Buy (almost) everything is back

In a flashback to the future, US markets fully returned to work overnight and partied like it was 2020. Stock markets powered higher; the US Dollar fell at the expense of risk-correlated currencies, US yields eased slightly, and industrial metals rose. Gold and cryptos both had positive days with only oil suffering, which we will discuss later.

There seems to have been a delayed reaction to Friday's impressive Non-Farm Payrolls. The whole buy everything process being given another sugar rush by the US ISM Non-Manufacturing PMI blowing forecasts out of the water. Markit Services PMI had outperformed as it rose to 60.40, but the ISM data stole the show. Non-Manufacturing PMI for March rose to 63.70 versus 59.0 expected, as the US reaps the Covid-19 jabs in arms, stimulus cheques peace dividend faster than expected.

That was enough for the FOMO massive to click the buy buttons as fast as they could until their mouses blew up. Inflation never got a word in, but why let reality get in the way of a good story? It probably should have when the sub-indexes are looked at more closely. ISM Non-Manufacturing Prices rocketed to 74.0, Non-Manufacturing New Orders printed at 67.2 versus 53.0 expected. Non-Manufacturing Employment rose to 57.2, well above the 54.0 anticipated. 

That all looks potentially inflationary to me, although maybe markets will say the rise in US yields has "priced it in" in the spirit of keeping the narrative going. The most surprising thing to me from overnight was that US bond yields fell slightly. I will not argue with the US Covid-19 peace dividend, but the price action in currency and equity markets last week was very much wax on, wax off. I will wait for another session or two to see if the FONO-gnomes have a valid point and the world has changed, but the buy-everything trade could yet bite the hand that feeds it.

On a side-note, the Wall Street Journal reports that someone called the US Senate's nonpartisan parliamentarian has ruled that the Senate Democrats can, once again, use the reconciliation process to move the Biden infrastructure package through the Senate by piece. This is important because it circumvents the 60-vote requirement and the filibuster. The Democrats used reconciliation to pass the last stimulus package, and my understanding is that reconciliation is only customarily granted once per year. So, the Biden $2.30 trillion New Deal will now proceed forward. The process will be complex, but it just got a lot less complex. Did someone mention inflation?

Asia has had several data releases today. It is increasingly clear to me that those countries that have got a grip on Covid-19, whether by elimination and border closures, shots in arms or as I sit here in Jakarta, by luck, appear to be accelerating away in the recovery stakes. Japan's Household Spending MoM rose 2.40%, Singapore's Markit PMI printed at a still-expansionary 53.50, while Australia's March ANZ Job Advertisements for March rose by 7.40%. That number is all the more impressive, given that the MoM number for February rose by 8.80%.

The Australian data will not be enough to knock the Reserve Bank of Australia off its lower for longer stride at 1230 SGT; rates will remain unchanged at 0.10%. Markets will be poring over the details, though, and every word of the statement, for signs that the RBA is wavering in its intent, such has been the pace of the Lucky Country recovery. With risk-seeking sentiment lifting the Australasians overnight, the Australian Dollar and Australian Commonwealth Bond yields could spike higher if the RBA is not as dovish as doves can be today.

China's Caixin Services PMI for March has also outperformed, rising to 54.3, well above the 52.7 expected. That is a welcome boost to the China story, where the pace of increases on the Manufacturing side has been slowing down after the frenzy of 2020. Asian stock markets have refused to buy into the overnight US exuberance today, though. Although the PMI number is bullish for Mainland stock markets, US index futures are lower. That, along with ongoing concerns about government clampdowns and Covid-19 in Yunnan Province, appear to be dampening the animal spirits of Mainland investors.

Turning to oil, the OPEC+ decision to start raising production from May has been unfortunately timed. Covid-19 in Europe and India has raised consumption fears. The US and Iran are also holding indirect talks over the Iran nuclear deal that the US withdrew from under the previous administration. Perversely, fears that the two sides might find some common ground is weighing on oil prices. An increasing amount of Iranian crude is finding its way to international markets, a significant reason the oil rally has run out of steam. Expect another leg down in oil prices at the first hint of progress.

Finally, and somewhat ignored by markets and the world, although it shouldn't be, we turn to the Ukraine. Russian and Belorussian armed forces are massing on Ukraine's Eastern border, spurring fears that more "peacekeepers" may soon be on the ground. That will expose yet another strategic European Union and German strategic misstep, placing Europe's energy security in the hands of an unreliable totalitarian state to the East. (think Nord-Stream 2) The EU could buy all the gas it needs from the US, Qatar or any number of other suppliers. The EU has already done the same with rare earth elements. Those abundant supplies in Norway deemed too "messy" to refine in Europe and left in the ground, and thus sub-contracted out to China. You couldn't make this up.

Boots on the ground in Ukraine will see oil and gas prices, something the EU could do without right now. But master tactician Putin knows he has the Eurozone right where he wants them thanks to the above. Like the former Yugoslavia, it will be left to the US to clean up the mess. With the Eurozone already wilting under Covid-19, thanks to the same Eurocrats responsible for the mess outlined in the previous paragraph, it is hard to construct a case for a "value trade" European recovery play at the moment. Stay long the Biden/Boris, short the Macron/Merkel basis trade.

Asian equities refuse US buy-in

US equities had a mighty session overnight, powered by ISM and Non-Farm Payroll recovery hopes. However, Asia's markets, less the sheep followers of Australia, have adopted a much more cautious tone. That is a pattern that repeated itself last week, where strong rallies on Wall Street were not replicated in Asia. Overnight the S&P 500 rose 1.44%, the Nasdaq rallied by 1.67%, and the Dow Jones finished 1.12% higher.

The schizophrenic behaviour of Wall Street last week, which spent it chasing its tail on a day to day basis, could be part of the reason. Doubts over the longevity of the rally overnight are as good a reason to be cautious as any. It could also be that investors globally, including Asia, are following the noise and concentrating on the seemingly effortless gains available on Wall Street. US index futures have also edged lower this morning after yesterday’s rally. Nagging Covid-19 fears in China, South Korea and Japan, mainly the latter two, may also be sapping investors nerves.

A combination of all of the above has seen the Nikkei 225 fall 0.70% this morning, with the Kospi down 0.20%. Nerves ahead of this morning’s 30-year JGB auction in Japan may also be denting sentiment. On Mainland China, The Shanghai Composite is down 0.10%, with the CSI 300 lower by 0.30%. Hong Kong is closed for a holiday, but Taipei has bucked the trend by rising 1.10% after technology's powerful rally on Wall Street.

Singapore and Jakarta are 0.10% lower, with Kuala Lumpur down 0.35%, while Manilla has carved out a 0.55% gain after inflation rose by less than expected. Australian markets are slavishly following Wall Street, though, boosted by significant increases in commodity prices overnight and an RBA anticipated to remain uber-dovish. The ASX 200 has risen 1.05%, and the All Ordinaries has climbed by 0.80%.

The cautious tone struck by Asian markets is likely to be reflected by heavily cyclical European markets this afternoon. Their situation complicated by Covid-19 and escalating tensions on their Eastern border. Asian markets most likely need to see two consistent days of powerful rallies by Wall Street to start buying into the recovery trade once again.

US Dollar pummelled

The US Dollar wilted overnight before the onslaught of bullish risk sentiment that swept Wall Street after Friday's Non-Farm Payrolls and the overnight ISM Non-Manufacturing PMI data. The dollar index fell 0.47% to 92.57, although it has recovered slightly in Asia to 92.68. Notably, despite the robust ISM data and aggressive equity rally, US yields drifted lower, undermining US Dollar support. The fall overnight leaves the dollar index not far from its 92.50 pivot point, and a daily close below that suggests a deeper retracement to 92.00 initially.

The majors rallied overnight, but the story was as much a weak US Dollar one than the dawn of a new day for the likes of the Euro and Yen. EUR/USD rose 0.44% to 1.1810, and if it closes above 1.1800 this evening, further gains are possible. Euro sentiment, though, will remain clouded by its Covid-19 situation and the potential Ukraine flashpoint.

USD/JPY fell 0.44% to support at 110.00 overnight but has rallied to 110.40 this morning, suggesting the US/Japan yield differential remains appealing to Japanese investors on USD/JPY dips. The 309-year JGB auction today could also be weighing on the Yen. If the bid-to-cover ratio is much weaker than the previous 2.766, more Yen weakness may occur.

The risk-sensitive Australian and New Zealand Dollars powered higher overnight, rising to 0.7650 and 0.7060, respectively. Both, however, have retreated by 0.20% today, unwinding many of those gains, as Asian equity markets refused to buy into the overnight Wall Street rally. Taken in context, the climb overnight was unimpressive, and the subsequent falls today hint that fast money is dominating flows, and not a structural turn in sentiment. The technical picture on both remains in downside correction territory.

Asian currencies have rallied overnight, led by the Indian Rupee, Korean Won and offshore Chinese Yuan. A firmer PBOC CNY fix at 6.5527 this morning has supported the regional currency grouping with the Malaysian Ringgit, a notable outperformer, USD/MYR falling 120 points to 4.1280 from its New York close. The PBOC quietly drained CNY 10 bio from the system today after the holiday weekend, which has also supported the currency but may be weighing on local equities.

With China keeping the Yuan form in recent times, Asian currencies have weathered the US Dollar storm relatively well. It is too early to call a top in the US Dollar based on one overnight session, but further regional appreciation will continue if the risk rally evolves this week. However, I expect the Rupee, Rupiah, Baht and Philippine Peso to be the region's underperformers.

Oil collapses on OPEC+ and Iran nerves

With the backwardation in the oil futures curves having vanished into thin air, it was odd that OPEC+ decided to open the taps from May. Although the reaction was modest on a holiday-thinned Friday, investors voted with their feet overnight, sending Brent crude 3.70% lower to $62.25 a barrel, and WTI 4.05% lower to $58.80 a barrel. Short-covering this morning in Asia has seen both contracts add 0.75% to $62.70 and $59.30 a barrel, respectively.

Although some bargain hunting has supported prices today, its longevity is suspect. With deteriorating Covid-19 situations in Europe and especially India, consumption is sure to take a hit. Additionally, India is taking a leaf out of China's book and flexing its buying power muscles with Saudi Arabia, its biggest supplier. Saudi Arabia has raised prices to Asian customers overnight, but India seems intent on increasing buying from alternative sources. That may have the effect of eroding OPEC+ discipline going forward.

Nagging fears of increased Iranian supply also persist, with increased Iranian exports, by foul means or fair, in no small part of the reason oil's rally has run out of steam. A breakthrough in the US-Iran indirect talks in Vienna this week will almost certainly lead to another decisive move lower by oil markets, as fears of more Iranian supply increase.

Brent crude's resistance is distant at $65.50 a barrel after the overnight fall, with support at $62.00 and $61.30 initially, followed by the March low at $60.30 a barrel. WTI has well-denoted resistance at $62.00 a barrel with support at $58.65, followed by the March lows at $57.30 a barrel.

Gold trades sideways

Gold traded sideways overnight, following two impressive daily rallies previously. Given the amount of bullish risk sentiment sweeping US markets overnight, the fact that gold didn't fall can be taken as a win for long-suffering bullish investors. Undoubtedly a weaker US Dollar and slightly lower US yields were supportive, but gold continues to show resilience after testing and rallying from long-term support last week.

Overnight gold edged 0.10% lower to $1728.00 an ounce, before rising 0.30% to $1733.50 an ounce in Asian trading this morning. Although gold has traced a double bottom near 1680.00 an ounce, further reinforcing the longer-term bottoming formation of prices on the charts, gold needs to rally through $1755.00 an ounce to confirm a structural low is in place.

Gold has support at $1720.00 and $1705.00 an ounce, followed by the long-term support region between $1675.00 and $1685.00 an ounce. Resistance is at $1745.00 and $1755.00 an ounce.