The overnight price action on Wall Street was very much a re-run of the day before. The momentum in the global recovery trade remains undiminished, with equities carving out fresh gains globally and the rotation out of US dollar continuing apace. Energy prices stalled on OPEC+ concerns but did not retreat.
The US ADP Employment outperformed—if one could call it that—with a fall of 2.76 million jobs versus an expected loss of 9 million jobs. The April number was also revised lower. US PMIs also posted above expectation improvements. The data confirmed a trend seen this week, ex Germany and France, of improving economic conditions around the world, albeit from a low base.
US Initial Jobless Claims are like to post another 1.8 million Americans heading to the jobless queue today. Ghoulishly, that number too, will be an improvement on the week before. The ADP (NASDAQ:ADP) data hints that tomorrows US Nonfarm Payrolls data will be better than the expected fall of 8 million jobs. Itself, unbelievably, a considerable improvement on last month’s 20.5 million jobs contraction.
Despite the divergence from reality by global equity markets, that has so many watchers of the financial markets shaking their heads with disbelief—the author included—the price action and momentum must be respected. Indeed, the upcoming employment numbers in the US are now “known unknowns,” and may perversely, add fuel to the fire should they outperform. I also note in self-reflection, that with so many market watchers questioning the veracity of the bounce in equity markets since mid-March, many investors may remain uninvested overall as they sit and watch in disbelief.
That all points to more disbelief rallies ahead as capital redeploys to trade-centric and emerging markets, equities and energy, fuelled by a desire to believe the worst of COVID-19 is behind us. The world is determined to reopen in some shape or form, with international airline “corridors’ filling the pages of the news now. Indeed, from the author’s perspective, only large-scale secondary outbreaks of COVID-19 can derail the global recovery, buy everything rally. Watching the thousands of American’s standing cheek by jowl on a nearby bridge to watch Space X launch astronauts to the ISS on television, those doubts still remain with me.
Attention will also be on the European Central Bank later today as it announces its latest rate decision. That will be, off course, unchanged at -0.50%. More interest will be on the statement, with speculation rising that the ECB will announce it will buy increased amounts of European bonds on a monthly basis. That will almost certainly boost European stocks but may temper the pace of the euro’s recent rally against the dollar, although it won’t derail it. That comes after Germany announced a new fiscal stimulus package totalling EUR 130 billion. It would make sense in this context, that the ECB ups its bond-buying quotes. Just don’t call it monetizing debt.
Against all that optimism, Asian markets do appear to be pausing for breath today, a not unexpected outcome after three days of impressive gains. Sentiment has perhaps been tarnished by news of US threats to bar Chinese Airline passenger flights to the US if US airlines access is not reciprocated. The US administration is reportedly set to designate more Chinese media outlets as foreign missions. Meanwhile, Hong Kong has said it is prepared for US sanctions. The US-China relationship may have been just the excuse Asia needed to take a rest but won’t be enough to change the overall momentum of the global recovery rally.
ASIAN EQUITIES SHOWED A MIXED PICTURE TODAY
investors appear content to lock in profits today after an impressive rally across regional markets this week. Having led global equity markets higher since Monday, Wall Street’s positive performance has been mostly ignored in Asia today. That has left regional equites content to trade either side of flat thus far.
The Nikkei 225 has eased by 0.30%, the KOSPI is flat on the day. In China, the Shanghai Composite and CSI 300 are both 0.25% lower, with Hong Kong easing by just 0.15%. the Singapore Straits Times has fallen by 0.50% while Jakarta and KLCI have climbed 0.50% as both of their currencies continue to perform strongly after the end of Ramadan holidays. The good news continues in Australia though, with the ASX 200 up 0.40%, and the All Ordinaries climbing 0.45%.
We expect Asia/Pacific equites to continue their aimless range trading each side of unchanged, as traders book profits ahead of the ECB decision tonight, and US employment data. The global rally though, remains well and truly intact.
THE US DOLLAR’S TUMBLE CONTINUES
The momentum of the rotation out of haven US dollars and into more risk-seeking recovery positioning shows no signs of abating. Overnight the greenback continued giving ground against developed and developing market currencies. The Dollar Index falling 0.46% to 97.22.
The only notable exception was against the Japanese yen. USD/JPY held its gains at 108.70, having broken through its 100 and 200-day moving averages (DMA) at 108.30 the days before. USD/JPY remains supported by buying in yen cross positions such as AUD/JPY, CAD/JPY and NZD/JPY. USD/JPY is set to test 109.50 initially, possibly as high as 111.50.
The euro’s rally accelerated overnight, EUR/USD rising 0.60% to 1.2235. Euro’s next target is 1.1400, although the rally may lose some momentum temporarily as pre-ECB nerves set in.
The Australian dollar continued its rally versus the greenback, climbing 0.40% again overnight to 0.6930. AUD/USD traded as high as 0.6985 before fading. A test of 0.7000 and 0.7100 seems likely sooner rather than later. The strong performance by commodity currencies such as AUD and CAD appears to be undiminished for now.
Across regional Asia, local currencies have eased today against the dollar, but are maintaining most of their recent gains. The Singapore dollar is consolidating, with USD/SGD trading at 1.4000 today. Having fallen through its 100 DMA at 1.4050, USD/SGD now targets a return to 1.3800 initially, assuming the rally in developed market currencies and the CNY continues elsewhere.
The Indonesian rupiah and Malaysian ringgit continue their rallies after the extended Eid holidays. USD/IDR has fallen from 14,750 earlier this week, to 14,150 today with government COVID-19 lockdowns set to end tonight in Jakarta. USD/IDR closed below its 200-day moving average (DMA) at 14,420, a bullish technical development. USD/MYR has fallen from 4.3500 on Monday, to 4.2670 today, just above its 100-DMA at 4.2640. A close below that level opens up further MYR gains to 4.2100, its 200-DMA.
OPEC+ NERVES SPARK PROFIT-TAKING
Oil markets had a sideways session overnight as concerns about OPEC+ disagreements reversed earlier gains. Brent crude and WTI finished almost unchanged at $39.60 and $36.90 a barrel respectively.
The main source of concern appears to be Saudi and Russian impatience with Nigeria and Iraq over compliance with the production cut agreement. The agreement is due to taper at the end of June, with neither Saudi Arabia and Russia in the mood to extend the headline June cut quota unless Iraq and Nigeria comply. Additionally, Saudi Arabia, the UAE and Kuwait have indicated they will not extend their own additional cuts, totally around 1.1 million barrels, past the end of the month.
Those disagreements have tested the nerve of Asia today, with traders choosing to lock in recent profits, pushing prices lower. Brent crude has fallen by 1.60% to $39.10 a barrel, with WTI easing 2.15% to $36.50 a barrel.
Today’s falls are minor in scope though, and not an indication that OPEC+ will derail all of the good work of the past two months. The price action is corrective in nature, with oils downside limited by the power of the global recovery rally in assets markets across the globe.
GOLD’S RALLY IS IN SERIOUS DOUBT
To describe gold’s price action overnight as underwhelming would be an understatement, it was overwhelmingly bearish. As global risk sentiment has increased exponentially, gold’s haven status has diminished rapidly in the near-term. Gold fell by 1.75%, or about $30.0 an ounce, to $1698.00 an ounce.
With some much long positioning added to gold above $1725.00 over the past two months, and against a backdrop of increasing hopes of a global recovery, gold is now in danger of a meaningful fall. A daily close below $1690.00 an ounce implies further losses to the 100-DMA at $1641.00 an ounce. A fall as far as $1575.00 an ounce cannot be ruled out if the rally in risk assets continues at the pace seen so far. At those levels though, serious longer-term buyers should emerge as the long-term fundamentals for gold still look strong.