China holiday mutes Asian session

A mainland China holiday today, with Hong Kong joining them tomorrow, is muting trading activity in Asia today. On Friday, the US Non-Farm Payrolls posted a lower than expected, but still very healthy, gain of 431,000 jobs. Notably, the previous month’s total was revised higher by 95,000 jobs.

That was enough to keep the 50bps Fed hikes in May, June and July trade alive and well. Stocks edged to a positive close and the US dollar rose once again. Bond markets saw the most action though, with 2 and 5-year rates sharply higher while yields fell in the 30-year tenor. The US yield curve now has a humped inversion from the 2’s to 10-years and the 2’s to 30-years is almost flat.

The noise of an impending recession, the Fed behind the inflation curve, the Fed will overtighten, will increase from here. However, the economic data just isn’t supporting that thesis at the moment. Pricing and supply chain issues aside, something the entire world is dealing with, the US economy continues to fire on all cylinders of its big-block hemi. That is likely one reason that equities keep defying gravity along with a fair amount of TINA (there is no alternative) Until those cracks start appearing, the FOMO gnomes of the equity market will keep doing what they’re doing, buying the dip.

Some good news out of China this weekend, which could be mildly supportive for Wall Street later today, is that China appears to be loosening its audit restrictions, reducing the immediate threat of a mass delisting of US-listed Chinese companies. Many of those are listed in Hong Kong, which should also find reasons to cheer as a result.

On the negative side, Shanghai is now in a full lockdown as the government tried to get on top of the latest Covid-19 outbreak. It is sending resources to test all 26 million residents. China’s covid vulnerability is a known unknown, and its evolution could yet impact Asian markets if it materially threatens growth this year. On the plus side, it may give some relief to commodity prices. Additionally, Evergrande has had 36 illegally constructed buildings confiscated by the Hainan government. China’s property sector leverage woes have not gone away, they’ve just been knocked off the front page by other events. A covid crisis in China will deepen the woes of that sector and give the government less wiggle room for an orderly wind down.

Orban wins big in Hungary’s election

Although the world’s weekend press has been dominated by alleged atrocities on Ukrainian citizens by retreating Russian troops, nothing market-moving has emerged from the conflict this weekend. Negotiations between the two sides resume online again today, and once again, we can expect another “peace in our time” rally at the vaguest hint of good news. Perhaps more problematically for the European Union, was Hungarian Prime Minister Orban’s landslide election victory over the weekend. Mr Orban is well known for his bromance with the Kremlin and has been a thorn in the side of Brussels for a number of years. The Hungarian victory adds a large dollop of uncertainty to EU unity regarding Russia at a critical juncture. Internal conflicts between members will be another headwind for Eurozone asset markets.

The week’s data calendar will be dominated by Services PMIs from China on Wednesday, and Europe and the US tomorrow. China’s Covid restrictions give downside risk to their data, and for obvious reasons, European releases as well. Germany’s Trade Balance, Services PMI and Industrial Orders will be more closely watched than usual for signs of the Ukraine conflict further impacting Europe’s powerhouse. Weak prints will be another reason not to be enthusiastic about Eurozone asset markets this week.

The US Markit Services PMIs should hold steady, while ISM Non-Manufacturing PMI should climb slightly from last month. It will be interesting to see if higher oil prices are impacting consumer sentiment. Weak numbers will potentially take some heat out of the 50bps hike mafia, while stronger numbers will make the noise louder. Additionally, we have another plethora of Federal Reserve talking heads speaking this week. The first dribs and drabs of the US earnings season start this week as well. It presents a key risk to equity sentiment this time around. Not because of the actual results, which should be good, but because of the danger of material mark-downs in forward guidance.

In the Asia-Pacific, the other main event this week will be the Reserve Bank of Australia policy decision tomorrow. The RBA will stick to its guns and leave rates unchanged at 0.10%. It will be what the RBA says, and not what it does that matters. Most especially, will the RBA finally shift its forward guidance from ultra-dovish. If it does, we can expect the Australian dollar to rally sharply, although it probably won’t be a great day for local equities. Inflation isn’t going away anytime soon, and it’s still hard to go past Australia as a hedge for commodity-based inflation in the bigger picture. As a Kiwi, it is hard for me to say that, but sometimes you just have to take it on the chin.

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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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