Hong Kong Ignored as Asia Powers Higher

The fallout from US Secretary of State Mike Pompeo’s declaration that Hong Kong was no longer autonomous from China, appears to be limited this morning. It seems mostly confined to Hong Kong and Mainland China markets. That follows another powerful overnight session by Wall Street, with the S&P 500 closing, notably, well above its 200-day moving average at 3006.00. And if nothing else, confirms the underlying momentum that still lies in favour of the global recovery trade, whether you believe in it or not.

The Hong Kong announcement capped a tumultuous night in US-China relations, with a Canadian court drawing the ire of China after saying the extradition of the Huawei CFO could continue to proceed. The pace of deterioration in US-China relations will now depend on what sanctions, if any, President Trump puts on either China or the Hong Kong SAR itself. Financial markets though, clearly believe that the post-COVID-19 reopening’s, and vaccine progress story is the bigger one, almost entirely ignoring the trade sabre-rattling between the two superpowers. There is also a sense of disbelief, that both sides would enact another trade war in the current circumstances. Looking at the two leaders involved, I’m not so sure.

President Trump himself is allegedly going to enact an executive order on Thursday, to stop Twitter fact-checking him, under the guise of a left-wing conspiracy amongst big-tech against conservative viewpoints. Apart from rolling eyes and its entertainment value, President Trump’s attempt to emulate his counterpart in Beijing is a non-story. Lawsuits along these lines have been thrown out by US courts previously, and I suspect that this executive order will be immediately challenged in court and be dead on arrival as well.

Elsewhere in the world, Japanese markets continue to be buoyed by the impending $1.1 trillion stimulus package, and the European Union is crawling ahead with its package, potentially totalling EUR 750 billion. South Korea cut rates to a record low of 0.50% this morning with its own fiscal stimulus on the way. The Reserve Bank of New Zealand this morning, also set the stage for more cuts, suggesting that a negative official cash rate (OCR), would not pose stability concerns. Taken as a whole, the monetary and fiscal landscape across the world suggests that galactic levels of easing and stimulus are still at the top of the agenda of governments and central banks around the world. In this context, it isn’t so surprising that the global recovery trade seen across financial markets has acquired such powerful momentum.

This afternoon, we see the release of pan-Europe business confidence data for April. In the context of the above, it is likely to be ignored entirely. A similar story will occur with US Initial Jobless Claims this evening, expected to show another 2.1 million Americans heading to the unemployment queue. US estimated GDP for Q2 is also released this evening, expected to show a 4.80% drop. I do note that the New York Fed GDP Nowcast remains anchored at around -31.0% in May. https://www.newyorkfed.org/research/policy/nowcast Similar models from other Fed branches tell much the same story. That implies that all is not well in Denmark, despite the hopes and wishes of the world’s financial markets. That said, although I feel the chance of a GDP disappointment is high, and retreat by asset markets will likely be brief.

Hong Kong fallout non-existent as Asian equities power higher.

After a powerful Wall Street session, Asian equities have almost entirely ignored Hong Kong concerns, including Hong Kong itself, and moved higher today. Global recovery and vaccine hope, powered by massive stimulus around the world continue to see equities defy gravity.

The S&P 500 rose 1.48% overnight, closing at 3036.15. Well above its 200-day moving average at 3006, in a positive technical development that suggests further gains to the 3200.00 in the near-term. The NASDAQ rose 0.77%, perhaps capped by Trump-tech-belligerence, and despite heavyweights such as Boeing and Chevron announcing massive job losses, the Dow Jones climbed an impressive 2.21%.

This morning, Japan and Australia are leading Asia Pacific higher. The Nikkei 225 has risen 2.05%, with the ASX 200 up 2.50% and the All Ordinaries up 2.10%. China mainland indices are also slightly higher, the Shanghai Composite is up 0.50%, and the CSI 300 by 0.15%.

Regionally, the Kospi has climbed 0.65% with the Straits Times up 0.25%. The surprise package is the Hong Kong Hang Seng, which has fallen by only 0.50% as I write. Given the magnitude of the fall last week after China’s initial security law announcement, the price action is impressive in its resilience.

We expect the global recovery trade momentum to continue for the remainder of the session, and into Europe, highlighted by the very shallow sell-off in Hong Kong today. Never let reality get in the way of a good story.

Currency markets consolidate Dollar gains. Chinese Yuan continues to weaken.

Currency markets were content to mostly consolidate gains versus the US Dollar overnight, with the session having a very much sideways look about it. The dollar index was almost unchanged at 98.95. Notably, EUR/USD rose through 1.1000 overnight, as high as 1.1030 at one stage, before retreating to close at 1.1010. The single currency continues to flirt with its 200-day moving average, today at 1.1011. A daily close above signalling further gains above 1.1100 are on the cards. The EUR boosted as the EU pushes ahead with its fiscal stimulus package, and the ECB states the German Constitutional Court ruling is of no concern to its QE programme.

Most eyes will be trained on China today as the onshore CNY continues to weaken at pace against the US Dollar. The USD/CNY climbed 0.50% to 7.1695 yesterday, with the PBOC setting today’s CNY fixing higher as well, at 7.1277. The CNY has now weakened from 7.0600 to 7.1695 throughout May. That is partly a reflection of the currencies in its fixing basket. Nagging doubts remain though that China is pushing back against the US by weakening the Yuan. Should the USD/CNY rise through 7.2000, concerns will mount that the US will accuse China of manipulating its currency and enact retaliatory measures.

Fears of trade relations between the US and China, appear to be weighing more heavily on currency markets, than other asset markets now.

Oil prices ease overnight in corrective price action.

After recent impressive rallies, oil markets took a breather overnight, with crude prices falling in what appears to corrective price action. A blowout in the US API Crude Inventories to an 8.7-million-barrel surplus, and trade threats by Washington DC, was all the cue oil markets needed to book profits and lighten long positioning.

Brent crude fell by 4.0% to $34.75 a barrel, with WTI easing by 4.50% to $32.80 a barrel. The rise in API inventories was very much unexpected and means this evening’s US EIA Crude Inventories will be monitored closely. That appears to be weighing on sentiment in Asia. Brent has fallen 2.25% to $34.00 a barrel, and WTI has dropped 3.40% to $31.70 a barrel.

Official inventories are expected to drop by 5 million barrels this evening. Fears of the data following the API trend, and threats of Hong Kong retaliation from Washington DC, will limit oil allies today. The price action, however, looks corrective still, with some culling of the bullish herd. That said, a daily close for Brent crude under $32.85 a barrel, and WTI under $30.70 a barrel, suggests that more thinning of the bullish herd will occur.

Gold’s price action remains unimpressive.

The pain of recent gold long position continued overnight, with gold falling through $1700.00 an ounce on its way to a low $1693.00 an ounce as stop losses were triggered. Trade tirades and a retreat in energy markets, saw gold regain all of those losses, but only to finish almost unchanged at $1709.00 an ounce.

The price action yesterday suggests that the soft side for gold in the near-term remains lower. Although gold has edged out a modest three-dollar gain to $1712.00 an ounce this morning, resistance remains distant at $1731.00 an ounce. The overnight low around $1693.00 an ounce is a series of recent daily lows, and capitulation of that level should see more stop-loss selling emerge and a test of $1675.00 an ounce.

Recently enacted long positions in May, look set for more pain ahead, before gold finds a medium-term bottoming price level.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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