Easing into Monday Morning

Financial markets finished Friday on a civilised note, after what was a very choppy week. US data saw equity markets move modestly back into their cyclical rotation happy place, while currency markets finished with some US dollar short-covering despite US 30-year yields falling slightly. Precious metals held steady while oil rose on Gulf of Mexico hurricane concerns. In the case of the latter, a glance at the US Hurricane Centre website this morning suggests that will be a storm in a teacup.

China keeps commodities under pressure

Commodities remain under some pressure as China continues to make noises about speculative excesses driving up prices. They have raised Dahlian futures margins and fiddled with VAT on imported ores, but in the bigger picture, raw materials remain not far from their recent highs. Given that China is a large net importer of ores, there is a limit to what they will be able to achieve in the medium to long term. However, in the short-term, their rumblings seem to be having the desired effect.

President Biden has trimmed 500 billion or so dollars of his infrastructure package to try and make it more palatable for Republicans in the hope of gaining bi-partisan support. The trouble is that Democrats and Republicans seem to have very different ideas about what infrastructure actually is. The Democrats’ definition includes societal programmes and roads and bridges, while the Republicans are sticking with tarmac. It looks increasingly likely the Democrats will have to try and go it alone on this programme, and if it stalls in Congress, that may end up doing China’s commodity price work for them. Who says US/Sino relations were at an all-time low?

The circus we know as the virtual currency space continues to snatch headlines. Elon Musk tweeted he remained a believer in cryptos, a handy attitude to have when you are long USD1.5 billion of them around these levels, with pesky individuals known as shareholders to answer to. However, China once again showed who was the big fish, signalling a clampdown on crypto-miners. While I am not sure we’ve seen the end of “Peak-Musk,” we did have another roller-coaster weekend of trading, with bitcoin slumping from US38,000.00 to US31,000.00 before recovering to US35,600.00 as of this morning. Once again, I reiterate, governmental/regulatory risk now represents an existential threat to the virtual currency space.  A clean break ofUS30,000.00 should see another capitulation trade and I can’t see that loss of digital wealth not spilling over into other asset classes, at least temporarily.

On the subject of equities, the Nasdaq spent last week gyrating each side of its 100-day moving average (DMA). Notably, it tested its rising support line from March 2020 a number of times but failed to reclaim it. It needs to reclaim 13,600.00 for bulls to breath more deeply once again, and preferably break above 14,100.00. The risks are still tilted towards a retest of support around 12,900.00 and then its 200-DMA at 12,600.00. That same Mar 2020 support line draws ever closer to the S&P 500 as well, today around 4080.00. The S&P 500 tested and held rising support twice last week, but failure of 4080.00 will be an ominous development. The Dow Jones, riding high on cyclical rotation, remains well clear of its similar support line.

The data calendar is thin in Asia today. Singapore releases its Inflation and Core Inflation Rates for April today, expected to rise to 2.0% and 0.90% respectively YoY. Taiwan should release an impressive data-set of Unemployment, Industrial Production and Retail Sales, which will be flattered by YoY effects. We also receive Thailand Manufacturing, South Korean Consumer Sentiment plus their Manufacturing BSI tomorrow with China Industrial Profits Thursday and Malaysian Trade on Friday. The data should both reinforce the recovery theory and also that prices are rising. However, in the case of Taiwan, Singapore and Malaysia, the street will remain fixated on their escalating Covid-19 situations with Malaysia bringing in national work-from-home restrictions over the weekend as cases continue to spike. That will dampen enthusiasm for ASEAN assets until an improvement is seen.

We have three central bank decisions in the region this week. The Bank of Indonesia on Tuesday and the Reserve Bank of New Zealand on Wednesday. Rates will remain unchanged with Indonesia having no room to move. With USD/IDR stuck above 14,000.00, it would be a huge surprise for BI to push its luck and cut again. Indonesia has dodged the Covid-19 bullets assailing much of Asia at the moment. The return of the country from the Eid holidays could change that balance and will likely also stay BI’s hand in case more fuel is needed later. The Bank of Korea will leave its base rate unchanged as well, but I consider it the most likely of the three to start talking about a taper later in the year as domestic demand is recovering now as well. My base case though is they will not want to see the Won shoot higher and will hold steady.

Much of Europe is on holiday today, which will mute activity in the Asian afternoon session. German GSP and IFO Business Sentiment tomorrow will be of passing interest, if only to reinforce that Europe’s recovery is picking up momentum as those vaccines roll out.  US Durable Goods and est. Q2 GDP on Thursday will give markets an insight into the trajectory of the US recovery and inflationary pressures. That story needs some fresh momentum after a series of data prints that haven’t reinforced the narrative. On that basis, next week’s Non-Farm Payrolls could well be the most important of the year, coming before a live FOMC meeting in June and after the severe disappointment of the May data.

Overall, the week’s data calendar doesn’t have a lot for financial markets to sink their teeth into. Next week, that will all change. That probably means we have another week of headless chicken financial markets ahead of us. Hang on for the intra-day volatility and sentiment swings. The Biden infrastructure/remake America package is starting to find some headlines again and may well be what drives direction this week. Cryptos may need Elon Musk to jump out of phone boxes in a Superman costume and tweet this week.

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