Running around in circles

Returning from a public holiday yesterday and looking at the fallout across financial markets over the past two sessions, I am reminded of Monday's words, which turned out to be oddly prescient. Given the lack of data releases this week, it might be a good one for investors to watch from the side-lines.

So it came to pass, with Monday’s Covid-19, we're all doomed, meltdown being quickly replaced by a buy the dip frenzy yesterday. The FOMO gnomes of the stock markets led the way, of course, with Wall Street retracing much of its losses on Monday, helped along by a US bond market where yields have well and truly thrown in the inflationary towel.

To be sure, the retracement overnight and this morning in Asia have not been a perfectly binary outcome. Oil and industrial metals have only bounced modestly. Some Asian equity markets remain lower by some margin versus their opening levels on Monday. Perhaps the biggest lesson of the past two days is that the global recovery trade will not be a perfectly synchronised one. There will be haves and have nots, with the North American and European region powerhouses having, and most of Asia and all the developing world have-not-ing.

The delta variant will undoubtedly force the hand of the most optimistic forecasters in the Asia-Pacific now. With much of the region in lockdowns or semi-lockdowns or just a mess, the recovery will inevitably be slower here until the world gets its vaccination act together. I even wonder how China will reopen to the world, given that the delta-variant mashed it's way through Mrs. Halley's and my vaccination with such ease, as it has across vaccinated persons in Indonesia. 

That will be a story for another day, I am sure, possibly 2022. In the meantime, I am no longer expecting ASEAN to be the value-trade of 2021, and I believe its currencies will also underperform into H2. The region as a whole will also be vulnerable to the Fed blinking on inflation, although those fears are now overblown if the US bond market is to be believed.

In the bigger picture, monetary policy rules, and I believe the virus tantrum of Monday will be the low point for the week. US bond yields continue to plummet; monetary policy globally remains ultra-loose, etcetera. In that environment, asset price inflation is inevitable as oceans of capital look for a home in a zero percent world. Buy-the-dip is not a beaten concept. Given the lightness of the global data calendar this week, with only the ECB tomorrow to make things exciting, we probably haven't seen the end of the headless tail chasing. As I said earlier, sensible investors should probably heat some popcorn, reach for the remote, and watch the circus from the side-lines.

In other news, the US infrastructure package's passage through the US Senate is looking shakier by the day, with the procedural voting kicking off tomorrow. Like US Q2 earnings, though, it has been relegated to the bench as the delta variant steals screen time. There is perhaps a sense of inevitability, though, that the Senate Republicans and Democrats would ever agree on anything.

In Asia, South Korea recorded firm 20-day exports for July, while imports also rose above expectations. Higher imports also swung Japan's trade surplus to a deficit in June, driven, no doubt, by higher energy and commodity prices. The Bank of Japan Minutes highlighted that the Board wouldn't hesitate to ease more if needed, still impressively consistent after 20+ years. The Tokyo Olympics have kicked off, with the biggest surprise being an athlete failing a drugs test instead of a Covid test. All-in-all, there was nothing in the data to shift market sentiment regionally.

Australian Retail Sales plummeted by 1.80% for June, led by the Victoria lockdowns. Inevitably, the New South Wales virus restrictions, which have now spread to Victoria and South Australia, will impact the data for July. Various institutions are now also downgrading Australian growth for the rest of 2021, and rightly so. It will stay the hand of the RBA, and I expect the Australian Dollar to remain under pressure this week, especially if global risk sentiment also shifts South once again.

Tentative rally by Asian equities

US stock markets staged a tail-chasing buy-the-dip rally overnight, but Asian markets, although mostly higher, have been far more circumspect. Much of the difference can be laid at the door of Covid-19. While the US is enduring surging cases, the economy continues to fire on all cylinders with their vaccination programme limiting and economic fallout. In contrast, much of Asia remains under a virus cloud compounded by slow vaccination rollouts. The price action in Asia today perhaps reflects the new realities of an asynchronous global recovery.

Overnight, the S&P 500 rose 1.52%, with the Nasdaq climbing 1.57% and the Dow Jones leaping 1.62%. Notably, the Dow Jones retraced to its March 2020 support line perfectly before rallying. Both the S&P 500 and Nasdaq remain well clear of their March 2020 support lines, and it seems that buy-the-dip remains the go-to strategy for investors on any material price dips. With the US earning's session progressing nicely, despite being lost in the delta-noise this week, I shall not argue that point. Futures on all three indexes are hovering at unchanged in Asia. 

The Nikkei 225 has risen 0.60% today, with the Kospi edging 0.40% lower after recording rising new virus cases today, raising lockdown fears. In China, the Shanghai Composite has risen by 0.60%, with the CSI 300 0.65% higher. Mainland stocks have been rock-sold this week as the blood flowed elsewhere, and I suspect that China's "national team"" have been at work this week. Hong Kong has fallen 0.50% with the China tech-clampdown and increasing credit concerns among Mainland property developers capping gains. 

Singapore is reinitiating virus restrictions once again, and that sees the Straits Times unchanged for the session. Kuala Lumpur is also unchanged, with Jakarta climbing 0.45% after the President hinted at easing virus restrictions. Taipei has fallen 0.30%, while Manilla is down 1.50%, and Bangkok is flat for the session. Australia's ASX 200 and All Ordinaries have ignored the Retail Sales disappointment and followed Wall Street higher, both rising by 1.20%.

European markets should open higher today despite the inconclusive Asian session. Asian markets are reflecting an asynchronous viral-recovery reality, while Europe is much further along that road, like the United States. An ECB expected to be dovish tomorrow should also support Eurozone equities today.

The US dollar remains strong

Safe-haven flows appear to be continuing to flow into US bond markets, with yields falling once again overnight. Those inflows are seeing US Dollar buying by international investors, which sees the remaining greenback firm, despite the fall in US yields. Until nerves calm sufficiently about the impact of the delta variant on the global recovery, that strength should continue, especially if the ECB is dovish at tomorrow's policy meeting.

The dollar index climbed 0.15% to 92.96 overnight, edging higher to 93.03 in Asia. The dollar index has now closed above previous resistance at 92.85 for two consecutive sessions, which signals a further rally targeting resistance at 93.45, it's 2021 high. 

EUR/USD remains treading water at 1.1775, as the single currency awaits tomorrows ECB policy meeting. A move to a fixed 2.0% inflation target by the ECB tomorrow would be a dovish evolution, suggesting more easing ahead. That would see support at 1.1750 tested, opening up a potentially sizeable downward correction that could target 1.1600 and then 1.1400. Reopening concerns and spiralling virus cases has kept GBP/USD well offered this week, and it remains vulnerable to a deeper correction, potentially reaching 1.3200.

Today's soft Retail Sales data from Australia has seen AUD/USD fell 0.30% to 0.7310, dragging NZD/USD lower to 0.6910. With widening virus restrictions in Australia and global risk sentiment still fragile, AUD/USD is vulnerable to a deeper correction to 0.7200 and NZD/USD to 0.6800. A new asynchronous global recovery reality is also ensuring that regional Asian currencies stay offered. USD/MYR, USD/SGD, USD/THB, USD/IDR and USD/KRW remain near recent highs, and with downgraded recovery expectations now, I expect AFX to underperform in H2.

API crude inventories halt oil recovery

After Monday's price meltdown, oil prices consolidated nervously at their recent lows overnight. Brent crude finished the session 0.20% lower at $68.60 a barrel, while WTI edged 0.25% lower to $66.40 a barrel. Although risk appetite showed signs of recovery in other asset classes, notably equities, gains by oil were limited after the US API Crude Inventories rose unexpectedly by 0.8 million barrels, versus an expected drawdown of 4.17 million barrels. 

The rise in API inventories was the first in some time. If official US Crude Inventories were to rise tonight, instead of fall by a forecast 4.5 million barrels, oil prices could be vulnerable to further losses. Indeed, oil remains very susceptible to intraday swings in risk sentiment and will remain so for the rest of the week.

Physical buyers in Asia have bought the dip today, pushing Brent crude 0.50% higher to $68.95 a barrel and WTI higher by 0.60% to $66.80 a barrel. Both contracts are flirting with their 100-day moving averages (DMAs) at these price levels, though, and today's rally in Asia is not signalling a change of sentiment, more likely, bargain hunting in thin liquidity.

Brent crude has resistance at $70.00 a barrel with the loss of support at $67.50 a barrel, signalling more losses targeting $64.50 a barrel. WTI has resistance at $67.50 a barrel with a failure of $65.00, signalling deeper losses to $62.00 a barrel.

Gold watches from the side-lines

Gold prices consolidated overnight, the yellow metal edging 0.15% lower to $1810.50 an ounce. Any gold rally is capped by a firm US Dollar, while the downside remains supported in this week's heightened global risk environment.

The loss of upside momentum has shifted the risks for gold to the downside. For now, though, and despite the noisy price action, gold remains hemmed in by its 100 and 200 DMAs at $1792.00 and $1826.00 an ounce, respectively.

Some short-covering has seen gold rise slightly to $1813.00 an ounce in Asia, with investors’ minds regionally clearly focused more on equity markets. A daily close below $1790.00 an ounce would signal a deeper correction targeting $1750.00. However, this is a week for patience, and with momentum shifting on sentiment, investors should respect the 100-and 200-DMAs and avoid getting caught out by whipsaw price action.