Asia Session: 4 Wheel Drives Only: Whipsaw Canyon Ahead

Call it a tug-of-war, tail-chasing or FOMO of galactic proportions, financial markets continued to defy reality and confound last night. Impressively they made a mockery of all the author’s outlooks yesterday, with the US Dollar, equities, energy and precious metals all rising in overnight trading. Apart from being impressively wrong on everything, I am now even less clear on the direction of the market than previously. Previous experience suggests, though, that when markets behave in this manner, the dangers of whipsaw price action for shorter-term traders increases exponentially.

Depending on who you read, or talked to, the overnight session was dominated by resurgent hope of a post-lockdown economic recovery or heightened risk-aversion. If we could chart headless chicken volatility now, I am sure it would be heading for record highs, implying a strong breakout was imminent, but with no real insight of the direction. One thing we can all accept though is that the peak-virus trade remains robust but seems content to await short-term market dips to re-infect markets, as opposed to chasing them directly higher.

Perhaps the biggest concern I have about the longevity of the peak-virus FOMO trade lies in the charts of the S&P 500. It has traced out a double top on the daily chart at 2950.00, its 61.8% Fibonacci retracement from the lows of the sell-off in March. A daily close below recent support at 2800 implies that a downward retracement is in play from a technical perspective. That will potentially take the wind out of the sails of the peak-virus trade across multiple asset classes.

China’s Industrial Production and Retail Sales data passed mostly without incident this morning. Industrial Production outperformed, rising 3.90%. However, Retail Sales disappointed, falling by 7.50% against an expected fall of 7.0%. Equities gave ground initially but have recaptured those losses with the China data leaving the street in a nil-all draw situation. Neither providing a strong recovery nor slowdown picture either way.

Indonesia’s Balance of Trade for April has held up remarkably well this morning at $-0.35 billion but flatters to deceive when one looks at the components. Exports for April fell by a much higher 7.02%, while Imports collapsed, falling by a massive 18.58%. That may be enough to bring the recent bullish runs in the Indonesian Rupiah and the Jakarta Composite to a halt for now. The data is suggesting that South East Asia’s economy is suffering a double whammy of falling exports and slumping domestic demand. The end of Ramadan holiday will seriously skew the data for May.

Asian stock markets trade in a choppy, directionless range.

US equity markets performed strongly overnight despite another dire Initial Jobless Claims number. Claims showed an0other 3 million Americans headed to the unemployment queues last week, somewhat worse than expected, but a slight improvement on the week before. Markets seized on the latter, ignoring the former and sent Wall Street indices higher, sharply reversing an initial move lower. The S&P 500 climbed 1.15%, the NASDAQ rose 0.91%, and the Dowe Jones jumped 1.62% despite a dire outlook from Delta Airlines.

Asia could not replicate the same bullishness, sinking initially after putting more weight on the disappointing China retail Sales data. That sell-off has quickly been reversed, despite the New York Governor announcing the state lockdown will be extended into mid-June unless specific criteria are met. It almost certainly putting Governor Cuomo on a collision course with President Trump.

A directionless session has seen Asian markets rise mostly into the green. The Nikkei 225 has climbed 0.40%, with the Kospi up 0.20%. The Shanghai Composite is down 0.20%, and the CSI is lower by 0.40% post the China data. The Straits Times has risen 0.20% with Kuala Lumpur climbing 0.50%. Jakarta lags after its unimpressive trade data; the Jakarta Composite is down 1.10%. Meanwhile, Australia has rallied with the ASX 200 up 0.90%.

The mixed bag of results, and a lack of directional momentum, suggests that Asia will end the week as directionless as it started.

The US Dollar remains content to range trade.

The greenback had a directionless session overnight, with the dollar index finishing almost unchanged at 100.33. The Dollar ignored another nightmare Initial Jobless Claims number and now, seems to be evenly balanced between the risk-on and risk-off camps.

In Asia, the greenback has drifted higher against both major and regional currencies, although it lacks the vigour to suggest renewed bullish momentum is upon us. Both the Australian and New Zealand Dollar’s continuing to give ground though after a tough week. The AUD/USD has fallen 0.20% to 0.6455, and the NZD/USD has declined 0.25% to 0.5995. The USD/CNH is unchanged at 7.1160.

Overall, currency markets appear to be waiting to see how events play out elsewhere, before setting up their stall.

Oil defies expectations to perform strongly overnight.

Oil continues to surprise and confound the author, reversing the previous day’s falls to climb sharply in overnight trading. Oil was boosted by the International Energy Agency forecasting lower oil stockpiles in H2 2020. That has some logic as economies around the world reopen on a national basis, if not an international basis. Airlines, for example, will not recover anytime soon. Much like equities, the peak-virus bulls in energy markets appear only to have taken a vacation, not left the country and will seize on any recovery hopes, however tenuous to add to longs.

I do note though, that with the June WTI expiry imminent, the skew is towards the upside, suggesting that unlike last month, there are still quite a few short positions to be rolled. However, I am not expecting the fireworks of the previous month to be repeated. Most of those shorts should be moved before Tuesday. The skew in the rolls may explain the outperformance of WTI overnight and support the contract in the short term.

Brent crude rose 6.60% overnight to $31.15 a barrel, climbing an additional 1.45% today, to $31.70 a barrel. Brent crude has resistance just above at $32.10 a barrel, and a daily close above this level opens up further technical gains towards $36.00 a barrel. Support lies at $28.00 a barrel.

WTI rose impressively by 7.75% overnight to $28.00 a barrel and has advanced another 0.40% to $28.25 a barrel this morning. WTI’s next resistance is at $29.00 a barrel although the technical picture is somewhat less clear on topside targets if we have a daily close above that region tonight. A fall through $25.50 a barrel suggests the rally will be complete.

Gold moves higher on technical buying.

Gold rallied strongly overnight, climbing 0.90% to close at $1731.00 an ounce, breaking daily resistance at $1725.00 an ounce. Although a few differing theories are floating around to explain gold’s rally, even as equities outperformed and the US Dollar remained unchanged. Most likely, though, is that the break of $1725.00 triggered stop-loss buying, and the rise drew algorithmic model buyers into the fray as well.

Gold is unchanged in subdued trading in Asia, and if the momentum continues to ease into Europe, those fresh longs could be vulnerable to whipsaw price action to the downside into the week’s end; particularly if equities and energy continue to defy gravity. The critical resistance level remains at $1750.00 an ounce, and until we see a daily close above that level, I remain cautious on being overly optimistic at these elevated levels.

Bitcoin continues to tease bullish investors.

The Bitcoin halving has passed without incident and theoretically, should be supportive of the electronic currency going forward, although miner’s electricity bills will almost certainly track higher. Bitcoin attempted and failed to test 10,000 versus the Dollar yesterday, its third failure there this month.

A more positive risk environment amongst other asset classes has seen Bitcoin fall by 3.40% to 9460.00 today as risk-averse trades are reduced. A break of the 10,000-mark tough, should flush new buyers out although I would be hesitant to get overly upbeat until that happens.

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