Although the Evergrande saga seems to have receded temporarily in the minds of financial markets this week, Evergrande’s stock is rallying today, China’s electricity crunch is gathering steam. Goldman Sachs and Nomura have downgraded their forecasts for China’s 2021 overnight, and it seems other forecasters will surely follow.

The news is most noticeable in the commodity space where SGX iron ore futures have unwound yesterday’s rally, slumping by nearly 7.0% this morning, although copper is proving remarkably resilient. Rocketing prices for coal and natural gas as a nascent pandemic industrial boom collides with climate targets, tight energy supplies and an impending Northern Hemisphere winter have created a toxic cocktail for China.

Where goes China, so goes Asia it seems, and sentiment across regional markets is negative this morning. Notably, resource-heavy Australian markets, which also saw Retail Sales slump this morning as the lockdown bite domestic consumption, are having a tough day at the office. If China factories are closing and reducing production, less resources will logically be required. If the situation drags on, it will likely be yet another roadblock in global supply chains as well. But the kids’ Christmas presents early.

The darkened tone in Asia is deepened by China Industrial Profits, which was released this morning. Industrial Profits YoY YTD for August eased to 49.50% from 57.30%. The usual suspects apply, a semiconductor shortage and rising commodity prices feeding into rising input costs. Going forward we can now add electricity shortages and factory shutdowns.

In contrast, US markets have swung back to pricing in a post-pandemic recovery, thanks in part I suspect, to their abundant energy resources. Durable Goods Orders rose by an impressive 1.80% for August, but when you strip out aircraft orders, the number is a rather more unimpressive 0.20%. It was enough to swing US stock markets back into cyclical recovery mode though, with the Dow Jones outperforming as investors rotated out of technology.

Republican Senators overnight refused to back legislation extending the US debt ceiling which is rapidly approaching its moment of truth. Markets have been here before and as such, are not pricing in a meaningful government shutdown as Republicans and Democrats play blink. That is despite warnings from US treasury Secretary Yellen and the Fed’s Williams and Brainard of extreme market reactions unless Congress gets its act together. They are probably more focused on the fallout if the US does the unthinkable and defaults, but the timing, coming as the US is still recovering from the pandemic recession, leaves it more vulnerable than usual to adverse knock-on effects. Markets are perhaps being rather too complacent right now.

No where is that more evident than US bond markets. US yields have risen steadily over the last few sessions with the 10-year hitting 3-month highs overnight. That will make testimony by Jerome Powell this evening, and a plethora of Fed officials over the rest of the week, all the more interesting. All eyes will be on further signals of a firming up of tapering expectations, although I expect Mr Powell to remain firmly ensconced in team transitory. Any signs of wavering should see another spike in yields and the US Dollar.

The rest of the day’s data calendar is fairly light. Malaysia’s Balance of Trade for August will show the ongoing effects of the national virus restrictions in place at the time. With the vaccination programme a much-delayed, but unmitigated success, we should see the data from Malaysia improve in the months ahead, although a China slowdown will mitigate its recovery.

The ECB’s Lagarde speaks this evening while the US releases Cass-Shiller house price data and the Richmond Fed Manufacturing Index for September. However, it is likely that US markets will be entirely focused on Fed Chairman Powell’s testimony on the Hill this evening, for clues on the direction of monetary policy. That said, if there are no surprises and the Richmond Fed Manf. Index is strong, the recovery rotation flows seen overnight on Wall Street should boost the Dow Jones further.

Asian equities fall on China growth fears

Asian equities, except for China, are having a lacklustre day today as fears surrounding China’s energy shortages and production curbs sap the growth outlook for China, and by default, Asia as a whole. Asian economies are also jostling for ever more expensive energy supplies and with factory shutdowns in China sure to add to logistical disruptions for the region.

In contrast, US markets for in pandemic recovery mode after a strong headline Durable Good’s number. That is despite the clouds looking increasingly ominous around the US debt ceiling. Growth outperformed the safety of tech as the Dow Jones rose 0.21% higher while the S&P 500 and Nasdaq lost 0.28% and 0.52% respectively. A rise in US yields once again tempering exuberance. While futures on the Dow and S&P 500 are flat in Asia, Nasdaq futures have continued south, falling by 0.25%.

In Asia, the Nikkei 225 has fallen by 0.45% this morning, with the Kospi retreating by 0.75%. After a negative start, China stock markets have reversed course and rallied quite strongly today, despite the negativity of power curbs on growth, Evergrande and China’s ongoing sectorial interventions. The slump in iron ore prices may be acting positively on stocks but the price action looks rather like China’s “national team” are in once again “smoothing.” The Shanghai Composite has risen by 0.53%, with the CSI 300 climbing by 0.38%. The Hang Seng has leapt higher by 1.25% with Evergrande and Evergrande’s EV company rallying powerfully. I am taking Hong Kong’s rally with a huge dosh of salt today, as it looks driven by speculative zeal, fast money, and hope, rather than fundamentals.

Regionally, Singapore has dropped 0.45%, which higher energy prices has lifted the KLCI to a modest 0.20% gain, while Jakarta is lower by just 0.05%. Taipei, by contrast, has slumped by 0.85% with Bangkok unchanged. The slump in iron ore prices combined with weak Retail Sales and China growth fears have heavily impacted Australian markets. The All Ordinaries and ASX 200 slumping by 1.20%.

Although Asia is having a poor session, the rally by the Dow Jones overnight should be enough to see European stocks open modestly higher today, with European markets heavy in growth orientated stocks as well. The nerves in Asia continued to be ignored by Europe, as does soaring energy prices. UK markets as well, have shrugged of the petrol crisis, probably because fundamentally, the shortages were sparked by scare-mongering stories in the UK press which sparked the petroleum equivalent of a bank run. Good job guys. UK equities shrugged of petrol shortages as a distribution, and not supply issue overnight, and rose despite the Bank of England Governor’s somewhat hawkish rate comments overnight. Short of a kah-pow from Powell, European and UK markets should remain resilient for now.

The US Dollar creeps higher with US yields

The US Dollar maintained its upward direction overnight, helped along by another firming of US yields and a general pro-growth sentiment on Wall Street after a strong headline Durable Goods number. US markets are, for now, ignoring the game of chicken on Capital Hill surrounding the debt ceiling, and the challenges mounting for the Democrat $3.50 trillion spending plan. Testimony from Fed Chair Jerome Powell this evening could give the greenback anther boost if he is perceived to be less “transitory” than previously.

The dollar index rose 0.14% to 93.40 overnight where it remains in Asia’s usual sideways session. The rise in US yields pushed USD.JPY up through 111.00 to 111.20 this morning, with the July highs around 111.65 now in sight. A daily close above that level should signal the start of a larger directional move higher for the pair. EUR/USD has retreated to 1.1700 and remains locked in a 1/1650 to 1.1750 range.

Sterling rallied overnight after the Bank of England Governor said every member of the MPC was ready to raise interest rates before Christmas if necessary to prevent transitory inflation becoming persistent. He may not feel so persistent today looking at Britain’s petrol station queues, but GBP/USD rose 0.20% to 1.3700, climbing to 1.3710 in Asia. GBP/USD needs to close above 1.3750 to signal a larger rally, but despite the BOE comments, markets seem reluctant to change their rate hike forecasts to any sooner than Q1 2021, probably with one eye on a potential winter of discontent. A fall through 1.3610 signals a much larger downward retracement is in play.

The Australian and New Zealand Dollars are proving remarkably resilient with AUD/USD, in particular, now 0.70% higher from early yesterday at 0.7305. Although plummeting iron ore prices on China growth concerns are torpedoing local equities, the Australian Dollar remains firm, something I attribute in part, to rocketing natural gas and coal prices. Nevertheless, is growth sentiment heads quickly south, or Mr Powell is slightly hawkish tonight, both AUD and NZD are more exposed than most to more downside.

The PBOC left liquidity unchanged and set the USD/CNY fixing neutral today, leaving regional currencies to their own devices, having retreated overnight as the US Dollar firmed. A hawkish Powell tonight will heap downside pressure on regional currencies whose monetary policy would be completely out of sync with the Fed’s. Currency markets are showing no China fears today, and it looks like regional currencies are content to range-trade ahead of the Powell comments tonight, and PMI data from China on Thursday.

Brent crude breaks $80.00 in Asia

For the second day in a row, Asian markets have continued ramping oil prices higher, as opposed to waiting for dips. The driver is clearly what appears to be escalating energy shortages in China, with winter not even here yet, with Asian buyers competing with Europeans for spot natural gas supplies, and now I suspect, spot oil supplies. Notably, downgrades of China’s 2021 GDP by Goldman Sachs and Nomura has had no negative impact on prices today, suggesting upward momentum remains strong.

Brent crude rallied by 1.75% to $79.35 overnight, fading just ahead of $80.00 intraday. WTI rose by 1.95% to $75.40 a barrel. In Asia, prices have powered higher with Brent crude jumping by 1.0% to $80.15 a barrel. WTI has rallied by 0.90% to $76.10 a barrel.

Tonight’s US API Crude Inventory data is usually a poor relative to the US official Crude Inventory which will be released early Thursday morning. But in the present environment where even Asia is aggressively chasing prices higher, it will assume more importance. Another print close to last weeks 6.10 million barrel drop is likely to boost prices higher once again.

A close above $80.00 a barrel this evening will be a significant bullish technical development for brent crude and suggest that the rally could revisit the 2018 highs around $87.00 a barrel with interim resistance at $82.00 a barrel. Only a fall through $76.00 a barrel changes the bullish outlook.

WTI had risen $76.00 a barrel in Asia, but still faces resistance at $77.00 a barrel. A weekly close above $77.00 a barrel leaves the charts with a lot of blue sky, and one needs to go back to 2014 to see similar levels. The charts suggest a move to $90.00 is possible one $77.00 is convincingly broken. WTI has support at $75.30 and $74.00 a barrel.

Gold treads water

Gold prices went nowhere once again overnight, with increasing risk sentiment in parts of the world being offset by higher US yields and a firmer US Dollar. Gold continues to trade in an ever compressing range that suggests a large move is imminent. Overnight finished unchanged at $1750.50 an ounce, before giving up early gains to edge 0.10% lower to $1748.50 an ounce in Asia.

Gold remains confined within a narrow $1740.00 to $1760.00 an ounce range and a daily close above or below will signal its next directional move. It will likely take a serious escalation in China concerns and their knock-on effects across the world to lift gold through $1760.00, and even then, overcoming resistance at $1780.00, let alone $1800.00, will  be challenging.

An even slightly less dovish tone from the Powell testimony tonight is likely to see US yields and the US Dollar rise, which will outweigh any risk aversion bids. A daily close under $1740.00 an ounce signals a fall to $1700.00 and potentially, long-term support in the $1680.00 an ounce regions.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities.

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