Buy (almost) everything is back

Stock markets rise, US dollar dips

In a flashback to the future, US markets fully returned to work overnight and partied like it was 2020. Stock markets powered higher; the US dollar fell at the expense of risk-correlated currencies, US yields eased slightly, and industrial metals rose. Gold and cryptos both had positive days with only oil suffering, which we will discuss later.

There seems to have been a delayed reaction to Friday’s impressive Non-Farm Payrolls. The whole buy everything process being given another sugar rush by the US ISM Non-Manufacturing PMI blowing forecasts out of the water. Markit Services PMI had outperformed as it rose to 60.40, but the ISM data stole the show. Non-Manufacturing PMI for March rose to 63.70 versus 59.0 expected, as the US reaps the Covid-19 jabs in arms, stimulus cheques peace dividend faster than expected.

That was enough for the FOMO massive to click the buy buttons as fast as they could until their mouses blew up. Inflation never got a word in, but why let reality get in the way of a good story? It probably should have when the sub-indexes are looked at more closely. ISM Non-Manufacturing Prices rocketed to 74.0, Non-Manufacturing New Orders printed at 67.2 versus 53.0 expected. Non-Manufacturing Employment rose to 57.2, well above the 54.0 anticipated.

That all looks potentially inflationary to me, although maybe markets will say the rise in US yields has “priced it in” in the spirit of keeping the narrative going. The most surprising thing to me from overnight was that US bond yields fell slightly. I will not argue with the US Covid-19 peace dividend, but the price action in currency and equity markets last week was very much wax on, wax off. I will wait for another session or two to see if the FONO-gnomes have a valid point and the world has changed, but the buy-everything trade could yet bite the hand that feeds it.

On a side-note, the Wall Street Journal reports that someone called the US Senate’s nonpartisan parliamentarian has ruled that the Senate Democrats can, once again, use the reconciliation process to move the Biden infrastructure package through the Senate by piece. This is important because it circumvents the 60-vote requirement and the filibuster. The Democrats used reconciliation to pass the last stimulus package, and my understanding is that reconciliation is only customarily granted once per year. So, the Biden USD2.30 trillion New Deal will now proceed forward. The process will be complex, but it just got a lot less complex. Did someone mention inflation?

Asia has had several data releases today. It is increasingly clear to me that those countries that have got a grip on Covid-19, whether by elimination and border closures, shots in arms or as I sit here in Jakarta, by luck, appear to be accelerating away in the recovery stakes. Japan’s Household Spending MoM rose 2.40%, Singapore’s Markit PMI printed at a still-expansionary 53.50, while Australia’ ANZ Job Advertisements for March rose by 7.40%. That number is all the more impressive, given that the MoM number for February rose by 8.80%.

The Australian data will not be enough to knock the Reserve Bank of Australia off its lower for longer stride at 12:30 SGT; rates will remain unchanged at 0.10%. Markets will be poring over the details, though, and every word of the statement, for signs that the RBA is wavering in its intent, such has been the pace of the Lucky Country recovery. With risk-seeking sentiment lifting the Australasians overnight, the Australian dollar and Australian Commonwealth Bond yields could spike higher if the RBA is not as dovish as doves can be today.

China’s Caixin Services PMI for March has also outperformed, rising to 54.3, well above the 52.7 expected. That is a welcome boost to the China story, where the pace of increases on the manufacturing side has been slowing down after the frenzy of 2020. Asian stock markets have refused to buy into the overnight US exuberance today, though. Although the PMI number is bullish for mainland stock markets, US index futures are lower. That, along with ongoing concerns about government clampdowns and Covid-19 in Yunnan Province, appear to be dampening the animal spirits of mainland investors.

Turning to oil, the OPEC+ decision to start raising production from May has been unfortunately timed. Covid-19 in Europe and India has raised consumption fears. The US and Iran are also holding indirect talks over the Iran nuclear deal that the US withdrew from under the previous administration. Perversely, fears that the two sides might find some common ground is weighing on oil prices. An increasing amount of Iranian crude is finding its way to international markets, a significant reason the oil rally has run out of steam. Expect another leg down in oil prices at the first hint of progress.

Finally, and somewhat ignored by markets and the world, although it shouldn’t be, we turn to the Ukraine. Russian and Belorussian armed forces are massing on Ukraine’s Eastern border, spurring fears that more “peacekeepers” may soon be on the ground. That will expose yet another strategic European Union and German strategic misstep, placing Europe’s energy security in the hands of an unreliable totalitarian state to the east (think Nord-Stream 2). The EU could buy all the gas it needs from the US, Qatar or any number of other suppliers. The EU has already done the same with rare earth elements. Those abundant supplies in Norway deemed too “messy” to refine in Europe and left in the ground, and thus sub-contracted out to China. You couldn’t make this up.

Boots on the ground in Ukraine will see oil and gas prices, something the EU could do without right now. But master tactician Putin knows he has the Eurozone right where he wants them thanks to the above. Like the former Yugoslavia, it will be left to the US to clean up the mess. With the Eurozone already wilting under Covid-19, thanks to the same Eurocrats responsible for the mess outlined in the previous paragraph, it is hard to construct a case for a “value trade” European recovery play at the moment. Stay long the Biden/Boris, short the Macron/Merkel basis trade.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.

Jeffrey Halley

Jeffrey Halley

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