Sharks circle in holiday-thinned Asia

Asia is off to a nervous start today with liquidity seriously thinned by holidays in mainland China, Japan and South Korea. In fact, a heavy holiday schedule amongst the Northern Asia heavyweights will likely affect liquidity to some extent all week, potentially exacerbating market moves.

The list of circling sharks is long, starting with increasing noise from the US about the debt ceiling. Raising the debt ceiling used to be a rubber stamp exercise, but in a polarised United States, that is no longer the case. Mainland China markets are closed today but all eyes are on Evergrande, which is scheduled to make bond repayments on Thursday. Their shares are already taking a beating in Hong Kong today along with property-related companies in general. Ever-Teflon actually has a grace period of 30 days before an official default is called so this story is likely to keep on giving.

China warning sends commodities lower

Commodities are also being sold heavily this morning after China’s Premier Li over the weekend, said that China will use “market tools” to stabilise commodity prices. I am assuming that means releasing more commodities onto domestic markets from China’s strategic reserves. As a price taker and not a price maker, there is only so much China can do to impact prices in the medium term. But coming on a day where liquidity is lower because of holidays, markets are nervous about a disorderly Evergrande collapse and US yields and the dollar have risen ahead of the FOMC, there is an outsized impact.

Copper had fallen by 1.45%, aluminium futures by 1.30%, with platinum down 2.55% and palladium down by 3.35%. Silver and gold are also lower. That comes after iron ore tumbled by 20% last week. Thankfully, with mainland China away today, iron ore trading is effectively closed, but one assumes, looking at its commodities brethren, that the news wouldn’t have been good. With the highest correlation to risk sentiment and commodity prices in the region, Australia is having a bad day with the Australian dollar and Australian equity markets sharply lower.

The week features a heavy schedule of central bank policy decisions, twelve by my last count. The main act will be the Federal Reserve FOMC decision on Wednesday. We are finally seeing markets awakening to the possibility of a taper with US bond yields rising and the US dollar rallying powerfully on Friday once again. I am not expecting any announcement of a taper this meeting, however, the FOMC dot plot update will be interesting, especially if rate hike expectations are brought forward. The FOMC will likely signal that a tapering decision will be live for the November meeting.

With growth concerns increasing in Asia and other regions, a more aggressive dot-plot or tapering indication will likely spark more US dollar strength. Nobody is pricing in a taper-tantrum for Q4, but I believe there is a rising likelihood it can happen, especially if US employment jumps over the next two months. I believe it is naïve that having got the world addicted to bottomless amounts of zero per cent money and a backstop to the dumbest of investment decisions over the past decade+, that the Fed can put that genie back in the bottle with no impact.

Norway will probably become the first DM central bank to raise rates this week, pipping New Zealand to the post. Elsewhere though, I expect Japan, Indonesia, the Philippines, and Taiwan to all remain unchanged. Sweden and Switzerland will similarly hold as will Turkey, but Brazil may surprise, once again. All roads lead to the FOMC though, and their tapering talking, and dot plots should see some volatility in Asia on Thursday morning. China announces its latest one and five-year Loan Prime Rates this Wednesday. It would be a huge surprise if they cut and would spark a juicy equity rally on the mainland. The PBOC is likely to prefer a RRR cut, possibly as soon as October if economic data doesn’t improve or Evergrande folds.

Canada heads to the election booths today with the Canadian dollar getting a beating at the end of last week on softer commodities and political uncertainty. The election is too close to call. Results are likely to start coming in over the Asian session tomorrow and with liquidity holiday-reduced anyway, the USD/loonie may live up to its name.

Australian markets are under pressure from China/Evergrande fears, slumping commodity prices and the fallout from the French submarine fiasco. Already there are rumblings from Europe that the Eurozone/Australia free trade agreement talks are now dead in the water. The French, for their part, are not happy, recalling their ambassadors to the US and Australia, an unprecedented move. Australia’s Prime Minister for his part is justifying the cancellation in favour of US/UK nuke submarines by saying Australia had harboured concerns over the capabilities of the to-be-built French submarines for years. The obvious question being, if that were so, why did you agree to spend USD 40 billion buying them in the first place? Keep up the good work ScoMo.

Finally, keep an eye on New Zealand this week. It appears that the delta variant has jumped the virus fence around Auckland. Auckland is in level 4 while the rest of the country is enjoying a relatively free level 2. If cases increase outside of Auckland, it doesn’t take a genius to guess what happens next, level 4 for the rest of the country immediately. That could spark a decent sell-off in the New Zealand dollar as the RBNZ’s October hike is postponed again, and New Zealand equities are likely to take a beating.

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