Buying the dip

Markets calm ahead of US nonfarm payrolls

Lots of noise, but little substance probably describes the last 24 hours in global markets. US equities moved sideways overnight, the US dollar was steady versus major currencies, US yields edged a little higher, while oil, a consistent outperformer, received a Libyan and Kazakhstan boost.

The US data dump overnight held no real surprises. ISM Non-Manufacturing PMI fell, as did Non-Manufacturing New Orders, Employment, Activity and Prices indexes. Like the soggy UK and European PMIs earlier, all of this can be laid at the door of omicron’s arrival. Notably, US Factory Order and Weekly Jobless Claims held steady, hinting that despite the omicron hit to services, underlying strength continues in the economy.

None of the data was enough to materially move the needle, especially when we have US Non-Farm Payrolls this evening. With a median forecast of around 400,000 jobs, we are likely to need a number lower than 250k, or higher than 550k, to drive a Fed risk-on, or risk-off, move to finish the week.

US equity index futures have put in a strong performance this morning, and it appears that the lack of new news is finally flushing out the buy-the-dip gnomes. That has been reflected by higher equity markets in Asia as well, especially those of Japan and Australia, which track Wall Street like a wide-eyed puppy these days. Buying the dip has been a wonderful strategy over the past 21 months and I’m not about to diss it now. Central banks are still qualitatively easing, and the cost of capital from them is still far too close to zero, and with omicron a minor storm in a test-tube in the markets’ minds, the recovery could easily extend into the end of the week and potentially for much of January.

Japan’s Household Spending and Tokyo CPI also showed signs of an omicron discount today. That hasn’t impacted Tokyo markets or the yen though. Notably, Japan, Australia (on a state basis), and the Philippines are all looking at bringing back virus restrictions to a greater or lesser degree. China also imposed testing restrictions on those trying to leave Shenzhen, which is adjacent to Hong Kong. Indonesia has tightened border measures to 10 days quarantine to keep the bug out, while Jakarta has raised alert levels. All this points to an Asian market that is nervously waiting for omicron and explains their reluctance to buy fully into the post-omicron rally sweeping US markets these last few weeks.

Next week’s data calendar in Asia is fairly thin still. China and India release inflation data with India being of more interest, given its risks to the upside. The Bank of Korea announces its next policy rate decision. I am expecting rates to remain on hold at 1.0% with an upside bias. That allows them to keep an eye on omicron and the economy while signalling their overall hawkish bias. Signalling a hawkish bias is important as USD/KRW has risen above 1200.00, a previous BoK redline. We are likely to see more stories like this in Asian currencies this year as the Federal Reserve gets busy with monetary policy normalisation.

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