Sharks circle in holiday-thinned Asia

Asia is off to a nervous start today with liquidity seriously thinned by holidays in Mainland China, Japan and South Korea. In fact, a heavy holiday schedule amongst the Northern Asia heavyweights will likely affect liquidity to some extent all week, potentially exacerbating market moves.

The list of circling sharks is long, starting with increasing noise from the US about the debt ceiling. Raising the debt ceiling used to be a rubber stamp exercise, but in a polarised United States, that is no longer the case. Mainland China markets are closed today but all eyes on Evergrande which is scheduled to make bond repayments on Thursday, Their shares are already getting a beating in Hong Kong today along with property-related companies in general. Ever-Teflon actually has a grace period of 30 days before an official default is called so this story is likely to keep on giving.

Commodities are also being sold heavily this morning after China’s Premier Li over the weekend, said that China will use “market tools” to stabilise commodity prices. I am assuming that means releasing more commodities onto domestic markets from China’s strategic reserves. As a price taker, and not a price maker, there is only so much China can do to impact prices in the medium term. But coming on a day where liquidity is lower because of holidays, markets are nervous about a disorderly Evergrande collapse and US yields and the Dollar have risen ahead of the FOMC, there is an outsized impact.

Copper had fallen by 1.45%, aluminium futures by 1.30%, with Platinum down 2.55% and Palladium down by 3.35%. Silver and gold are also lower. That comes after iron ore tumbled by 20% last week. Thankfully, with Mainland China away today, iron ore trading is effectively closed, but one assumes, looking at its commodities brethren, that the news wouldn’t have been good. With the highest correlation to risk sentiment and commodity prices in the region, Australia is having a bad day with the Australian Dollar and Australian equity markets sharply lower.

The week features a heavy schedule of central bank policy decisions, twelve by my last count. The main act with be the Federal Reserve FOMC decision on Wednesday. We are finally seeing markets awakening to the possibility of a taper with US bond yields rising and the US Dollar rallying powerfully on Friday once again. I am not expecting any announcement of a taper this meeting, however the FOMC dot plot update will be interesting, especially if rate hike expectations are brought forward. The FOMC will likely signal that a tapering decision will be live for the November meeting.

With growth concerns increasing in Asia and other regions, a more aggressive dot-plot or tapering indication will likely spark more US Dollar strength. Nobody is pricing in a taper-tantrum for Q4, but I believe there is a rising likelihood it can happen, especially if US employment jumps over the next two months. I believe it is naïve that having got the world addicted to bottomless amounts of zero percent money and a backstop to the dumbest of investment decisions over the past decade+, that the Fed can put that genie bank in the bottom with no impact.

Norway will probably become the first DM central bank to raise rate this week, pipping New Zealand to the post. Elsewhere though, I expect Japan, Indonesia, the Philippines, and Taiwan to all remain unchanged. Sweden and Switzerland will similarly hold as will Turkey, but Brazil may surprise once again. All roads lead to the FOMC though, and their tapering talking, and dot plots should see some volatility in Asia on Thursday morning. China announces its latest one and five-year Loan Prime Rates this Wednesday. It would be a huge surprise if they cut and would spark a juicy equity rally on the Mainland. The PBOC is likely to prefer a RRR cut, possibly as soon as October if economic data doesn’t improve or Evergrande folds.

Canada heads to the election booths today with the Canadian Dollar getting a beating at the end of last week on softer commodities and political uncertainty. The election is too close to call. Results are likely to start coming in over the Asian session tomorrow and with liquidity holiday-reduced anyway, the USD/Loonie may live up to its name.

Australian markets are under pressure from China/Evergrande fears, slumping commodity prices and the fallout from French submarine fiasco. Already there are rumblings from Europe that the Eurozone/Australia free trade agreement talks are now dead in the water. The French, for their part, are not happy, recalling their ambassadors to the US and Australia, an unprecedented move. Australia’s Prime Minister for his part, is justifying the cancellation in favour of US/UK nuke submarines by saying Australia had harboured concerns over the capabilities of the to be built French submarines for years. The obvious question being, if that were so, why did you agree to spend $40 billion buying them in the first place? Keep up the good work ScoMo.

Finally, keep an eye on New Zealand this week. It appears that the delta variant has jumped the virus fence around Auckland. Auckland is in level 4 while the rest of the country is enjoying a relatively free level 2. If cases increase outside of Auckland, it doesn’t take a genius to guess what happens next, level 4 for the rest of the country immediately. That could spark a decent sell-off in the New Zealand Dollar as the RBNZ’s October hike is postponed again, and New Zealand equities are likely to take a beating.

Hong Kong and Australian equities take a beating

FOMC tapering nerves and increasing noise from Washington DC around the debt ceiling and tax hikes sent Wall Street lower on Friday. Friday also saw index futures and option and single stock option expiries which could have distorted and already nervously negative move. Wall Street finished the week on a continuing negative tone with the S&P 500 falling 0.92%, the Nasdaq falling by 0.91%, and the Down Jones losing 0.48%. All three indexes finished only slightly lower for the week though, which was dominated by large swings in daily sentiment thanks to a depleted tier-1 data calendar.

In Asia, the story is rather glummer. Commodity prices are tanking this morning over China growth concerns and the threat of Evergrande in China missing debt payments this week. With Mainland China, South Korea, Japan and Taiwan closed, Hong Kong has born the brunt of the risk aversion flows. The Hang Seng has collapsed by nearly 4.0% with property stocks under the hammer.

With its high beta to commodity prices, Australian markets are also suffering after the commodity sell-off today. Woes surrounding the French submarine order cancellation, and its threat to an EU free-trade deal are also darkening the mood. The ASX 200 has tumbled by 2.30%, while the All Ordinaries has retreated by 1.90%.

Elsewhere, Singapore is 0.35%, while Kula Lumpur has dropped by 0.65% with Bangkok lower by 0.40% and Manilla by 0.15%. Jakarta has fallen by 0.55%. The fall-out on regional Asia has been limited thus far, with investors preferring to negative sentiment in the more correlated, and more liquid, Hong Kong and Australian markets. With tapering noise around the FOMC increasing, ASEAN markets will struggle to maintain material rallies this week, especially with the Northern Asia heavyweights taking holidays.

Given the negative finish on Wall Street, and the heavy selling in key Asia Pacific markets today, European markets will open slightly lower this afternoon. However, a lower Euro, and much lower commodity prices are likely to be positives at the periphery for Europe, limiting negativity from tapering and China nerves.

The US Dollar stages a broad rally

Although not many are predicting a Fed taper tantrum, currency markets appear to be waking up to the possibility. The US Dollar continued its rally on Friday and what is notable is that now also includes fellow havens such as the Swiss Franc and Japanese Yen. The dollar index soared 0.41% to 93.25 as US yields firmed, climbing once again in Asia by 0.10% to 93.35. The dollar index is now within sight of its August high at 93.72, and only a fall through 92.80 changes the technical bullish outlook. It will probably take huge bidding interest at the US long-dated bond auctions this week to slow the upward momentum.

Firming US yields sent EUR/USD 0.40% lower to 1.1725, before easing further to 1.1710 in Asia. A failure of 1.1600 will signal a new down leg for EUR/USD that could extend to 1.1200. GBP/USD has fallen 0.30% to 1.3710 today and failure of 1.3680 targets 1.3600. GBP/USD has traced out a major top around 1.3900. USD/JPY has climbed nearly 90 points over the past two sessions to 109.90 today, as a US/Japan yield differential play at the moment, it remains stick in a broader 109.00 to 111.00 range with a bias now to the topside.

USD/CHF is also on the move, climbing above 0.9300 on Friday on its way to 0.9325 in Asia, breaking out of its three-month range. Given its haven status, the fact that the US Dollar has manged to rally so powerfully in the past two sessions (approx. 130 points), is to me, a firm signal that more US Dollar strength generally is imminent.  An FOMC signalling a year-end ostensibly dovish taper, or a more aggressive dot plot hinting at 2022 rate hikes, should do the trick.

AUD/USD and NZD/USD are on the back foot today, falling 0.50% and 0.25% respectively to 0.7235 and 0.7020. The slump in commodity prices and risk sentiment in a liquidity thinned day in Asia is to blame and both have potentially anther 100+ points lower in them over the next few sessions. Watch NZD/USD for news on the delta variant front, which escaped Auckland this weekend. Any signs that the government is going to pull the national lockdown trigger will be a major negative for the New Zealand Dollar.

With Mainland China closed, all eyes have been on the offshore USD/CNH this morning. It spiked to 4.4850 at the open but quickly retreated to 6.4810 later to be just 0.16% higher today. The PBOC added CNY 90 billion of liquidity via the repos on Saturday, a surprise moves to calm nerves ahead of the holidays. Its impact has been negligible on equities but seems to have soothed nerves in currency markets. USD/Asia as a result, is only around 0.25% higher today. However, given the nerves over Evergrande in China and its potential fallout, and increasing taper nerves ahead of the FOMC, regional Asian currencies are likely to endure a tough week unless the FOMC is ultra-dovish come Thursday. Holiday-driven liquidity will exacerbate and headline -driven moves.

Oil falls in Asia

With Mainland China, South Korea and Japan away today, oil trading volumes are thin. Oil eased slightly on Friday as Gulf of Mexico production returns, but otherwise has remained immune to the risk aversion nerves seen elsewhere and US Dollar strength. In Asia today, the broad commodity sell-off has flowed into oil markets, which have retreated modestly once again.

Brent crude fell 0.40% to $75.30 on Friday, retreating by 0.60% to $75.85 a barrel in Asia today. WTI dell 0.90% on Friday to $71.90, easing another 0.70% to $71.30 a barrel in Asia this morning. Both contracts are likely to continue trading heavily until New York hours as long as the broader commodity sell-off persists, although I do not anticipate an aggressive move lower.

Brent crude has traced out a double top at $76.10 which s followed by $76.80 a barrel. Support is at $74.50 and then $73.80 a barrel. WTI has resistance at $72.00, followed by more formidable resistance at $73.00 a barrel. A fall through $71.00 could see a spike lower to $70.00 a barrel.

Gold follows other metals lower

Platinum and Palladium have been pummelled today in a broad commodity sell-off, tumbling by 3.50% and 3.50% respectively. That has dragged silver 1.15% lower to $22.1460 an ounce, and an already fragile gold lower by 0.45% to $1746.60 an ounce after finishing unchanged at $1755.00 an ounce on Friday.

A lack of liquidity is amplifying moves in metals in Asia today thanks to Northern Asia being on holiday. However, gold’s price action is ominous, especially as US Dollar strength persists and US yields continue firming. The next few days ahead of the FOMC could be long ones for bullish investors.

Gold now has resistance at $1755.00, having fallen through support at $1750.00 an ounce. That is followed by $1768.00 and the far more formidable $1780.00 an ounce region. Today’s low around $1742.50 is potentially a double bottom if gold closes above there this evening, forming a modicum of support. However, gold looks far more likely to continue trading heavily which will set up a test of $1720.00 an ounce. From a longer-term perspective, must hold support is at $1675.00 an ounce. Failure opens up uncharted territory for gold.