A bright start for Asia

Following a US holiday on Friday, Asia has shrugged off the Covid-19 clouds that dominated the weekend press and is basking in a positive start to the week. Asian equity markets have made a strong start, with the US Dollar easing lower across the board.

Financial markets have long shown a herd immunity to the Covid-19 pandemic, although the headlines across the weekend gave no solace to the real world. Covid-19 continues to wreak havoc across the US sunbelt and Latin America, while a disturbing trend of localised lockdown has emerged internationally, stretching from Australia to Spain and onto Great Britain. However, only Australian markets appear to reflect those concerns this morning.

The data calendar this week is a much quieter one, after last week's blockbuster. In Asia, the highlights will be tomorrow's Australian and Malaysian rate decisions. The Reserve Bank of Australia (RBA) will undoubtedly stay unchanged at 0.25% with no mention of negative interest rates. What they may express though, is concerns about the recent rally in the Australian Dollar. That may be enough to induce a short-term correction lower. Bank Negara Malaysia (BNM) will almost certainly cut 25 basis points to 1.75%. There is a decent chance though that they may cut 50 points to 1.50%, given recent inflation data plunging into negative territory. The recovery of the Ringgit in the past two-months may embolden their hand as well.

Elsewhere, the US ISM Non-Manufacturing PMI is released this evening. The expected recovery inactivity should be equity supportive as the US returns from holidays. Euro-zone negotiations continue this week over the size, scope and details of the regional Covid-19 recovery package. Again, if a compromise agreement is hammered out in a very European way, that should provide a boost to European equities and notably, the Euro itself. 

Hong Kong concerns are fading as fast as they began, as the new China imposed security laws allow money to talk without the annoying interference of protestors. This story still has more to run in a geopolitical context. Canada suspended its extradition law to the SAR over the weekend, and the US Congress passed its Chinese officials censure bill. President Trump has not signed it, but that does not mean some sort of retaliatory measures is not on the way. They most certainly are. The scale of those measures will dictate whether geopolitics will have more to say on global financial markets. 

With a relatively second-tier week of data ahead, the immunity of the peak-virus herd is likely to dominate proceedings. That suggests that equities, commodities, energy and Asian emerging market currencies will be notable beneficiaries. With the market in "forward-looking" mode again, only a dramatic scaling-up of US-based Covid-19 lockdowns looks like to scuttle proceedings, given that markets are completely ignoring them elsewhere. 

Asian equity markets are off to a strong start

Asian stock markets have leapt higher this morning, along with US Index Futures, as the no new news is good news trade resumes. The Bank of Japan increasing its targeted 5 and 10-year JGB buying targets proves yet again that global central banks have got investor's backs. That has ensured the Nikkei 225 is off to a positive start, rising 1.55% today. 

The Kospi is up by 0.80%, boosted by a jump in LG Electronics. Over in China, the financial sector and real estate stocks are leading the way higher yet again, in a repeat of Friday's price action. The Shanghai Composite and CSI 300 have risen by 2.0%

US equity futures have joined in the fun, with the retail herd jumping onto the early-week upward momentum, probably having come in from their Sunday BBQ's. The S&P mini and Nasdaq futures have risen 0.50%.

Across Asia, the story is much the same. The Hang Seng has jumped 2.0% with its Mainland counterparts. The Straits Times is up 0.80% with Kuala Lumpur up 1.05%. The only blot is Australia. Covid-19 is weighing on sentiment after New South Wales announced it would close its border with Victoria, and new cases continued to rise in Melbourne. 

With some clear upward momentum to equities as the wee starts, only an ugly headline bomb could ruin the party. That sentiment is likely to continue through Asia today and into Europe and the US, with no economic data of note that could upset the applecart.

US Dollar eases in Asia

With a risk-on mood coursing through the veins in Asia, the US Dollar has given ground against both major regional currencies this morning. Notable gainers are the Euro, and the trade-sensitive Australian and New Zealand Dollars, all higher by 0.30% to 1.1280, 0.6960 and 0.6550 respectively.

Offshore China Yuan (CNH) has also strengthened, USD/CNH falling 120 points to 6.570. The Thani Baht, Malaysian Ringgit and Singapore Dollar have all traced out 0.10% gains. The USD/JPY has risen slightly to 107.70 as traders unwind Yen haven positioning, although resistance at 108.00 looks insurmountable still in the near-term.

The news is not all positive though, with the Indonesian Rupiah falling 1.40% against the Dollar, mirroring a similar fall on Friday. The chief culprit is the deal between the Ministry of Finance and the Bank of Indonesia (BI). Last week the Finance Minister announced that the BI had agreed to some "burden-sharing." It agreed to buy from the Finance Ministry directly, some of the newly issued tranches of bonds to fund Indonesia's Covid-19 recovery. Without saying debt monetisation, that is precisely what it is. That has spooked investors with Indonesia running an extremely delicate balancing act at this stage.

The IDR had staged a miracle rally from mid-March, USD/IDR falling from 16,800 to 13.950 a month ago, helped along by some very serious central bank verbal and physical intervention. Since then though USD/IDR has crept back to 14,200 last week, as concerns mounted over Indonesia's Covid-19 progress, and its state finances. The IDR sell-off accelerated last week. USD/IDR has risen to 14,563 this morning, climbing back through its 200day moving average (DMA) at 14,428. USD/IDR looks poised to increase further to 14,800 initially, near to its 100-DMA at 14,900. We fully expect, though, that the BI will intervene aggressively to slowdown any prolonged sell-off in the Rupiah.

Indonesia's currency pressure highlights how complicated the recovery task of highly indebted emerging markets countries will be. Especially those with sizeable offshore dollar borrowings and a weak current account surplus. Or an outright deficit. Should the global downturn be prolonged, interest rates will have to remain higher than optimal, and countries such as Indonesia will become more reliant on the sentiment of international investors than would otherwise be optimal.

The Rupiah aside though, currency markets in the bigger picture have a summer doldrums look about them still, despite the sentiment driving moves this morning. Currency markets have been reluctant to keep following the FOMO gnomes of Wall Street into new highs territory, and their stubbornness looks set to continue.

Oil rises slightly in Asia

With the US closed on Friday, Asian markets had precious little direction to start the week. Like currency markets, oil traders are reluctant to jump all in on the recovery momentum displayed by equity markets today. Oil prices seem evenly balanced between opposing forces at the moment. On the one hand, the procession of economic data released last week is emphasising that a global recovery is underway for now. On the other, having rallied so far on so little since mid-March, nagging doubts over the recovery’s longevity are capping gains. 

Chief amongst those, is the explosion of Covid-19 across the US sunbelt, aa well as an increase in new localised lockdowns across countries that have ostensibly reopened. Fears that this could derail consumption growth is tempering exuberance of the most ardent bulls at the moment.

Brent crude and WTI have edged higher in Asia as the US Dollar weakens. Brent crude is higher by 0.40% to $42.90 a barrel. WTI is 0.35% higher to $40.40 a barrel. The critical resistance level for Brent crude remains $44.00 a barrel, and for WTI, it is $42.00 a barrel. Until a daily close is seen above either, we remain in a range-trading mode, with prices moving on the whims of intra-day sentiment.

Gold continues consolidating in a directionless market

Gold is unchanged at $1773.00 an ounce for the second day in a row, with volumes and ranges muted by the US holiday on Friday. The yellow metal is almost exactly mid-range of the $1750.00 to $1790.00 an ounce four-week range. 

The return of the US this afternoon will inspire more volatility, with bullish traders likely to be disappointed in the near-term. Should the peak-virus sentiment sweeping Asia mysteriously today continue into the US trading session - and I see no really for it to not - some selling pressure will emerge in gold at these levels. The expected fall, though, should be mollified by a weaker US Dollar.

The net result is that gold prices are likely to continue bouncing around aimlessly within the greater four-week range. Gold is lacking the momentum to attempt a material assault on long-term resistance at $1800.00 an ounce. Buyers appear content, for now, to bide their time and pick up long positions on dips to the 1760.00 an ounce region, rather than chase the market higher.