China weighs on Asia today

Asia is off to a mixed start this week with individual asset classes struggling to find a central unifying theme. Equity markets are mixed after China announced a pilot programme of property taxes in some cities, and Covid-19 cases rose on the mainland. Cases remain extremely low, but ominously, are quite spread geographically. There is plenty of per cent internationally to see how delta plays out in Covid zero countries and it will be interesting to see how this develops in China. It is a potential dark cloud if it results in widespread social restrictions.

Evergrande, having made an offshore coupon payment in a nick of time on Friday, faces another in four days’ time on 29 October. Its Chairman has said work has restarted on property projects in China, and it is going big on its EV division in the decade ahead. Where all that money is coming from, I know not, and markets seem to be sharing the same thoughts.

Powell says it’s time to taper

The US dollar made a comeback on Friday thanks to Fed Chairman Powell’s remarks that it was time to taper, but not hike. He also said inflationary pressures would persist well into next year but remained transitory. Clearly, central bankers’ definition of transitory inflation is a bit different to many of us, with two years seemingly transitory. Still, I agree that raising interest rates is not the answer now when the drivers of the inflationary surge are beyond the reach of domestic monetary policy. Although Mr Powell was stating the obvious on rate hikes, the limited boost in the US dollar likely reflects those remarks. However, US 10-years are holding comfortably above 1.60% and with next week’s FOMC meeting locked and loaded to announce the Fed taper, I suspect we are nearing the bottom of the US dollar retracement.

Before that though, we have a raft of earnings announcements this week, kicking off with HSBC this afternoon. Faceplant, I mean Facebook, is later today and after Snap got an Apple caught in its throat, markets will have an itchy trigger finger over the sell button if the social network says the same. Additionally, this week, it is a FAANG-sters paradise, heavyweights such as Alphabet, Microsoft and Apple also announcing, along with some international financial heavyweights and real economy stalwarts like Caterpillar, General Motors, and Ford. It will be big-tech, however, that decides whether the US earnings season party continues, before the FOMC reasserts its dominance next week.

Over the weekend, the Saudi Arabian Energy Minister said that OPEC+ would remain cautious over output. Oil had a banner Friday as it was and has moved higher in Asia. Ominously, natural gas futures have risen over 4.0% this morning, and China coal futures are also 4.0% higher, perhaps testing the limits of the ability of China’s central government to talk prices down. A resumption of the energy rally will be a bullish factor for the US dollar. In the US, Nancy Pelosi said the Democrat’s spending package was 90% done. Market impact is limited for now, as, like me, the street seems to want to see the details before it is reconciled through the Senate. The debt ceiling has gone quiet as well but will undoubtedly come back to the front pages soon enough with December not too far away.

The data calendar in Asia is quiet today but we do have both regionally, and in the northern hemisphere, despite the dominance of US earnings in investors’ minds. South Korean Q3 Adv. GDP tomorrow morning will be slightly old news, but Singapore’s Manufacturing Output and Employment later in the week should confirm its export recovery remains intact, even as the domestic economy lags. Today’s CPI will be a non-event as the MAS tweaked monetary policy higher recently already.

Japan’s Retail Sales, Australian Q3 CPI and China’s Sep Industrial Profits will grab the headlines on Wednesday, with the Australian CPI potentially increasing the noise around the RBA’s ultra-dove stance. Sub-par China Industrial Profits will, similarly, increase the noise around the China slowdown and probably weigh on all of Asia. Thursday’s Bank of Japan policy decisions will be a non-event ahead of the election on 31 October.  Heading North, German IFO is released this afternoon and in the US, Consumer Confidence tomorrow, Durable Goods Wednesday, GDP Thursday, and Personal Income/Expenditure Friday round out a busy week for them. Europe’s highlight will be the ECB policy meeting on Thursday with an outside chance that they could lay the ground for tapering, although I’m not holding out much hope from the European Central Bank of Japan.

We may well have another week ahead of us of higher equities and a weaker US dollar as earnings have their week in the sun. Next week, and the week after, it’s business time once again with the US FOMC, and China’s Central Committee meeting the week after. Evergrande may throw a spanner in the works as well if they don’t pay by Thursday and I wouldn’t rule out some “shared prosperity” announcements before the China meeting.

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