At all costs

Bloomberg is running a very interesting top story this morning stating that China’s Vice Premier Han Zheng has ordered the country’s top state-owned energy firms to secure energy supplies, meaning anything that comes out the ground and can be combusted, “at all costs.” It is probably a strong signal about how concerned China is regarding keeping the industry going, and more importantly, the winter that is just around the corner. I’m fairly sure it still isn’t enough for “that” phone call to be made from Beijing to Canberra. And if Chinese steel and aluminium smelters are going to be shutting down for extended periods, you can be sure that will reverberate through global supply chains. Don’t expect global PPI data to show “peak stagflation” anytime soon.

None of that is going to be good news for Europe either, who will now be in a gloves-off bidding war with Asia for spot energy supplies. Russia, whom Europe have foolishly tied their energy security to, have hinted that Gazprom might be able to pump more gas if only Nord Stream 2 approval could be hurried up a little. Subtle. Vladimir Putin and Scott Morrison make strange bedfellows. But as they cast their glances towards Europe and China, I am sure they are rubbing their hands with glee and going to bed with smiles on their faces.

Asia spot natural gas prices are now trading at near the equivalent of USD 180.00 a barrel of Brent crude, meaning that oil’s appeal as a gas substitute for power generation is almost irresistible. Damn the torpedoes on emissions targets as well, get me coal. OPEC+ may not offer much solace either. No details have emerged from the JTTC meeting ahead of the OPEC+ Ministers meeting on Monday. Reuters is reporting that OPEC+ is only considering a one-month hike of 800,000 bpd in November, with no increase in December to offset that. So basically, a one-month NPV of the planned rises. The last time I saw compliance data from OPEC+, it was at 116%. That suggests that OPEC+ is struggling to pump enough to meet its present targets, let alone ramping up production. It then needs to be pumped, loaded on tankers, and transported. After a torrid 18 months for OPEC+ producers, (does anyone remember the negative price WTI futures debacle?) the opportunity to refill government coffers may be irresistible. Whichever way you cut it; shorting oil is only for the brave with very deep pockets. I am expecting Riyadh’s hotlines to start ringing a lot more.

US equities slump over logjams in Congress

Over in the United States, a deal funding the US Government until December 3rd was passed. Kicking the can down the road didn’t save Wall Street, where equities slumped into the quarter’s end. An infrastructure bill vote happens in the House this morning Asian time. But the USD 3.5 trillion build-back better package looks to be in trouble, both from within the Democrats themselves where the “progressive wing” looks intent on progressively marching to defeat in next year’s mid-terms, and without from the Republicans. Both bills and a new debt ceiling face a Republican brick wall in the Senate. If it all looks like a mess, it is, and markets are reacting appropriately as nerves fray.

One group I hope to hold their nerve, are those central banks moving towards tapering quantitative easing, most especially the Federal Reserve. Introducing some two-way volatility into equity markets and cutting out the cancer of never-ending asset price appreciation is long overdue. About eight years overdue in fact. The cost of capital in corporate finance parlance is not zero, and the worlds’ central banks need to stop stealing the wealth creation of our children and grandchildren to keep the lights on today. If that means a taper-tantrum or two and other creative destruction, then so be it. Sadly, I know too well where the Fed, BOE and ECB’s – insert central bank here – happy place is if things start looking really wobbly, and so does the market. Don’t get too bearish on equities, property and yes, cryptos just yet.

Hong Kong is on holiday today, as is mainland China, which won’t return to the office until next Friday. That will mute liquidity in Asia and possibly explains why oil prices are not reacting to the Bloomberg story, although industrial metals are easing this morning. Asia released its first of the month dump of Jibun Bank and Markit PMIs along with Japan’s Q3 Tankan Surveys. Starting with Japan’s Tankan, the Large-Manufacturer Index beat at 18, but the Large Non-Manufacturing survey was an underwhelming 2. Ostensibly good news for manufacturing, looking under the hood, it shows that input and output prices are rising rapidly. And non-manufacturing is clearly taking a Covid-19 hit. This Tankan may be a high-water mark as those underlying pressures hollow out Q4’s outlook. Net market impact is minimal with Japan’s markets more focused on events overseas and what fiscal goodies the new Prime Minister will wheel out.

The Markit Manufacturing PMIs across Asia Pacific were a mixed bag. Australia showed remarkable resilience given the scale of its lockdowns, rising to 56.80. Taiwan and Japan eased, but remained expansionary, while South Korea rose. ASEAN was a mixed bag, with the region showing some signs of recovery, especially Indonesia where Covid-19 cases have slumped. Nevertheless, Indonesia aside, ASEAN remained in contractionary territory below 50.0 and the Asia North/South divide remains as stark as ever.

We get more PMIs from across Europe today, but the street is going to be more focused on the circus on the Hill in Washington DC, and US Personal Income and Expenditure, as well as ISM Manufacturing PMIs. Sentiment is fragile after last night’s weekly Initial Jobless Claims rose unexpectedly, raising the spectre more of recovery slowdown fears. My understanding is the number was distorted by California moving jobless claimants of the expired federal package and onto a state one. Nevertheless, it is clear that markets are in a dark mood and the US data needs to put in a good show tonight to avoid an ugly end to a torrid week for equities. A jump in personal expenditure and income may not assist anyway, as it will put tapering nerves back on edge.

A quick look into next week makes me think it will be just as frisky as this one despite China being on holiday. Apart from all the ebbs and flows of everything else I have outlined above, none of which is going away next week, it is also a US Non-Farm Payroll week. Additionally, we have three central bank policy decisions in the Asia-Pacific. India and Australia will remain on hold with their rate outlook of most interest. We also have New Zealand where the RBNZ postponed a planned rate hike due to the Covid-19 outbreak. Auckland still remains fenced in but it will be interesting to see if the RBNZ thinks the country’s containment measures have achieved enough success for it to follow Norway and hike.

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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