When a plan doesn't come together

Although the world loves it when a plan comes together, an opposite reaction occurs when it doesn't. Such was the case overnight when US ISM Manufacturing PMIs missed expectations quite noticeably. The headline print for April came in at 60.50, still expansionary but well below market forecasts of 65.0. The new order and employment sub-indices also missed while ominously, manufacturing prices rose. That inflation genie just won't go back into its bottle.

The reaction was immediate; US bond yields moved lower, the US Dollar gave up much of Friday's month-end gains, and gold powered higher to just shy of $1800.00 an ounce. If nothing else, it shows just how much financial markets are wedded to the US recovery story leading the world out of the pandemic recession.

That made it doubly odd, though to see oil rally aggressively while on Wall Street, a good dose of cyclical rotation occurred. The Dow Jones and S&P 500 rose at the expense of the tech-heavy Nasdaq. Equity and oil markets are more myopically focused on more full reopening announcements by various local governments in the US overnight.

The moves in oil and equities were inconsistent with the movements in currencies, bonds and precious metals. The only linkage really being a weaker US Dollar. That suggests to me that markets are choosing the stories that fit the tail-chasing narrative of the day and that perhaps US recovery nerves are overdone. One data set does not make a trend, and I suspect the ISM will be put to bed rather quickly, and the street will quickly move on.

In the spirit of moving on, Asia has also had a mixed day at the office, with activity somewhat muted by China and Japan holidays once again today. South Korean inflation rose above expectations suggesting pricing pressures are being felt consistently across the world. Australia's Balance of Trade for March narrowed to AUD 5.574 billion, with exports falling 2.0% whiles exports rose by 4.0%. 

The fall was led by rural goods, suggesting China's import bans are starting to make their presence felt. Nevertheless, the rising imports and Home Loans rising by 3.0% this morning indicate Australia's domestic recovery remains on track, leaving the market impact relatively neutral.

The Reserve Bank of Australia and Bank of England announce their latest policy decisions today. Of the two, the RBA has the highest capacity to surprise. Although both central banks will remain unchanged, both policy rates and QE, markets will be looking for any sort of hint that the RBA's ultra-dovish tone is easing. In that instance, Australian yields will jump, as will the Australian Dollar, while local equities are likely to hit a temporary speedbump.

The US releases its March Balance of Trade tonight, with the deficit expected to rise to -$74.5 billion. Arguably, a higher deficit is supportive of the US recovery and thus global recovery in trade premise. I suspect markets will more closely watch the US Factory Orders data for March, after last night’s ISM PMI miss. Orders are expected to rise by 1.30%, and if that number disappoints, we could be in for another bout of US Dollar weakness, falling bond yields, and this time, equities and energy may not escape the fallout.

Asian equities are mostly flat

Asian equity markets have opened in a sedate fashion today, mostly trading around each side of unchanged as volumes are muted by the China and Japan holidays. The somewhat confusing price action overnight in New York has left the region content to sit in wait-and-see mode with Covid-19 nerves regionally, offsetting the bullishness of the Wall Street reopening gnomes. 

Overnight, the S&P 500 rose 0.28%, while the Nasdaq retreated by 0.48%, even as the Dow Jones climbed 0.71%. Equity markets ignored the ISM data, concentrating on announcements around New York of the impending easing of pandemic restrictions, with the reopening/recovery narrative in the ascendant. In Asia, futures on all three have fallen, giving back much of the overnight gains and suggesting that despite the noise, equity markets are as directionless as other asset classes over the past two sessions.

The South Korean Kospi is down 0.35% after the higher inflation print this morning. Hong Kong is unchanged, while Singapore has fallen 0.30% as locally transmitted Covid-19 fears persist. Kuala Lumpur has climbed 0.10% after oil prices rose last night, and Jakarta has increased by 0.35%.

Australian markets have edged higher ahead of the RBA decision and statement, anticipating the central bank to maintain its dovish rhetoric. A hawkish surprise on that front could lead to a sharp reversal. For now, the All Ordinaries are 0.15% higher, and the ASX 200 has risen 0.35%.

The US tumbles on weak ISM data

The US Dollar sharply reversed much of Friday's month-end gains as ISM Manufacturing data disappointed. I suspect that much of the greenback's rally on Friday was built on month-end rebalancing and not a fundamental swing in outlook. As such, it was of no surprise that the US Dollars fortunes quickly reversed at the first hint of trouble.

The dollar index retreated by 0.35% to 90.97, just below its 100-day moving average (DMA) at 91.04. The 100-DMA markets the rough mid-point of the past fortnights range between 90.50 and 91.50. that leads me to believe that markets are still deciding where the US Dollar is going despite the choppy range trading of the past two weeks. A break of either 90.50 or 91.50 will therefore indicate the greenback's next directional move.

As expected, the Euro, Sterling and Australian and New Zealand Dollars all rallied overnight, as Asian currencies put mixed performance. The Thai Baht retreated, USD/THB rising to 27.934 today as Covid-19 woes persist. USD/INR also reversed course, rising to 74.20, although it recovered much of its intraday losses. USD/INR has climbed to 74.270 in Asia, and with early hopes dashed that Covid-19 cases are slowing, we may have seen the best of the Rupee recovery for now.

Oil rallies on reopening and lower US Dollar

Oil markets ignored the US ISM data, preferring to concentrate on the reopening announcements from around New York and boosted by the fall of the US Dollar. Oil may also have been encouraged by signals from the US government that a US/Iran deal was no nearer than previously. 

Brent crude rose 1.50% to $67.65 a barrel, easing slightly to $67.45 a barrel in Asia. WTI rose 1.60% to $64.65 a barrel before easing slightly to $64.35 in Asia.

Despite shorter-term profit-taking pushing oil slightly lower in Asia, both Brent and WTI have now moved to near the top end of their one-month ranges once again. Given that the fall in the US Dollar overnight appears to have been the primary driver of the rally, much will depend on its direction once Europe and New York markets arrive this afternoon. 

Brent crude has resistance at $68.00 and $69.00 a barrel, with support at $66.00 and $64.50 a barrel. WTI has resistance at $65.00 and $65.50 a barrel, with support at $63.00 and $60.50 a barrel. A Brent crude close above $69.00 implies a near-term test of $70.00 followed by $72.00 a barrel.

Gold retesting major resistance

A significant beneficiary of the overnight fall in US yields, and a retreat by the US Dollar, was gold. Gold rose by 1.25% to $1794.00 after testing resistance around $1800.00 an ounce. In Asia, profit-taking has seen gold retreat modestly to $1789.00 an ounce.

Given gold's direct correlation to the direction of US 10-year yields and the US Dollar, demonstrated in spades overnight, further gains are entirely reliant on weakness in the other two. Should that scenario play out today, entirely possible if US Factory Orders disappoint, gold will mount a vigorous assault on resistance at $1800.00 an ounce, home to its 100-DMA.

A rally through $1800.00 opens further gains to $1825.00 an ounce. Meanwhile, support remains distant at $1870.00 after the overnight moved, followed by the Fibonacci support at $1860.00 an ounce. The $1760.00 to $1800.00 support/resistance has boxed gold in beautifully over the past three weeks. Any daily close, above or below, should be respected from a technical perspective.