Global Recovery Rally Continues Unevenly In Asia

The peak virus global recovery rally continued unchallenged on US equities overnight, with the S&P 500 now officially fully recovered from its March dose of COVID-19 infection. The rotation out of US dollars and into the wider world continued uninterrupted, with the Australasian currencies’ notable beneficiaries. Oil’s rally stalled overnight, but the price moves look corrective, not structural. That is hardly surprising given the volume of speculative long positioning added to the futures market in the past month. US long-dated Treasury yields unwound Friday’s sell-off, with yields falling again ahead of the FOMC starting today.

The FOMC itself should contain no surprises. Overnight the Federal Reserve announced an expansion to its Main Street Lending Program, allowing more small and medium businesses to access support. That should be screaming to one and all that the Fed will have no surprises when it announces its latest rate decision tomorrow night. The Fed Funds rate will be unchanged at 0.25%, and we can expect the Fed to remain in uber-dove mode. It will also reiterate that policy will stay that way until its unemployment objectives, around 4.0%, is achieved.

That should mean that there will be no surprises to derail the buy everything post-COVID-19 rally that is still in full swing. The rally in equities has not been built on a v-shaped recovery by the world economy. Those of us living in the real world know this is not so. Instead, it is built on the almost limitless amounts of unconventional easing by the world’s central banks in its myriad forms. And, it appears in the Fed’s case especially, a determination to backstop any losses by investors, no matter how stupid or greedy they are.

Across the developed world, we will soon know if our national leaders were geniuses, lucky, naive, greedy, short-sighted or just plain dumb. Economies all over the globe are reopening before COVID-19 has been controlled. Only large secondary outbreaks of COVID-19 though, or an escalation of primary ones that result in more national shutdowns, can, at this stage, seemingly derail rail the peak-virus juggernaut. Which side of that equation, those national leaders and their nation’s economies are, shall be apparent soon enough.

That said, the level of disbelief and lack of engagement in the global asset rally many investors, the author included, suggests that there is still plenty of capital on the side-lines with itchy trigger fingers. Given that circumstance, and assuming the world dodges a second COVID-19 bullet, the peak-virus trade may have plenty of legs left in it yet. At this stage you are either long or square, but certainly not short unless you have impressively deep pockets.

Asian equities are mostly in the green, with some notable exceptions.

Wall Street was firing on all cylinders of its big-block V-8 engine overnight; emissions be damned. A clearly supportive Fed, and no headline surprises, meant it was peak-virus business as usual, as the S&P 500 notably, erased all it’s March losses. The S&P 500 rose 1,21%, the NASDAQ rose 1.13%, and the Dow Jones pushed 1.71% higher.

Today in Asia, the picture is mostly a positive one. Australian stock markets are on fire, led by the large banks and resource stocks. The rally was also partially supported by investors returning after a partial holiday yesterday. The ASX 200 is 2.60% higher, and the All Ordinaries are 2.40% higher. No wonder it’s called the lucky country.

The Nikkei 225 and Kospi are both in the red today, as North Korea announces it is cutting off all communications with the South, and the aftermarket S&P 500 futures ease on profit-taking. The Nikkei 225 is down 0.70%, and the Kospi has fallen 0.30%.

Elsewhere though the picture is all positive. Hong Kong has leapt by 1.50% ahead of some prominent IPO’s this week, a calmer security situation, and Cathay Pacific, Swire and Air China shares suspended pending an announcement. The obvious outcomes being a new capital raising or a buyout/merger.

Mainland China’s Shanghai Composite and CSI 300 are 0.50% higher. Singapore’s Straits Times is 1.10% higher, with Jakarta up 1.10% and Kuala Lumpur climbing 1.65%.

The US Dollar sell-off is seeing that capital deployed across the globe, including regional Asia. With no surprises expected from the Federal Reserve tomorrow night, the equity rally should continue peacefully on into European markets this afternoon.

Profit-taking is seen in Asia after the US Dollar sell-off continued overnight.

The US Dollar endured its 9th consecutive daily fall overnight. The dollar index of developed countries fell 0.30% to 96.65. The stars of the evening were the Australian and New Zealand Dollar, rising 0.80% to 0.7020 and 0.6560 respectively. The land’s Downunder continue to be boosted by COVID-19 successes, and their high beta to China and commodities, and therefore by default, to the global recovery. With no signs of central bank trash-talk, and the global equity rallies momentum undiminished, higher levels beckon for both.

Elsewhere amongst the majors, the USD/JPY fell by 1.10% to 108.40, as profit-taking on Yen cross positioning appeared to sweep the market. Today, North Korean tensions have seen further Yen-haven inflows, USD/JPY falling 0.30% to 108.10. Interestingly, a close at these levels will see USD/JPY close below its 100 and 200-day moving averages for the first time since April. That could presage a deeper correction to 107.00.

The US Dollar has gained modestly across most major and regional currencies in Asian trading. The price action, however, looks driven by the slight drop in the S&P 500 futures. The overall picture suggests currency markets are consolidating recent gains versus the Dollar before it’s sell-off resumes later today.

Oil sees profit-taking overnight, but price action remains constructive.

Oil markets retreated overnight, as Saudi Arabia officially announced that it, the UAE, and Kuwait’s excess production cuts would not continue as part of the new OPEC+ agreement. The extra cuts had been voluntary anyway and were not expected to have continued. But with such a large amount of speculative long position in the market, it sparked some profit-taking selling. Brent crude fell 3.50% to $40.80 a barrel, and WTI fell 3.40% to $38.25 a barrel.

Buyers have returned in Asia though, with Brent crude climbing around 0.80% to $41.20 a barrel, and WTI rising about 1.0% to $38.60 a barrel. The price action suggests that plenty of buyers in Asia are eager to snap up oil on any price dip, driven by physical demand. That further reinforces the constructive price action evident on both contracts.

Brent crude remains poised to fill in its March price gap to $45.00 a barrel, with WTI seemingly set to test $40.00 a barrel sooner rather than later. If the global recovery trade remains on track in other asset markets, it should also continue with oil as well.

US Dollar grants gold a stay of execution.

Gold continued to display its Teflon qualities overnight, as a falling US Dollar and US long-dated yields, granted gold longs another stay of execution. As the US Dollar fell, gold managed to rally impressively by 0.80% to 1698.00 an ounce.

Gold, though, could not attempt to breach resistance at 1705.00 an ounce. Indeed, it has tried and failed to do just that in Asian trading this morning. It has now retreated to $1694.00 in the morning session to lick its wounds.

Gold must break its descending trend-line resistance line at $1705.00 to give bullish traders hope, even though resistance at $1720.00 an ounce lies close behind. A failure to progress from its overnight gains, though, sets up further losses to $1670.00 and then $1645.00 an ounce, its 200-day moving average.

With the market having spent the last three months getting long gold at now unattractive higher prices, the risk remains strong, that gold will suffer a much deeper correction lower; especially as other asset markets continue to rally strongly.

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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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