Inflation nerves alive and well

Inflation nerves are alive and well with robust US Retail Sales lifting US yields on Friday and underpinning the US Dollar. Over the weekend, Bank of England Governor Bailey warned the bank would “have to act” to curb inflationary pressures. Mr Bailey sees plenty of transitory inflation, but his all-seeing monetary policy eye is also spotting underlying medium-term pressures as well. Lastly, New Zealand inflation, released this morning, rocketed to 4.90% YoY for Q3, well above the RBNZ 1-3% target. The New Zealand data was made all the worse by the fact that its largest population centre, Auckland, has been under Covid-19 restrictions for a good part of that time.

Markets are locking and loading a hike before year-end from the Band of England, while talk has shifted to a potential 0.50% hike from the Reserve Bank of New Zealand in November. Both Sterling and the New Zealand Dollar have outperformed in the last week on rate hike expectations. The only thing capping the Kiwi at the moment is that the spiralling Covid-19 cases in Auckland may prompt the government to announce a level 4 “circuit-breaker” lockdown later today.

Meanwhile, Singapore’s Non-Oil exports YoY in September, rising by 12.30%. The MAS pre-emptively tightened policy slightly at its 6-monthly policy review last week. Assuming Singapore holds its nerve and continues to reopen, the NODEX should maintain its upward trajectory and hit high-speed if the Singapore-Malaysia border loosens to allow greater labour movement.

Asian markets will be pre-dominantly focused on China data today. China releases Q3 GDP YoY (5.2% exp), Fixed Asset Investment YoY September (4.5% exp), Retail Sales YoY Sep (3.3% exp), Industrial Production YoY Sep (4.5% exp), and Unemployment. Of those, GDP, Retail Sales, and Industrial Production will carry the most weight. There is downside risk in all three thanks to holidays, weather, the energy crunch, the government crackdowns along with rising material costs and supply chain disruption. The National Bureau of Statistics press conference after will be worth following for signals on the path forward for China’s economy for the rest for the year and into 2022.

China markets are likely to find some solace initially from weekend comments from the PBOC, dampening down nerves that Evergrande and its fellow property develops pose a systematic risk to the financial system. But the data dump will provide a binary outcome for regional markets today. Weak data equals equities down, strong data equals equities higher. A weak data print though, will lift expectations of an imminent PBOC RRR rate cut which should be supportive of domestic markets once the post-release noise dies down.

A divergence in monetary policy between Asia (still soft) and much of the rest of the developed world (tentative tightening), will provide challenges for the region as Q4 progresses. The Fed taper is the elephant in the room, and if the PBOC remains accommodative and allows the Yuan to modestly weaken, currencies around the region will once again face selling pressure. The indirect tightening of monetary policy that causes could cause angst amongst the region’s central banks and likely sees intervention measures stepped up. Some of that pressure may be relieved by the slew of reopening announcements by ASEAN countries last week, particularly in the tourism space. ASEAN is probably the only part of the world pining for a cold Northern Hemisphere winter to flush those winter sun tourists out of hiding.

Cryptos have had a busy few days after rumours flew on Friday that the US SEC might approve two Bitcoin futures ETFs this week. Why you would want to buy a bitcoin futures ETF instead of bitcoin itself escapes me. But if you are an investor that is mandated to only have exposure to regulated markets, then this could be your chance to get involved, despite getting long at near-record highs. The increased drone of the “crypto is becoming mainstream” buzz in my ears is more irritating than tinnitus. Still, as long as vast swathes of the investment community are looking to get rich quick by believing it has any real value, I will respect the tradeable versus investible price action. Bitcoin jumped 7.50% on Friday to $61,650.00, held those gains over the weekend and has risen again by 1.50% to $62,500.00 this morning. I believe Jack Dorsey might have said something. Anyway, the all-time high around $65,000.00 is in sight, and a daily close above that level tilts the technical picture to further gains targeting $80,000.00 going forward. And you all thought I was a crypto-cynic?

Putting down my copy of the now very well read Emperor’s New Clothes with a “will they never learn” shake of the head, we circle back to this week’s data calendar. Asia isn’t very exciting after today’s China data dump. Indonesia will leave rates unchanged tomorrow, while Japan’s trade balance may have some marginal interest. Its stock markets are hitched to Wall Street and the impending 594757635385^th extra budget since 1995, and the Yen is trading purely ion the US/Japan rate differential. Wednesday sees China announce its latest one and five-year Loan Prime Rate decisions. Unless today’s data is an absolute shocker, they will remain unhanged at 3.85% and 4.65%.

In Europe and the US, the pickings are relatively slim as well. US Industrial Production tonight and the Fed Beige Book on Wednesday will be of marginal interest. While Thursday’s Initial Jobless Claims could weigh on equities if it gives back last week’s positive gains. UK CPI on Wednesday will increase the rate hike noise to deafening levels and lift Sterling if the YoY prints over 3.50%. Friday brings Markit Manufacturing, Services and Composite PMI releases from the European heavyweights, and the US. The UK releases Retail Sales and Manufacturing PMIs. Arguably they could have the largest impact on the week data-wise if only because they may give greater credence to the inflationary pressures, or, if the data is soft, temporarily alleviate tightening concerns.

US quarterly earnings swing from the large banks last week, to a broader mix of technology, FMCG and manufacturing companies. Goldman Sachs reported strong earnings on Friday to left US markets. With the masters of the universe filling their coffers for another quarter, the picture across the real economy may look rather more mixed, especially if you are exposed to rising, interest rates, material costs or supply chain disruptions. Their 2022 outlooks will be of more importance than their actual results and this week could see heightened two-way volatility in stocks.

Asian Equities of to a mixed start

New York turned in a strong performance on Friday after US retail Sales unexpectedly rose by 0.70% for September, well above the 0.20% expected. US yields firmed across the curve but were ignored by equity markets as the S&P 500 rose 0.75%, the Nasdaq gained 0.50%, and the Dow Jones jumped by 1.10%. US futures are quiet in Asia thus far easing slightly on long-covering from Friday’s close.

Asia appears to be on hold ahead of the China data dump this morning with early markets showing a mixed performance. The 0.25% fall by the Nasdaq futures this morning sees the Nikkei 225 easing by 0.40%, while the Kospi is 0.30% lower. Mainland markets finished almost unchanged last week. The PBOC comments on the risks in Chinas property market being contained may give some comfort initially, but the data releases, god or bad, will dominate proceedings. Hong Kong has fallen 0.70% in early trade after soft guidance from Ali Baba, hinting that the Mainland may have a soft open.

Singapore is unchanged, but Kuala Lumpur has risen by 0.55% as reopening plans gain traction and commodities, especially energy, remain firm. Jakarta, riding the same wave, is 0.15% higher as the government projects a lower than expected deficit. Taipei has risen by just 0.10% with Manila climbing 0.40%. Australian markets have also edged higher after a strong finish in New York. The ASX 200 and All Ordinaries have risen by 0.25%. With New Zealand deciding on whether to revert to level 4 restrictions in Auckland today, the NZX has fallen by 0.10%.

The China data dump at 1000SGT will dictate most of the region’s direction today although indications seem to suggest we are seeing another rotation day from North Asia to ASEAN markets, seemingly a sort-term defensive play for local investors at the moment. European markets have shown little inclination to take their direction from Asia of late. Thus, no matter how Asia’s session turns out today, Europe is likely to open firmer based on the positive finish from New York and a alack of market-moving headlines over the weekend.

The US Dollar treads water

The US Dollar continued to tread water versus the major currencies on Friday. The dollar index maintaining a 94.00 close for the third day in a row. EUR/USD remains unchanged at 1.1590, while Sterling strength was offset by Yen weakness in the index. Early selling pressure on the US Dollar was alleviated as US yields firmed across the curve after the strong Retail Sales data on Friday.

While EUR/USD trades sideways at 1.1590, Sterling continues to rally versus both the greenback and the Euro. GBP/USD rose by 0.56% to 1.3750 on Friday before easing to 1.3740 in Asia, despite hawkish rhetoric over the weekend by the BoE Governor. Sterling’s strength is based on ever-rising hiking expectations and a rally through 1.3775 opens a retest of 1.3900. Only a fall through 1.3700 changes the bullish outlook. USD/JPY rose 0.56% to 114.20 on Friday after resistance at 113.80 gave way. With US yields firming across the curve the only way was up for USD/JPY. In the absence of any haven buying of Yen from domestic investors, USD/JPY remains at the mercy of the US/Japan rate differential and a test of 115.00 is likely this week.

Elsewhere, the improvement in investor sentiment on Friday after the Retail Sales data saw the US Dollar mostly retreat. AUD/USD remained firm at 0.7410, but NZD/USD rose 0.55% to 0.7070 on RBNZ hiking expectations. Today’s New Zealand inflation print boosted the Kiwi to a high of 0.7105, as that noise increased. However, all those gains have now gone as spiralling Covid-19 cases in Auckland have led to speculation that the Auckland region (New Zealand’s largest population centre) could re-enter level 4 lockdown this afternoon. A government announcement is expected at 1600 NZT. With a lot of speculative longs out there, NZD/USD could fall quickly to 0.7000 if a tightening of restrictions is announced.

Regional Asian currencies also enjoyed a positive back end of last week thanks to a weakening US Dollar, and some judicious intervention by a few regional central banks. The Malaysian Ringgit and Indonesian Rupiah have outperformed thanks to high energy and commodity prices as well firmer investor risk sentiment. This week looks rather less clear though as despite US equities rallying on Friday, US yields also firmed across the curve. If that status quo remains, or yields move higher, the pressure will once again come on ASEAN currencies as well as the Yen and the Won.

In the bigger picture, we are starting to see a pattern emerging in the developed market space of currency outperformance from those on a nearer-term hiking path. The key remains the Fed taper and the list of Fed speakers this week will probably give more clarity in this respect. Ever rising energy prices are also supportive of the US Dollar. I am still expecting prolonged US Dollar strength in Q4, although this week, may see more sideways action as speculation long US Dollar open interest is culled.

Coal lifts oil in Asia

Hong Kong coal futures have leapt 9.0% higher this morning, meaning that the China energy crunch has made its way back to the front of investors minds. That has lifted oil prices in Asia as well, with Brent crude surging 0.80% higher, and WTI leaping by 1.0%.

On Friday, oil prices continued to grind higher, with no sign of any inclination to open the pumps by OPEC+, or announcements by the US Government on SPR releases. Brent crude finished 0.90% higher at 484.90, and WTI finished 1.25% higher at $82.50 a barrel. In Asia Brent crude has risen to $85.65, and WTI has risen to $83.40 a barrel as coal futures rocket into space.

With no signs of the China energy crunch alleviating soon, and with the rest of Northern Asia and Europe competing for scarce energy supplies, particularly gas, the price environment for oil remains constructive. Even a US or China SPR release is only likely to provide temporary relief. A rapidly reopening aviation sector, with a slew of reopening announcements from ASEAN last week, will be another price pressure point.

Brent crude should now target the October 2019 high at $86.80 and onto $90.00 barrel, with support at $84.25 and 82.00 a barrel. WTI has now meaningful resistance until the $89.00 regions although I expect some sellers to appear above 86.00 a barrel initially. Only a fall through $82.00 a barrel changes the bullish outlook.

If Brent crude moves to $90.00 a barrel, I expect the pressure on OPEC+ to step up quite a few notches from the US White House. The huge weight of speculative long positioning in oil futures means a sudden $5-8 a barrel drop could still occur on a headline shock. However, with the underlying fundamentals for oil so strong, any large dip will reverse just as quickly.

Nervous specs cut long gold positions

Although the US Dollar finished roughly neutral on Friday, higher yields across the US curve were enough to spook speculative longs in gold. That saw the predicted rush for the exit door, and gold fell rapidly by 1.60% to close at $1767.50 an ounce.  In early Asia, gold has recouped some losses, rising 0.25% to $1771.50 an ounce.

The price action on Friday speaks volumes about the gold market now. US Dollar4 weakness earlier last week soured gold buying and drew in fast-money speculative longs. The equally rapid unwinding of most of those gains on Friday reinforces that much of gold’s rally was built on speculative hot air, and that those longs have little to no appetite to wear any pain on those long positions. In the bigger picture, the lack of staying power from gold longs suggests that it will struggle to maintain any upward momentum, even is gold reaches $1800.00 an ounce. Up vis the stairs, down via the sixth floor window.

Firmer US yields, should they endure this week, will be a headwind for gold rallies, especially if it leads to US Dollar strength. Gold has nearby support at $1765.00 followed by $1745.00 an ounce with failure reopening a test of $1720.00. Gold failed for the third day in a row at the 100 and 200-day moving averages (DMAs), today at $1795.40 and $1796.60 an ounce, formidable resistance.

In the bigger picture, only a rise through $1835.00 an ounce, would trigger a multi-month inverse head-and-shoulders technical pattern and swing gold’s outlook back to positive. The risks remain firmly to the downside.