Lots of noise, not much substance

The overnight session in New York was a noisy one, equities seesawing back and forth before closing slightly higher, a figure that belied the intra-day volatility. US Initial and Continuing Claims data disappointed, with concerns rising that the US recovery could be running out of steam. However, New Home Sales data was very positive and was enough to turn the herd away from the cliff edge and back to the relative safety of plains.

As the dust settled, Asia finds most asset classes pretty much where they were yesterday, with very little directional information to sink its teeth into. The tail-chasing nature of the New York session suggests that sentiment remains fragile with the FOMO crowd undecided at these levels, but probably more nervous about negative headlines and hanging out close to the exit doors. 

We can expect more of the same today, with the Asian and European data calendars sparse ahead of US Durable Goods this evening. Things get rather more exciting next week with the end of the month. China releases Industrial Profits over the weekend, which is expected to be down 4.70% YoY, but showing a continued recovery. A surprise either way could set up Monday to be a busy one.

Elsewhere the calendar is packed with official and Caixin PMI's from China on Wednesday along with US GDP. Japan's Tankan survey is released on Thursday with US Personal Income Data. Friday culminates with US Non-Farm payrolls data. On the flip side, China heads on holiday for a week from Thursday, October 1st. Several other countries in the region will also head for Mid-Autumn breaks, notably South Korea. The net effect is likely to be a muting of activity in Asia in the second half of next week just as the week's data calendar hits its peak.

Off course, a week seems like a year in these markets at the moment, with plenty of volatility to come between now and then. In the US, the Democrats are apparently finalising a $2.50 trillion fiscal package to put before the Republicans. A headline number like that is sure to be dead on arrival with them. The jobless claims data overnight may be the first real indication that the effects of the previous package are running out of steam. With a US election just over a month away, and a potentially noisy Supreme Court appointment ahead of it, the chances of both sides reaching an acceptable fiscal compromise recede by the day.

A surge in Covid-19 cases in Europe notably, and the US, continues to threaten an increase in renewed movement restrictions. This scenario has always been one of my global recovery banana skins and the risks to appear to be rising. Although I still expect a vaccine to appear in Q4, because I'm not all doom and gloom, there is a belated realisation, that its efficacy will be uncertain. A cold reality is that the US and Europe, will not magically be able to vaccinate entire populations overnight.

That is certainly quite a list of risk factors financial markets are having to belatedly adjust to after six months of uncontained euphoria. The packed data calendar next week, and a weekend of potential political developments, may change that picture. But in the short-term, I suspect the correction in equities and the US Dollar still have more room to run. By the end of next week, we should know if the travails of this week are what pundits label a "healthy correction." Or whether the mother of all reversions to the mean is finally upon financial markets.

Equities move higher in Asia

Although Wall Street endured a torrid whip-saw session, all three major indices managed to crawl into the green by the end of the session. The S&P 500 finished 0.30% higher, the Nasdaq 0.37% higher, and the Dow Jones edged 0.19% higher.

Asia-Pacific stock markets have started the day much stronger though, thanks to our old friend, the after-market US stock index futures. The futures have rallied strongly today, perhaps on hopes of a US fiscal stimulus deal. The S&P 500 e-minis have risen 0.65%, with the Nasdaq futures climbing 0.80% and the under-pressure Dow Jones futures rising 0.45%.

That has lifted the Nikkei 225 by 0.70%, and the Kospi by 0.95%, China's Shanghai Composite, CSI 300 and Hang Seng have risen 0.30%. Kuala Lumpur has jumped 0.80%, despite its political travails, with Singapore higher by 0.60%. The ever-effervescent Australian exchanges needed no second guess, the ASX 200 jumping 1.40%, and the All Ordinaries leaping 1.60% higher.

Asia has been taking its cues from the US index futures throughout the week. It will, of course, only take one negative headline from the US for the dentists of Minnesota to rush for the exit door, dragging Asia down with them. The interconnected digital world is a strange place at times. With that in mind, although the session has started strongly, readers should take care not to get sucked into a "worst is over" false sense of security.

The US Dollar remains steady in Asia

Currency markets were relatively more sedate overnight than in previous sessions. Wall Street’s slightly positive close temporarily took the wind out of the greenback’s sails, with the flight to safety noticeably absent compared to the last session. The dollar index finished unchanged at 93.33, having probed higher to 95.60 overnight. Today in Asia, it is much the same, with currency markets moribund and the dollar index almost unchanged at 94.35.

That has left G-10 currencies treading water into the final day of the week. Euro, Sterling and the Commonwealth's holding their own, but only just off their recent lows. That suggests that the weaker side is still the downside for all of them, with today's jump in the equity markets having little to no positive impact. 

Asian currencies have edged higher though, albeit only modestly. With the PBOC content to let USD/CNY make time between 6.7500 and 6.8500 for now, regional currencies should continue to outperform vis-a-vis the developed market grouping. The stability overnight will be a sigh of relief for the beleaguered Indonesian Rupiah. However, the extension of Jakarta lockdown measures overnight has seen USD/IDR edge back over 14,900.00. Further rises today will almost certainly see the Bank of Indonesia intervening again to defend 15,000.00.

The reluctance of currency markets to reverse US Dollar strength overnight and this morning, even as stock markets outperform, suggests that more US Dollar upside remains the path of least resistance.

Oil rises overnight as equities find their feet

With a modicum of confidence returning to equity markets, oil managed to find its feet, with both Brent and WTI's 100-day moving averages (DMA's) providing support. Brent crude rose 0.60% to $41.74 a barrel, and WTI rose by 1.40% to $40.15 a barrel. This morning in Asia, with equities performing strongly, both contracts have risen another 0.60% to $42.00 and $40.40 a barrel. 

The moves higher overnight and today look entirely driven by slivers of confidence appearing in other asset classes. Talk of support from the fall in US crude inventories is just that, talk. Oil actually fell on those numbers initially, and as such, is a classic case of looking for news stories to fit the price action. Fundamentally, nothing has changed to the supply side of the equation that is weighing on oil prices in the bigger picture. I also believe that another 10% drop in prices from here will force OPEC+ to revisit their production cut agreement. 

In the short-term, the 100-DMA's on Brent crude at $41.40, and WTI at $38.85 a barrel, are providing reliable support, as they have done all week. Unless those supports give way, or equity markets take a sudden turn for the worse, oil is likely to range-trade into the week's end. 

Gold stabilises near its lows

Gold contented itself to follow intra-day moves on equity markets overnight, suggesting that the buy the dip mob remains side-lined for now, either licking their wounds after going long at $1900.00 an ounce, or expecting better levels to buy more. 

Gold probed the downside during the New York session, but support at its 100-DMA at $1845.50 held firm and is key pivot level for today's session. Gold finished the session 0.25% higher at $1867.00 an ounce, in line with the non-descript close on US equity markets. Notably, though, it is failing to follow Asian equity or US futures markets higher this morning. That suggests that Asian investors remain nervous about gold prices at these levels. 

Gold has initial support at $1845.50 an ounce as stated, followed by $1800.00 an ounce. Resistance lies at $1880.00 an ounce with a break back above $1900.00 an ounce likely to suck in FOMO buyers.