Today's theme: Inflation

And just like that, we're back to financial markets schizophrenic flirtation with inflation. Not enough meds have been ingested clearly because all the talk was of ebbing inflation fears after Friday’s mammoth Non-Farm Payrolls miss. Yet overnight, the inflation ghoul reappeared as US yields moved higher, and technology stocks were hammered as cyclical rotation once again moved to the Dow Jones.

Some mentions have been made that the Colonial Pipeline cyberattack could lead to a spike in fuel prices, pushing up, you guessed it, inflation. That is nonsense, of course. Only a prolonged shutdown would show up in the data, and parts of the system are already being bought back in line. To be sure, we have some inflationary hurdles this week, notably in the US, where official inflation is released tomorrow, followed by 10-year and 30-year auctions. However, if the JOLTs Job Openings for April come in much lower than the forecast 7.5 million jobs tonight, I expect the inflationistas to breathe easier once again.

That is not to say that I am now dismissing the inflation threat. What is most interesting about the price action overnight is how quickly the inflation theme has remerged. Precisely one day, in fact, after a very deflating US jobs number on Friday. A very dovish set of comments from Chicago Fed Evans were also ignored. Inflation nerves just won't go away. I continue to maintain that the power of the commodity price rally and the expected GDP growth in the US is inconsistent with US 10-year yields remaining at 1.50%. Despite the liquidity ocean looking for a home, and whether or not the inflation is transitory or not.

The falls overnight on equity markets, notably technology, are likely to be just as much due to extended shorter-term valuations and nervous investors than to inflation prospects. Goldman Sachs may also be partially responsible, publishing a report on technology stocks highlighting that regulatory risks are the biggest threat to the big-tech story. Readers will know I have alluded to the same theme before; although I do not consider myself a Master of the Universe and don't consider lunch is for wimps, it's nearly as important as breakfast. But Goldman's moves markets, though, as evidenced by their bullish commodity report yesterday and early Asia rallies in the space.

Asian equities, particularly North Asia, have opened much lower today after the fall by the Nasdaq overnight. I will stick my head out and say the Nasdaq fall bears monitoring. The index closed below its upward 14-month support line overnight, the first time since the lows in March 2020. It also closed below its 100-day moving average (DMA), another warning sign. The Nasdaq needs to recapture 13,350.00 tout suite or a substantial correction lower on the cards, targeting the 200-DMA around 12,500.00. The S&P 500 and Dow Jones look much healthier by comparison, with their March 2020 support lines still far from present levels. Cyclical rotation, anyone?

On the inflation theme, China's Official Inflation and PPI data came in almost bang-on expectations today. Inflation YoY for April rose 0.90%, while PPI YoY for April rose 6.80%. The latter reflects the rise in oil prices, commodities and other inputs. But whether this translates to higher factory gate prices from China is another thing altogether. That's not been the case in the past, but maybe this time it will be different?

Philippines GDP disappointed yet again as Covid-19's eternal lockdown and swine flu in the pork industry torpedoed growth once again. GDP YoY fell 4.20%, lower than the -3.0% forecast but better than the previous -6.8% fall. Indonesian Retail Sales fell by -14.60% YoY in March, distorted by base effects but highlighting that domestic demand remains crimped even as exports recover. Again, that is a slight improvement over the previous -18.1% print. The best that can be said is that the Philippines and Indonesian data is improving a very low base. That reflects most of ASEAN, with vaccination programmes proceeding at a snail's pace and leaving them vulnerable to COvid-19 waves and tourism sectors in a deep freeze. Nevertheless, with high beta to the cyclical recovery, assuming all go well, and starting from a low base, ASEAN markets remain my favourite recovery trade.

On the theme of Covid-19, Malaysia also releases GDP today and is expected to show the same trend as the Philippines. Negative but recovering of a low base. However, that is likely to be drowned out by the announcement yesterday of a dramatic tightening of Movement Control Orders across the entire country for the next month. Like Thailand, Covid-19 cases have been spiking in Malaysia, prompting government action. Indonesia also has a bullet to dodge, having cancelled Eid-based movement for two weeks by air, sea and land. A large portion of the ASEAN recovery rests on how the next two weeks play out across the region with Covid-19.

Otherwise, the data calendar is strictly tier-2 across Asia and Europe today, with the German ZEW Economic Sentiment Index only passing interest. Investors will be more interested in if the equity sell-off deepens and broadens, or if this is another wax-on, wax-off day with the gnomes of Wall Street deciding that inflation isn't such a worry tomorrow after all. Watch the US JOLTS Job Openings and the ISM New York Index for April, though. With the street on inflation-alert again, high prints could deepen the technology sell-off.

Wall Street tumble sinks Asian equities

Wall Street got inflation jitters overnight, and with Goldman Sachs highlighting big technology company risks, the Nasdaq tumbled with some of that money flowing into the cyclical-heavy Dow Jones. The S&P 500 fell by 1.04%, with the Nasdaq tumbling by 2.55%, with only the Dow Jones holding its own, finishing just 0.10% lower. Ominously, the sell-off has continued via the futures market in Asian time. Nasdaq futures are 1.0% lower, while S&P e-minis have fallen 0.60%, with Dow Jones futures easing by 0.25%.

The continued fall of the US index futures in Asian time has spooked the retail-driven fast money markets across the region. The Nikkei 225 and Taipei have tumbled by 2.80%, with South Korea down 1.35%, while Hong Kong is falling 2.20%.

Mainland China's Shanghai Composite is 0.60% lower, with the more tech-heavy CSI 300 falling 1.15%. The pace of the sell-off in China is being muted by the PBOC injecting liquidity today, and the threat of China's 'national team" of state-owned investment funds. The "national team" has been on the bid of late each time Mainland markets start to look "disorderly."

Across regional Asia, Singapore has fallen by 0.70%, with Jakarta and Kuala Lumpur down 0.50%. Iron ore has fallen by 3.0% this morning, adding to the malaise in Australia, with the ASX 200 down 1.15% and the All Ordinaries are tumbling by 1.50%.

European shares should open weaker this afternoon, with US indexes continuing to sell off in Asia. We have been here before with inflation scares and extended valuations in technology fraying investor nerves. Nevertheless, the technical break of support by the Nasdaq overnight is significant. If it does not recapture that tonight, equities could be in for a torrid week. From my perspective, though, I would like to see the downside break confirmed, as I have learnt how to spell whipsaw from previous calls.

Risk sentiment lifts the US Dollar

The US Dollar rose modestly overnight as inflation nerves sapped risk sentiment and firmed up US yields, notably in the 30-year tenor. In contrast to the panic seen in equities overnight and this morning in Asia, currency markets were orderly. The dollar index tested the downside initially before regaining those losses to finish 0.05% higher at 90.27. The index is unmoved in Asia, and if dip-buyers return to equity markets this evening in New York, the index may yet test support at 90.00.

The dollar index would have performed better had it not been for the Sterling. GBP/USD rose 1.0% to 1.4115 overnight as the results of the Scottish election lessened fears that another independence referendum would occur. Covid-19 restrictions were also eased yesterday in Britain, further boosting the Pound. The technical picture suggests GBP/USD will rest at 1.4250 this week, on its way to 1.4400. Only a failure of the critical pivot level at 1.4000 questions this outcome.

The other major currencies spent the session on the back foot to lesser degrees, not far changed from the Monday open. EUR/USD is trading at 1.2140 with only a loss of 1.2100, suggesting a reversal. Similarly, AUD/USD is trading at 0.7835 with support at 0.7800. NZD/USD struggled to break 0.7300 once again. It is trading at 0.7265 with a failure of 0.7250, extending the pullback to 0.7200.'

Asian currencies emerged from the overnight session relatively unscathed and supported by the PBOC today, which set the CNY fixing versus the dollar at 6.4254, its strongest level in nearly two years. With FX markets content to watch the shenanigans in equities and commodities from the side-lines, regional currencies are calm today.

Two exceptions are the Malaysian Ringgit and Indian Rupee. USD/MYR has risen 0.25% to 4.1150 today after the government dramatically expanded its MCO's to stop the spread of Covid-19. The fallout has been modest all-in-all, but a rally through 4.1250 by USD/MYR could see further gains to 4.1500. Much will depend on the Covid-19 situation in Malaysia.

The Indian Rupee is also in danger of running out of steam after an impressive rally driven by dip-buying foreign investors and a lack of importer US Dollar buying. The Covid-19 tragedy shows no signs of ebbing, and with cities and states imposing lockdowns as the central government vacillates, an economic hit is now inevitable. That seems to have taken the wind from the sails of the INR rally. USD/INR held its 100-DMA at 73.400 overnight and is now threatening its 200-DMA at 73.637. A rise above the RBI QE breakout line, today at 73,720, will signal that INR's decline has resumed.

Oil markets watch from the side-lines

Despite the noise elsewhere, oil markets were content to sit the volatility and inflation nerves out last night. Both Brent crude and WTI finishing almost unchanged from Friday $68.25 and $64.90 a barrel, respectively, despite respectable intraday ranges. With both contracts bouncing around in near two-dollar ranges, it seems that energy markets are still suffering a Non-Farm Payroll hangover and are struggling for their next directional move.

In Asia, oil has retreated as base metal and platinum group metal prices fall, with the equity sell-off fraying global recovery nerves. Both contracts have fallen by 40 cents to $67.85 and $64.50 a barrel, respectively. A continuing lack of upward momentum will increase the chances of an abrupt downside correction as the week goes in.

Brent crude has resistance at $70.00 and then $71.50 a barrel. It is flirting with support at $68.00. That is followed by $67.00 and $66.00 a barrel. WTI remains dead centre of its near two-month rising channel bounded by $62.50 and $67.00 a barrel. Only a failure of $62.50 would disrupt the longer-term bullish picture. Interim support and resistance lie at $64.00 and $66.00 a barrel, respectively.

Gold is resilient

Gold finished almost unchanged overnight, climbing 0.25% to $1835.50 an ounce, where it remains in Asia. Gold once again probed resistance near $1850.00 an ounce, also its 200-DMA, only to be repulsed once again. The rise in US yields sapped the upward momentum without turning the gold rally into a reversal.'

I note that US 10-year yields rose only slightly overnight, with the 30-year firming more in comparison. That means that golds negative correlation to rising 10-year yields has yet to be still tested. The double failure ahead of $1850.00 an ounce has increased the likelihood of a correction lower, especially if the 10-year yields move higher tonight.

A failure of $1830.00 could see gold retrace to $1817.00 an ounce and possibly back to $1800.00 an ounce. Only an outright failure of $1800.00 an ounce, though, will imply the rally has run its course. In the immediate term, the $1850.00 area presents a formidable barrier to further gains. Once cleared, resistance appears at $1875.00 an ounce.