North Asia catches a Friday flu

North Asian equity heavyweights have deviated from the price action on Wall Street overnight, heading directly South this morning. Mainland China, Hong Kong, Japan and South Korean stock markets are all well and truly in the red, despite Wall Street shrugging of uninspiring US GDP and finishing higher overnight.

I cannot see any particular headlines driving the fall this morning in Asia and can only speculate that a combination of factors may be driving investor sentiment. A Friday "delta-dip" is undoubtedly one factor, with Covid-19 cases rising in Japan, South Korea and appearing in three provinces in China. China also releases official Manufacturing and Non-Manufacturing PMIs this weekend. After some middling GDP and Jobless Claims data from the US overnight, that suggests the recovery remains on course, but at a slower pace, investors may be concerned the China PMIs could signal something similar. 

Finally, with Mainland and Hong Kong markets enduring a torrid week on Chinese government clampdowns and restrictions, the assurances from the central government that such measures are targeted and not broad, maybe falling on deaf ears with investors pondering weekend event risk. All in all, it looks like investors are taking risks of the table over the weekend. With sentiment remaining fragile, despite some stabilisation yesterday, the fast-money herds don't need much to spook them.

Overnight, the US GDP printed at 6.50%, impressive but well below forecasts of 8.0%+, with a fall in inventories and those inevitable supply chain bottlenecks taking the edge of the numbers. Initial Jobless Claims rose to 394,500, which was disappointing, while Core PCE Prices rose by 6.10%. None of that was enough to shake off the transitory inflation espoused by Jerome Powell the day before post-FOMC. The US yield curve flattened once again as inflation lethargy deepened, which saw the US Dollar drop and gold rally.

In Asia today, South Korean Industrial Production rose 2.20% for June, higher than expected, but Retail Sales only grew by 1.60%. Similarly, Japan Industrial Production MoM for June increased by 6.20%, above expectations; but Retails Sales MoM for June rose by 3.10%, recovering from their May slump. The data shows that both countries' manufacturing and export engines continue to fire on all cylinders, with Japan officials noting the chip shortage is easing. However, the mixed domestic retail sales data, which will have taken a Covid git in July, suggests that the ongoing pandemic and slow vaccination rates will delay a full recovery by Asian economies ex-China over the coming months. It was clearly not enough to overcome weekend risk nerves for both stock markets.

German and Eurozone GDPs will be the highlights of the European session, along with Eurozone Inflation. German flash GDP should rebound by 2.0% for Q2, with Eurozone GDP rising 1.50%. Eurozone Inflation for July is expected to come in at 2.0%, right on the ECB's target. The Euro's recovery accelerated overnight, and strong reading from the data could see the single currency stage another powerful rally into the end of the week.

US Personal Spending is expected to rise 0.70% this evening, with Personal Income falling -0.30%. Core PCE Prices, a favourite Fed measure, are expected to increase by 0.60% MoM. With nothing seemingly able to shake US bonds markets out of their low inflation stupor, the weak side into the end of the week seems to be the downside. If the US data comes in higher, the US Dollar, stocks and bonds are unlikely to react. However, if the data comes in lower, the US Dollar is likely to take another fall, bond yields will move lower again, and the FOMO gnomes of Wall Street will buy everything.

Don't discount delta, though. The US CDC published some scary data about infectiousness overnight, and US daily cases rose to just shy of 100,000. Countries such as Israel, meanwhile, are offering their over 60's third Pfizer shots. A weekend delta discount is being applied in Asia today, and I don't discount the discounting continuing into the US session close.

Asian equities fall for no apparent reason

Asia equity markets have mostly fallen today, with North Asian markets leading the charge lower. In contrast to North America, where strong earnings and benign inflation expectations saw the leading indices rise once again to record highs. The S&P 500 rose by 0.42%, while the Nasdaq was weighed down by Amazon's results but still finished 0.11% higher, and the Dow Jones climbed by 0.43%. All three indexes are wobbling in Asia, though, with futures on the Nasdaq plummeting by 1.30% in sympathy with China, while the S&P 500 futures have fallen 0.75% and the Dow Jones futures are 0.32% lower.

Meanwhile, the Nikkei 225 has slumped by 1.60%, with the Kospi falling 0.80%. In China, the Shanghai Composite is 0.35% lower, but the CSI 300 has tumbled by 1.30%, with Hong Kong plummeting by nearly 2.0%. Singapore has risen by 0.20%, but Kuala Lumpur, falling into more political and Covid disarray, has declined 0.40%, while Taipei is 0.20% down. Jakarta and Ho Chi Minh are higher by 0.45%, with Manilla 0.10% higher, and Bangkok has risen by 0.20%. Australian markets are slightly lower, with the ASX 200 and All Ordinaries down by 0.20%.

The North Asia to ASEAN divergence is intriguing. The fact the tech-heavy Nasdaq futures have led US index futures lower suggests that they, and China, Japan, and South Korean markets are suffering a dose of pre-weekend China regulatory risk jitters. Notably, there is likely to be a lot of Covid bad news priced into ASEAN markets. With delta-variant nerves rising in North Asia, the combined China and delta risk may be causing some rotation into ASEAN markets as a defensive position.

A strong rally by the Sensex this afternoon in India would suggest that investors are rotating out of China, but unwilling to leave the Asian story, are looking for pastures new in other parts of the region. Going forward, depending on how the regulatory risk landscape evolves vis-a-vis China, ASEAN and India equity markets may find more friends from the international investor community than they have of late.

US Dollar falls on US data

The retreat by the US Dollar continued overnight, as US GDP and Initial Jobless Claims reinforced transitory inflation sentiment, flattening the US yield curve. The dollar index fell by 0.45% to 91.88, although delta-variant nerves in Asia has lifted it slightly higher to 91.96 this morning. Rallies should now be limited to 92.20, and the index will be eyeing its critical medium term pivot level at 91.50 next week. That is a clearly denoted support line and also the 50 and 100-day moving averages (DMAs). Failure will signal further directional losses targeting 89.50.

EUR/USD continued to rally overnight, the single currency powering through resistance at 1.1850 on its way to a 0.40% gain to 1.1887. The 1.1850 zones should limit losses now, and EUR/USD should test 1.1900 by the end of the week and target further increases to 1.975, the 100-DMA, early next week. GBP/USD broke through its 100-DMA at 1.3925 as it rose 0.40% to 1.3960 overnight with a close above the 1.4000 level, signalling further gains next week. 

USD/JPY continues to wilt, falling to 109.50 overnight as the US yield curve flattens. USD/JPY remains a US/Japan yield differential play, and until US rates start to move higher, USD/JPY will struggle to hold onto gains above 110.00. A loss of 109.00 targets 108.20.

The weakness of the US Dollar overnight saw the Chinese Yuan fixed substantially stronger today, although that was in line with movements in the basket. USD/CNY was fixed 350 points lower at 6.4602 this morning, leaving USD/CNY near the bottom of its recent 6.4500 to 6.4900 range. Notably, that has not translated into strength across regional Asian currencies, with US Dollar strength confined to the major currencies and the Yuan. USD/THB, USD/IDR and USD/KRW fell overnight modestly but have swiftly risen to near recent highs this morning, with only the Singapore Dollar continuing to hold onto its recent gains. 

With Singapore's vaccination programme racing at breakneck speed, it seems that the delta-discount remains firmly applied to its regional peers. Until Asia as a whole gets on top of Covid-19, Asian regional currencies will remain under pressure. On that note, the Malaysian Ringgit heads into the weekend, looking particularly vulnerable. USD/MYR is near its recent highs, trading at 4.2340 this morning. The disastrous Covid-19 situation continues to lurch from bad to worse. The picture for the Ringgit has got cloudier still after the Malaysian King rebuked the Prime Minister yesterday, raising the spectre that the government or the PM will fall over the weekend. USD/MYR could strengthen to 4.2800 next week as the country's political and virus crisis deepens, with no solace being found from higher oil prices.

Oil prices rebound in delayed inventory reaction

Oil prices rallied strongly overnight in what appears to be a delayed reaction to the substantial US official crude inventory falls by crude and gasoline stockpiles the night before. From my perspective, it seems that the inventory numbers were lost in the noise of the FOMC outcome, which arrived at roughly the same time. The fall in the US Dollar overnight has refocused investor attention, pushing oil higher.

Brent crude rose by 1.50% to $75.85 a barrel, and WTI rose by 1.40% to $73.40 a barrel. In Asia, both contracts have retreated by 0.35%, with the price action on equity markets suggesting that delta-variant nerves, and their potential effect on Asia's recovery, have acted to push prices slightly lower.

Despite the retreat this morning, oil's price action looks construction and barring any weekend shocks, both contracts looked poised for more gains next week. Only a sudden escalation in delta-variant nerves like last Monday week would change that narrative, and once again, I expect any sharp drops to be short-lived. The global recovery remains on track, and by association, oil consumption Even if that recovery will be much more geographically uneven than previously expected.

Brent crude broke higher through resistance at $75.00 overnight, and dips should be limited to this area. It has resistance at $76.10 and $76.70 a barrel, and I expect a $75.00 to $78.00 a barrel trading range next week. WTI has resistance at $73.60, with support at $72.50 a barrel. I expect WTI to trade in a firmer $73.00 to $75.00 a barrel range next week.

Lower US Dollar sparks gold rally

The retreat of the US Dollar overnight sparked gold into life as the US yield curve continued flattening once again. Gold rallied by 1.20%, or 21 dollars, to $1828.00 an ounce. It has edged slightly lower in Asia, with no evidence of risk hedging flows, with regional investors seemingly reluctant to chase prices at these levels.

Gold broke through significant resistance at the $1821.00 an ounce, the 200-DMA, overnight, and this should now limit losses into the end of the week. Gold is flirting with its 50-DMA at $1828.00 this morning, and its next technical target is $1835.00, followed by $1860.00 an ounce. 

With the relative strength index (RSI) is in neutral territory, gold has plenty of headroom from a momentum perspective. That suggests that $1860.00 is not out of the question next week, especially if the US Dollar continues to trade on the weak side, as I expect. Of course, we have a heavy data calendar to negotiate to start the month, and another delta-variant scare could see US Dollar strength temporarily return. Overall, though, gold's technical picture looks very constructive.