“Gidday Scotty, do you happen to have any spare coal?”

2021 has been another strange year, so you wouldn’t completely dismiss a phone call like this from Beijing to Canberra. Australia probably has ready stocks available after China’s import ban last year. Still, President Xi is more likely to tell his citizens to put on extra layers of clothing this winter than make that phone call.

It’s not just China, however, with energy issues, the entire Northern hemisphere is now sweating (or is that chilling), on whether the forthcoming winter is mild or cold, because only a win for Team Mild is likely to bring relief from higher energy prices. Brent crude traded above USD 80.00 a barrel overnight, before sharply retreating as speculators booked profits, helped along by a surprise rise in US API Crude Inventories of 4.127 million barrels. Like MacArthur, it shall return.

Apart from energy, there were plenty of other doom and gloom scenarios giving equity markets are reason to pummel stocks overnight. The US debt ceiling will need to be passed line by line by the Democrats alone through the Senate. The USD 3.5 trillion spending bill is in trouble as well, not just from Republicans, but also by the progressive wing of the Democrats. They clearly haven’t heard of the terms mid-term elections and unemployment. President Biden has though, and he is cancelling a trip to knock heads.

We had hawkish comments from Fed President Bullard last night and even Fed Chairman Powell, in congressional testimony, was less dovish than previously, suggesting that the conditions for a Fed taper were locked and loaded. Elizabeth Warren said she would vote against his reappointment as well, calling him dangerous. US data was mixed with confidence indicators and the Richmond Fed Manufacturing index retreating, while the Case-Shiller house price index continued climbing at a race that would make Space-X envious.

Stagflation, anybody?

That was all enough to send equities tumbling overnight and US 10-year yields higher to 1.55%. Although stagflation is now being mentioned ad nauseum, a concern mentioned many times by this newsletter in the past, but nobody listened, I believe we are facing a stagflation-lite and not stagflation-heavy. Growth remains expansionary, but if energy markets carry on the way they are going, growth momentum will slow even as input costs rise. There is not much monetary policy can do about that, the only cure for high prices is high prices and more winter woollies.

Markets too finally seem to be coming around to the author’s premise that some sort of taper tantrum is going to occur in Q4 as the reality of the Fed tapering finally pokes the most one-eyed equity bull. Rice tech prices, built on stratospheric growth forecasts in a rampant bull market, will come under stress as 10-year yields approach 2.0%. Which likely explains their bronze medal last night. The knock-on effects will be felt far and wide though. ASEAN currencies will suffer as the region’s monetary policy settings move out of sync with the US. You can pop Japan and Europe into that equation as well, possibly China if the energy crisis deepens. Gold will face a lot more downside pressure and it will be interesting to see how appealing cryptos become in a higher US interest rate US dollar bull market. Let’s hear it for the hedge against risk, currency debasement mantra Bueller. Bueller? Ferris Bueller? Elon Musk’s Twitter account may need to be super busy in Q4 to keep that party going.

To be clear though, I am not expecting a big-bang taper tantrum, more of a creeping reality bites one. We may have to get used to a lot more two-way volatility in equity markets as a result, which will be no bad thing. Even after a Fed taper, interest rates are going nowhere, anywhere in the world. And you can be sure if things get ugly, the world’s central banks will be there to backstop the whole mess once again. Even if equity markets fell 10 to 15%, we would still be in a bull market, so let’s keep it real.

Today Japan’s LDP selects a new prime minister. Timing is everything, and the doom and gloom noise in international markets will drown out any response locally to whoever wins. USD/JPY is, and continues to be, a US/Japan yield differential play, so any fallout on the currency will be non-existent. Only if the new prime minister says there is no reason to open the fiscal stimulus taps again will Japanese markets react negatively, as much of the recent Japanese equity rally is based on just that premise.

China has apparently asked state-backed firms to start picking up Evergrande assets. That is probably the first hint of the China solution. A state-backed asset-stripping leaving a faint core, looking like a dwarf star post-super nova. Evergrande is due to make another US dollar coupon payment today of around USD 47 million. I fully expect that not to happen, as with last week’s, with the company making full use of its 30-day grace period. It will add another cloud to a bleak landscape today.

The data calendar is quiet in Asia today with just the Bank of Thailand policy decision due later. Rates will be held at record lows of 0.50% although the finance minister has already been on the wires exhorting the bank to be “accommodative.” They already are, and Thailand isn’t Turkey. Nevertheless, with my comments above in mind, there are precisely zero reasons to be long the Baht right now. You can probably add the rupiah, dong, won and peso into that group as well.

The situation in the United Kingdom appears to be going from bad to worse as well. The British pound collapsed overnight as petrol shortages persist at service stations, thanks to the panic-inducing bank-run qualities of the British press last weekend. Britain has plenty of fuel, just no truck drivers to deliver it. A problem now affecting vast swathes of the UK economy in a post-Brexit no-visa world. Stagflation could be a real problem here in the months ahead, and if the winter is cold, a winter of discontent beckons, and unfortunately Boris isn’t Churchill. “Sell sterling Your Majesty?” “Yes Mortimer, sell.”

Looking ahead over the next 24 hours, two data points leap out to me. Firstly, official US Crude Inventories this evening. Energy markets really need a chunky rise in inventories to take the heat out of energy markets temporarily. Secondly, China’s official Manufacturing and Non-Manufacturing PMIs and the Caixin Manufacturing PMI. If they are soft once again Asia is in for a torrid end to the week, something that will probably spill into Europe and the US this time. If you think things couldn’t get murkier, China then goes on holiday for a week from Friday with Evergrande unresolved. Add in shenanigans surrounding the US debt ceiling and spending bills on Capitol Hill and there are not many reasons to suggest the investing world will be a safer place by the end of the week.

It will be interesting to see if the Tina, fomo-gnome, dip-buying army look at this as an opportunity to do what they do best.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is 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, Channel News Asia as well as in leading print publications including 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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