Equities dip, dollar up on China nerves

The weekend G-7 meeting may also be darkening the mood, agreeing to enact a phasing out of Russian oil imports. The important words here are “phasing out,” which was enough to get Japan on board. The language was loose enough to have had little impact on oil prices today, which have fallen today as China slowdown nerves outweigh short-term supply shocks. The G-7 measures are more forward-looking. Still, Asia has a very high dependency on imported energy and the G-7 announcement is certainly not positive for Asia’s growth going forward, implying higher for longer energy prices.

Friday’s US Non-Farm Payrolls rose by 428,000 jobs, not far from median forecasts. The headline number was not enough to juice up the Fed tightening narrative but was definitely not going to allow any hopeful rate hike doves their day in the sun either. The result was a gentle continuation pattern. US equities eased, the US dollar ground higher, and US yields also ground higher. The hump in the US yield curve is now gone with the 2-year to 30-year now back to positive and the 10-year yield now comfortably above 3.0% at 3.15%.

So, net-net, we are still in high inflation tightening Fed, China slowdown, higher energy, and food price environment, with the added uncertainty surrounding Russia’s war on Ukraine, which Vladimir Putin may make official today at Moscow’s May 9^th parade. Little surprise, therefore, that Asian markets don’t really want to play today.

Shortly we will receive the China April Trade data. It comes as new home sales plunged by 33.0% over last week’s holiday period, and bankers seized a New York property of a defaulting China property developer according to Bloomberg. China’s private developer leverage saga has been knocked off the headlines but remains a slow-moving trainwreck that is also being exacerbated by the covid-zero policy. Forecasts for the Trade Balance are for a slight gain over March to USD 50.65 billion. There are downside risks in the import component which could flatter the headline, even as exports remain robust. Lower exports or imports or both will likely give the bears more fresh salmon for dinner.

Later today, Indonesia releases its April inflation and trade data. Expectations are for an increase of 0.80% MoM, and 2.60% YoY, while the trade data should be robust, thanks to economic reopening and resource demand. A much higher inflation rate will increase the pressure on Bank Indonesia to hasten its reluctant hiking timetable. BI is struggling to cap USD/IDR at 14,500.00 at the moment and a high inflation print will see another wave of selling hit the rupiah.

Later this week, we have China and India CPI where the risks lie in opposite directions. A lower CPI than 1.50% YoY will increase the pressure on the government and PBOC to hit their stimulus buttons. That could be a short-term boon for mainland equities, but actions speak louder than words, as even China is finding out. After an unscheduled rate hike by the Reserve Bank of India, if India’s inflation moves higher than 7.0% on Friday, the pressure will be on for the RBI to act again. That may give some strength to the rupee but is unlikely to be bullish for local equities.

We can expect some volatility in Philippine markets today as well with the presidential election taking place. It does look at this stage that this marvellous country will shake my faith in democracy and elect a Marcos as President, and a Duterte as Vice-President. Yes, you read those names correctly and yes, politics in Asia as a family business is sadly alive and well. I’m not sure how international investors will view that outcome, but I suspect the BSP’s work is about to get harder in the months ahead. For me, if a Marcos is back in power, I’m looking to get long luxury handbag and shoe producers, who preferably accept cash and cryptos for payment. Let the people eat cake.

In the DM space, US CPI data on Wednesday is the week’s highlight. Like the Non-Farm Payrolls, the outcome is binary. A much higher CPI print equals more Fed tightening equals a higher US dollar and lower equities. A much lower CPI equals a relief rally and a correction lower for the US dollar. CPI prints across the Western Europe heavyweights and the UK throughout the week could also ratchet tightening pressure on the ECB and BOE, although I think this will be in vain as the needs of a war-time economy rightly take precedence. That likely means euro and sterling are going to finish the week lower than where they started today.