'Joe the builder,' yes, we can

Wall Street shrugged off a headline disappointment in the U Durable Goods data overnight, as US President Joe Biden secured a preliminary deal on his infrastructure package. A bipartisan group of Senators presented an acceptable, but much slimmed-down infrastructure agreement to the President that will still total around $1.2 trillion over the next eight years.

That will still pay for a lot of Bob's to build "stuff" to move people around in the US, stay connected on the internet and keep lights and heating on. However, challenges remain with the additional $1.8 trillion of social spending plans and proposed tax increases on the wealthy and corporations still stuck in a deep freeze. Mr. Biden and Ms Pelosi expect those bills to progress along with the infrastructure as part of a greater overall package. 

But Wall Street is never one to let the facts and reality get in the way of a good story; stock markets rose, notably the growth heavy Dow Jones. Any company remotely associated with picks and shovels, materials and earth moving had a good day. That unwound the disappointment with a lower headline print from the US Durable Goods data, although Wall Street overlooked adjustments upward to the previous month, offsetting the undershoot in May.

Europe and the UK also helped equities recover from their taper nerves, with German IFO Business Climate and Expectations hitting multi-year highs and the Bank of England standing pat on rates and quantitative easing at their overnight policy meeting. Interestingly, although optimism has swept equity markets, where FOMO has long ruled the nest, currency, energy and precious metals remained mostly unbudged. That has very much been the story of their week, and the post-FOMC dot-plot-gate is still resonating there in a quiet data week. Asset markets ex-equities and the zombie apocalypse gnomes of the virtual space clearly have an eye on the juicier data calendar, and a new month next week, for more concrete directional clues.

In Asia today, South Korean Business Confidence rose to 98 while New Zealand's Balance of Trade outperformed, the surplus rising to NZD 496 million. Tokyo CPI YoY for June "rose" to 0.0%, and Japan is one place we don't have to worry about a taper tantrum. The data prints are modestly positive without setting the world on fire.

Malaysian Inflation YoY for May is expected to ease slightly to 4.70% later today. With the country in the grip of a major pandemic wave, a print closer to 5.0% may send some alarm bells ringing and weigh on local markets, with Bank Negara having little room to move. Similarly, Singapore Industrial Production YoY for May has some downside risks with a huge base-effect jump of 23.0% expected. The City-state is also grappling with Covid-19, and the risk is we could see a sub-20% print. But, once again, the impact is likely to be limited to local markets.

Tonight's highlight will be US Personal Income and Spending and the Core PCE Price Index for May. Arguably the latter is the more important, and a MoM print above 0.70% may give Wall Street some inflation jitters once again to round out the week. 

Overall, it has been a day-traders market this week across most asset classes, and I believe that will continue today. Markets will take some confidence from the bipartisan US infrastructure deal, but its effects may be transitory. The street will still be vulnerable to headlines and Fed-speak with a send-tier data calendar. With the beginning of the month heavyweight data releases due next week, some directional normality should return.

Equities move higher on US infrastructure

The bipartisan US infrastructure agreement announced overnight lifted Wall Street, particularly growth stocks, flowing over into Asian markets today. Overnight, the S&P finished 0.58% higher, with the Nasdaq rising 0.69% and the Dow Jones outperforming, climbing 0.98%. The rally was fairly broad-based, with big-tech having a good day at the office, although markets were more focused on US infrastructure winners. Arguably, a massive investment in broadband would obviously benefit big-tech, so the package had something for everyone.

US index futures have continued their move higher today in Asia, with the S&P minis and Nasdaq futures slightly higher, but the shovel-heavy Dow futures jumping by 0.40%. That has green-lighted a broad rally in Asia, with the Nikkei 225 rising 0.75% and the Kospi climbing 0.70%. Mainland China's Shanghai Composite has risen 0.45%, with the CSI 300 0.55% higher and the Hang Seng rallying by 1.0%.

Singapore is 0.30% higher, while Kuala Lumpur has climbed by 0.40%, and Taipei has risen by 1.0%, and Jakarta has shaken off a rapidly deteriorating Covid-19 situation to post a 0.50% gain. Both Australia and New Zealand remain on delta-variant Covid-19 tenterhooks today, with parts of wider Sydney also entering firmer lockdowns. That has not dented sentiment, though, with the ASX 200 rising 0.60%, the All Ordinaries by 0.50%, while Wellington has gained 0.30%.

It seems that where the US goes, so goes the world, particularly when Wall Street rises. That is certainly the case in Asia, where the US has given APAC 1.2 trillion reasons to be cheerful on the commodity, machinery and electronics exports front. Positive German data yesterday lifted Europe, and Europe and UK equities should get another infrastructure tailwind this afternoon. A higher US Core PCE Price Index tonight could introduce some inflation gremlins for Wall Street, but it would take a severe upside surprise and some Fed-speak to upset a positive finish to the week.

Currency markets remain cautious

As previously stated, other asset classes, ex-equities, remain far more cautious following the FOMC dot-plot-gate and Bullard in a China shop inflation comments this week. With one eye on next week’s PMIs from Asia and the US Non-Farm Payrolls, currency markets continued to trade sideways with the US Dollar quietly consolidating the previous week's gains. 

It remains a range-traders market as the dollar index once again finished almost unchanged at 91.82. It has drifted a few ticks lower in moribund Asian trading. EUR/USD, USD/JPY and AUD/USD are also almost unchanged over the past 24 hours at 1.1940, 110.90 and 0.7560, respectively.

An unmoved Bank of England overnight has seen Sterling fall 0.30% to 1.3932 as of today. Notably, GBP/USD failed precisely just ahead of resistance at 1.4100 earlier this week and has now closed back below its 100-day moving average at 1.3950. That sets up GBP/USD to retest its recent lows at 1.3800 into next week, and I cannot rule out a deeper correction with a potential head and shoulder pattern forming on the pair.

USD/CNY continues to trade near the top of its range at 6.4650 today, with the PBOC setting a weaker fix today, and injecting CNY 20 billion via the repos this morning. That follows a CNY 10 billion injection yesterday. The PBOC continues to signal that comfortable with a weaker Yuan for now, which has kept the pressure on other regional currencies.

Notably, USD/Asia has not corrected lower this week to any notable degree, with THB, MYR, IDR and INR posting almost no gains at all, although the KRW and PHP have made up some lost ground. The post inflation scare bounce has been reflected in modestly stronger DM currencies and not EM currencies. That suggests that markets remain concerned about the low being in place for US rates and further US Dollar strength below the surface. I do not disagree with this premise at all, and next week’s US Non-Farm Payrolls may answer that question for us.

I expect currency markets to continue ranging into the end of the week, with a gentle bias towards US Dollar strength. 

Oil markets enter a pre-OPEC+ holding pattern

Oil markets once again traded sideways overnight, albeit with a slight upward bias. Brent crude and WTI were almost unchanged at $75.50 and $73.30 a barrel. Both contracts have added 15 cents a barrel in a subdued Asian session today.

Although physical demand has kept prices on both contracts comfortably at the top of their ranges this week, oil is now vulnerable to a short-term correction lower. The relative strength indexes (RSIs) on both contracts have moved well into overbought territory, which is typically a decent signal of an impending correction. US Dollar strength this evening, or tap-opening rhetoric from OPEC+ officials, either today or over the weekend, could be enough to deliver a sharp correction lower.

Any washout of speculative long positions should be short in duration, as oils physical fundamentals remain very supportive. Thus, Brent crude could correct to near $73.00, and WTI to $70.00 a barrel. Unless OPEC+ massively opens the taps next week, however, any selloff will be short-lived.

Gold remains side-lined

Like equities and energy, precious metal markets remain in wait-and-see mode, with gold edging just 0.23% lower to $1774.00 an ounce in another range-trading session. In Asia, weekend risk hedging has seen it unwind those modest losses today, nudging 0.20% higher to $1778.50 an ounce.

Gold remains locked in a $1760.00 to $1800.00 an ounce range, with the 100-DMA, today at $1793.50 an ounce, capping gains. As ever, golds fate will be decided by other markets, notably the US Dollar's direction. Its RSI, though, remains near oversold levels, and I believe gold may yet retest its resistance zone around $1800.00 an ounce before the week finishes as the bounce of support at $1760.00 an ounce was quite strong.

In the bigger picture, gold needs to complete a daily close above $1800.00 an ounce, or below $1760.00 an ounce, to signal its next directional move. Otherwise, patience is required in a range-trader's market.