outlook. Last week's quick spike to $1819.00 an ounce looks increasing stop-loss, options and algo-driven. With equity markets in positive territory, market participants feel comfortable picking up gold on dips to $1800.00 an ounce, rather than needing to chase prices higher. A decent period of consolidation at these levels, strengthens the case for more gains soon.