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Asia Session: Equities Cautious As Markets Await The Fed

Published 11/03/2021, 02:22 AM
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US stocks ground higher to another record close, showing no pre-FOMC nerves as US earnings continue to impress. Avis (NASDAQ:CAR) rose 108.0% overnight, dragging Hertz (OTC:HTZZ) with it, after releasing blockbuster results. 21% of Avis’ free float is shorted and the unexpectedly impressive results appeared to have set off the mother of all short squeezes. Their CEO also used that most magic of words “EV” (I think we can call it a word these days), which also attracted the Elon Musk meme-disciples from their Reddit burrows.

Hopefully, it doesn’t end like the Squid Game crypto, but one thing is clear to me, words like digital, online, and especially EV are good for a CEO’s stock price. Bed Bath & Beyond (NASDAQ:BBBY) also came up smelling of roses and lavender overnight by mentioning “online store “at their earnings call, and for once, it wasn’t investors taking a bath, the stock rising 9.60%.

If Meme-sters are the new Team-sters, such is their effectiveness, it did have me thinking I need to use the same strategy in our forthcoming year-end reviews and salary assessments. “Dear Mel, after a heavily engaged year in the digital space where I massively increased our online presence, I am going to buy an EV. Please adjust my salary accordingly. Regards, Jeff.” I am looking forward to my 108% pay rise.

Australasian markets were still reacting to yesterday’s RBA policy decision with both AUD and NZD under pressure overnight. The RBA chose to keep its AUD 4 billion a week bond-buying program in place until February 2022, while ending its yield curve control 0.10% target for the April 2024 CGB, deeming it past its sell-by date.

That was a pragmatic decision, with Governor Lowe sticking doggedly to his benign inflation and wage growth targets and 2024 rate hike schedule. Although he did throw a bone to the crowds by saying a 2023 hike was possible. Having piled into short bond long AUD positions ahead of the decision, markets sent bond yields and the AUD lower after it, as the dovishly hawkish statement left investors in “damp squib” mode.

Similarly, the New Zealand dollar followed its big brother south despite Unemployment massively beating forecasts, falling to 3.40% this morning. Although the NZD traced small gains, the RBNZ Financial Stability Report poured water on more aggressive hikes. Highlighting risks to asset prices from higher offshore interest rates, a Delta-induced slowdown as New Zealand fully reopens and a plethora of other standard global central bank lines from their joint playbook. The Deputy Governor also said that RBNZ will only hike in 0.25% increments. The first one should be this month, by the way, followed by February.

If the words of the RBA and RBNZ are anything to go by, tonight’s FOMC policy decision could also be another dovishly hawkish affair. US yields have hit a ceiling in recent sessions, suggesting that’s what bond markets believe as well. The FOMC should announce a $15 bio per month taper to their $120 bio per month QE program. Anything less will be interpreted as dovish—buy everything and sell US dollars, anything more is likely to be sell everything and buy US dollars.

Chairman Powell could surprise the street and give a more compressed timeline for either the end of the taper and future hikes, but I can’t help feeling he’ll hedge his bets, even though he shouldn’t. Still, I continue to believe that once the initial dust settles, the reality of the Fed taper will sink into global markets, especially Asia, and we can look forward to more US dollar strength and a lot more two-way volatility in equity markets. Mr. Powell may cling to his transitory inflation raft this evening, but it is going to keep taking on water in the months ahead.

China released October Caixin Services PMI this morning, which rose to 53.8 from 53.4 in September. With the manufacturing sector struggling with the plethora of well-documented issues ailing the rest of the world, China markets will draw a small sigh of relief from today’s number. The afterglow is probably going to be short-lived though, with the government’s request that households stockpile household essentials like vegetables for the winter.

Widening COVID-19 restrictions and potential winter energy crunches appear to be weighing on sentiment and could be behind the government’s announcement yesterday. Reports that iron ore stocks have markedly increased in China as mill output and manufacturing output falls on power restrictions amongst other drivers have seen iron ore futures fall around 20% in the past week. Another headwind for Australian markets and the AUD, but also another sign that risks remain in China as well. The Communist Party Central Committee meeting, starting on the 8th, probably means China’s “national team” will be out and about to support local equity markets, but we should expect too many upside fireworks either.

Although Asia and Europe already look to be in pre-FOMC wait-and-see mode, US markets were likely to have a choppy session. ADP Employment, Markit and ISM Non-Manufacturing PMIs, Factory Orders, ISM Non-Manufacturing Activity and the EIA Crude Inventories all hit the wires pre-FOMC.

And post-FOMC, the show continues with Norges Bank and Bank of England policy decisions tomorrow, US Initial Jobless Claims and an OPEC+ meeting tomorrow. Friday sees the monthly US Non-Farm Payrolls arrive once again. The list of possible outcomes from that rogue’s gallery is already giving me a headache, but one thing we won’t be short of is volatility.

Asian equities strike a cautious note

US earnings propelled Wall Street’s main indexes to another record close overnight, with the FOMO gnomes either complacent or totally ignoring the event risk into tonight’s FOMC policy decision. The S&P 500 rose 0.37%, the NASDAQ gained 0.34%, and the Dow Jones climbed by 0.39% with Pfizer (NYSE:PFE) and Avis star performers. US futures were steady in Asia.

Japan markets were closed for a holiday today, with Wall Street’s overnight gains lifting Asia cautiously higher ex-China and South Korea. The KOSPI fell 1.15% this morning, as the Prime Minister said the government couldn’t afford another round of universal COVID-19 relief grants. Elsewhere, the picture is mixed. Singapore was 0.25% lower despite positive big bank earnings, and Kuala Lumpur was down 0.25% as lower oil prices and government tax measures weighed. Taipei rose by 0.30%, with Jakarta up 0.15%, while Bangkok was flat.

China markets were mixed despite the positive Caixin Services PMI data today. That had a higher beta to the CSI 300 which duly rose by 0.25% this morning, but the Shanghai Composite fell by 0.45%. Hong Kong tumbled by 0.90%. China markets were reacting cautiously thanks to government warnings to households to stockpile essentials, and with tightening COVID-19 restrictions in parts of the country.

Throw in two Evergrande (HK:3333) offshore payments due on the 6th, and an FOMC tonight, and there are not many reasons for Mainland investors to be excited. China’s “national team” is likely to appear on the bid if the equity retreat accelerates, however,

Down under, with the RBA still in dovish mode, the ASX 200 rose by 0.85%, with the All Ordinaries climbing by 0.80%.

We have probably seen the best of the gains to be had in Asia today already, as investors in the region adopt a cautious stance into the FOMC. US monetary policy has a very direct impact on the Asian market, especially with their plethora of dirty US dollar pegs. Similarly, European equities are likely to have a neutral open with an empty data calendar ahead of some blockbuster US releases culminating in the FOMC decision.

US dollar firms pre-FOMC

The pre-FOMC jostling continues with the US dollar rising overnight, despite US yields heading slightly lower. The dollar index rose 0.24% to 94.10, easing slightly to 94.07 in Asia. With a pile of US data to come before the FOMC later, I expect the index to trade in a choppy 93.80 to 94.20 range. A $15 bio per month Fed taper looks to be priced in now and the greenback could fall if the FOMC announces that and stubbornly clings on to their transitory inflation and 2023 hiking path. A higher monthly taper could frighten markets though and see US yields and the US dollar move sharply higher. It is very much a binary outcome tonight.

EUR/USD eased to 1.1580 in Asia and the single currency should range ahead of the FOMC, although it remains highly vulnerable to a hawkishly dovish Fed. Support is at 1.1520, failure of which signals more losses to 1.1400. Resistance remains at 1.1700. Sterling retreated again overnight, falling to 1.3610 in New York before recovering to 1.3630 in Asia. The crowded BOE hiking trade unwinding has continued and I am beginning to wonder if a 15bps hike tomorrow is no longer priced in. A dovish Bank of England can still see Sterling retest the 1.3400 region, but equally, a rate hike and a hawkish outlook could see it jump to 1.3700 and 1.3750.

USD/JPY was locked in a narrow range each side of 114.00 once again. Trading volumes were lower due to a Japanese holiday. It remains a slave to the US/Japan rate differential and as such, will not see much movement until tonight’s FOMC announcement. USD/JPY has support at 113.40 while a rise through 114.70 signals more gains above 115.00. A hawkish FOMC opens a test of 116.00.

AUD/USD and NZD/USD have been punished after a dovishly tiny bit hawkish RBA decision yesterday, and RBNZ warnings over the pace of rate hikes and reopening headwinds and asset prices. AUD/USD collapsed by 1.25% overnight to 0.7440 today, while NZD/USD retreated by 1.0% to 0.7120. A dovish FOMC will lift both currencies, but any signs of hawkishness risks both extending much deeper losses. AUD/USD has closed below support at 0.7450 and risks testing 0.7300 if the FOMC blinks on inflation. Similarly, NZD/USD closed below support at 0.7130 overnight and risks a larger fall to 0.7000.

The PBOC set a slightly weaker yuan setting today at the USD/CNY fixing, and combined with pre-FOMC nerves, the KRW, THB, MYR and TWD fell 0.20% against the US dollar. If US monetary policy is set to diverge from regional Asian policy, my base case, we are likely to see a wave of selling across regional currencies. That is unless the region’s central banks decide to start spending foreign reserves to defend the currencies. With high energy prices and the Northern hemisphere winter to come, that may well be the preferred option initially, rather than in imported inflationary shock further down the road. The FOMC tonight should help answer these questions.

Oil faces challenges this week

Oil prices continued to ease in international markets as a stronger US dollar, and a wait-and-see attitude ahead of tomorrows OPEC+ meeting, act as a short-term headwind. Additionally, US API Crude Inventories unexpectedly jumped by 3.60 million barrels overnight giving traders another reason to lighten long positioning.

Brent crude fell by 0.50% to $84.10 overnight, easing another 0.30% to $83.80 a barrel in Asia. WTI fell by 0.95% to $83.00 overnight, retreating another 0.30% to $82.70 in Asia. While OPEC+ will be front and center for oil markets tomorrow, tonight’s official US crude inventories should not be forgotten.

A rise in headline inventories of around 2 million barrels is expected with distillates and gasoline stocks expected to fall once again. However, the critical data point will be the crude stocks at the Cushing Hub. Much of WTI's recent narrowing of its basis with Brent is because stocks are continuing to plunge in Cushing. If Cushing inventories post another large drawdown, WTI should outperform, even if the headline number pushes Brent crude lower.

Brent crude was struggling to maintain gains above $85.00 and has further resistance at $86.00 a barrel. Support was at $82.20, and failure could see it retest $80.00. WTI looked the more constructive but was testing trendline support at $82.30 a barrel this morning, which opens further losses to $80.50. It has resistance at $84.75 and then $85.50 a barrel.

Gold retreats on a rising US dollar

Gold’s choppy range trading continued ahead of the FOMC, with the wider $1770.00 to $1810.00 range continuing to contain nicely. Once again overnight, gold showed no other interest other than moving in an inversely correlated manner to the US dollar. With the greenback rising overnight, gold fell 0.30% to $1788.00, before easing another 0.35% to $1781.60 an ounce in Asia.

The price action in Asia suggested that gold investors were concerned about a potential hawkish surprise from the FOMC tonight and if that were the case, is probably worth a $50 an ounce move lower tonight. Unless the FOMC torpedoes the US dollar and bond market by sticking to their dovish mantra and not tapering, it is hard to see gold having the momentum to recapture $1800.00 this week.

Gold fell through its one-month trendline support on Friday, which was today at $1798.00 an ounce. That was followed by resistance around $1810.00 and then $1835.00 an ounce. It had support at $1772.00, followed by $1760.00 and $1745.00 an ounce.

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