Holidays in mainland China and Hong Kong are muting activity once again in Asia, which looks content to watch this session from the sidelines. Overnight, Elon Musk stole the headlines, announcing with a swipe of his debit card, the purchase of a 9.20% stake in Twitter worth USD 2.90 billion. That was enough to light the fires in the tech space with the Nasdaq booking decent gains, with the Musk feel-good spreading to the US equity space in general. China ADRs also performed well, following the Hong Kong rally after the mainland government appeared to ease audit restrictions, sharply reducing China ADR delisting risks.
Oil rallies on calls for further sanctions
Oil markets have also rallied overnight, as calls grow in Europe for wider sanctions from the Eurozone on Russia after evidence of civilian atrocities in Northern Ukraine. The French President has gone further by calling for a ban on Russian oil. Of course, saying and doing are two different things. However, even the slightest chance that Europe might actually do something along those lines was enough to send oil prices 4.0% higher, rallying again in Asia. I believe there is very little chance that Europe will sanction Russian energy, as there is no immediate alternative and the effect would plunge Germany into a recession. It will have to wait for another time.
Threats of Russian energy sanctions by Europe also torpedoed the euro as well, and the re-election of Viktor Orban in Hungary, a noted Putin fan, likely added a European disunity discount to the euro. Short of a Ukraine peace deal, we may have seen the highs for the single currency for a while. Over the other side of the Atlantic, US yields and Fed hiking expectations continue to rise. The US/Europe rate differential may do to the euro what Vladimir has not.
In Asia, Japanese officials have been on the wires talking about the yen today. The usual watching currency movements closely and with concern were enough to knock USD/JPY down 20 points in early trading, but bang for the buck, the reaction they got today was poor compared to last week. Declining marginal utility. Other comments regarding potential unlimited buying by the BOJ to cap JGB yields offset any impact of currency jawboning. Japan can’t have its cake and eat it as well and once again the yield differential with the US means USD/JPY won’t be back below 120.00 anytime soon.
Japan data was mixed. Jibun Bank Services PMI for March surprised, rising to 49.4, within shouting distance of expansionary. Most of the gains can be put down to an easing of virus restrictions. Elsewhere, the picture was less rosy. Average cash earnings YoY was a measly 1.10%, no great resignation here. Household Spending YOY for February also seriously disappointed, slumping to just 1.10%, with the MoM number tumbling by -2.80%, so we can dismiss baseline effects. A falling yen and soaring energy prices in March won’t help the trend of caution in Japanese consumer confidence. It does, however, somewhat justify Japan’s monetary position.
In contrast, South Korean inflation YoY for March rose to 4.10%, well above the 3.80% expected. Philippines Inflation YOY Mar also rose to 4.0%, above guestimates. While the Philippines’ BSP will put off rate hikes as long as position, the South Korean data should set the scene for a BOK rate hike soon.
Whatever premium China equities were likely to gain after the easing of audit concerns by the government at the weekend, is likely to be eroded when China returns to work tomorrow by the Shanghai lockdown. Officials have apparently finished testing everyone in the city, a feat that has left me seriously impressed. Cases have spiked to 13,000 and the lockdown has been extended indefinitely. That is probably one factor weighing on Asian markets today, China holidays aside. Fears are increasing that China’s Covid-zero policy could lead to wider and more extended shutdowns in the face of omicron, something that will not only impact China and Asia’s growth but have knock-on effects around the world.
Today’s data highlight will be the RBA interest rate decision. It has been analysed to death down this part of the world this week. Australian markets have already priced in a lot of rate hikes from mid-year through till the end of 2023. They seem primed for the RBA policy statement to roll back some of its uber-stubborn rhetoric, but not to announce a full-scale retreat like the RBNZ. That should be bullish for the AUD and a short-term headwind for equities. With the market so lopsidedly balanced now though, the risk seems to be the RBA changes nothing to its outlook. Any sort of hike would be a massive surprise, but an RBA standing pat could see UAD stage a sharp, if temporary, move lower.
Later today, we get services PMIs from Europe and the UK for March. For obvious reasons, they will most likely not make pretty reading. That could add more pressure to the currencies, especially if the US ISM Non-Manufacturing PMI and sub-indexes show a US economy still firing on all cylinders.
Otherwise, markets will be watching for Ukraine headlines, or European sanctions headlines. If energy is left alone, both European equities and the Euro could stage a temporary recovery. We also have the Federal Reserve’s Brainard and Kashkari speaking. So there are plenty of noise generators to come for financial markets today, although I suspect when the dust settles, volatility, and not direction, will be the victor once again.
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