Vaccine hopes steady the ship

A semblance of business as usual has reappeared this morning after another chaotic session in New York on Friday. US FDA approval of the one-shot Johnson and Johnson Covid-19 vaccine over the weekend has seen the global recovery trade reappear with a vengeance this morning. Equities, energy and commodities have jumped higher, as have the cyclical Commonwealth currencies. Even precious metals have found some friends today, while Asian regional currencies have moved higher as well.

With markets freshly vaccinated with the latest buy everything potion, they were able to shrug off a very mixed bag of China and pan-Asia manufacturing PMI's this morning. China released official manufacturing and services PMI's yesterday, which disappointed. The manufacturing PMI releases across the rest of Asia told a similar underperformance story with South Korea's Balance of Trade showing surging imports and lower exports. 

Much of the blame can be laid at the heels of the Lunar New Year break in February and rising commodity prices. On that basis, financial markets have given a pass mark to the data's seasonal factors, meaning fall-out has swamped in vaccine news. Financial markets may not be as sympathetic next month if that trend is repeated. However, a month is a decade these days.

Australia delivered a mixed data dump this morning, with ANZ Job Advertisements rising strongly, along with home lending. Manufacturing PMI retreated but remained well in expansionary territory, with inventories flat after calculation methodology changes. The overall picture for the Lucky Country is that it remains lucky, and its recovery continues.

The week ahead, being the first of the month is a packed one from a data release point of view. The Reserve Bank of Australia and Bank Negara Malaysia have rate decisions this week. Both should remain unchanged but continue to uber-dovish in their respective statements, staying on message with their central bank brethren. 

China's annual People's Political Consultative Conference and National People's Congress occur on Thursday and Friday. I expect an explicit GDP target to be dropped again, emphasising self-reliance (notably in semi-conductors), domestic consumption, and green energy. Various Chinese officials are mumbling about rear earth elements this morning. With the Western world having outsourced rare earth refining to China because it is too polluting, in one of the dumbest nimby-ism strategic moves ever, expect comments in this direction to have more impact than the late week congress' themselves.

Europe, the United Kingdom and the United States all release PMI's this week, starting with manufacturing today. The picture should be one of resilience in manufacturing, while services suffer due to Covid-19 interruptions. The US also releases Factory Orders, ADP Employment and Jobless Claims, all of which could outperform as California's January lockdowns ended. The week culminates in the US Non-Farm Payroll data, with the street currently forecasting a gain of 140,000 jobs. Depending on the ADP data, that will likely change, probably to the topside. 

Any or all of the US data could stoke the inflation fear trade again, and I note that the US House of Representatives passed the Biden $1.90 trillion stimulus package on Saturday. It now moves to a much more challenging reading in the Senate, although the minimum wage hike's dropping should ease its passage before the March 14th deadline expiry of the previous stimulus measures. 

Stimulus noise has been blissfully quiet of late, and I'd frankly got sick of writing about it every day. That noise will amp this week as the bill hits the Senate. With a market suddenly nervous about inflation, $1.9 trillion sounds inflationary to me, so don't bet on the bills progress this week not having an impact. 

The usual plethora of Federal Reserve Governors are speaking this week and will have their work cut out to stay on the dovish message. The headless chickens have been quiet today, roosting in the comforting coop of the J&J vaccine. Any of the US data points, the stimulus package, Fed governors or just itchy trigger fingers could let the inflation fox in. Don't bet on the buy everything trade's return today being a metaphor for the rest of the week.

Equities race higher on vaccines and stimulus

Friday saw another chaotic day on Wall Street, with the Nasdaq finishing higher while the S&P 500 and Dow Jones continued falling. It is all about the J&J vaccine re-energising the global recovery trade today in Asia, though, with regional markets rallying strongly.

South Korea and Taiwan are closed today, but the Nikkei 225 has leapt by 2.10%. China’s Shanghai Composite has risen 0.50%, with the CSI 300 climbing by 1.10%. The Hang Seng is 1.10% higher ahead of expected changes in its composition to be announced later today.

Singapore has rallied by 0.90%, with Kuala Lumpur flat, and Jakarta 0.70% higher. Australia's ASX 200 has jumped 1.40%, and the All Ordinaries have risen by 1.0% as commodity prices jump in Asia today.

Although the week has started on a positive note, the recovery is far less vaccine powered then we have seen in times past. Europe will reluctantly follow suit, but the heavy data and event risk calendar, the US stimulus bill all provide plenty of fodder for the inflation vigilantes to reappear. Today's rally looks like a mechanical reaction to the J&J news, but markets have not shaken off the trauma and doubts of last week yet.

Pro-cyclical currencies rebound in Asia

Rebounding commodity prices and vaccine optimism have lifted pro-cyclical and Asian currencies this morning. The dollar index rose 0.83% to 90.83 on Friday, but a quiet day on the majors has seen it edge lower to 90.80 in Asia.

Far more activity is being seen on the Australian and New Zealand Dollars today, which endured a torrid session on Friday. The Australian Dollar has risen 0.60% to 0.7750, and the New Zealand Dollar is ignoring the Auckland lockdown, increasing 0.58% to 0.7274 this morning. Both have fallen over 3.0% in the previous sessions, so it would be far too soon to say their downward corrections are over in a week packed with event risk. Key support for AUD/USD is 0.7700, and for NZD/USD, it is 0.7200. Failure signals more losses ahead.

The Canadian Dollar remains in trouble as well, with USD/CAD at 1.2705 this morning, a stone's throw away from its resistance line at 1.2725, which extends back to its March 2020 highs. A rise through 1.2725 targets more USD/CAD gains to its 100-day moving average (DMA) at 1.2885 initially.

USD/JPY's choppy one-month rally is back on track today, with the pair rising 0.35% to 106.55 on Friday. Although unchanged today, USD/JPY should now target 108.00 in the coming days. GBP/USD has fallen back into its multi-month channel and could retreat as far as 1.3750 this week ahead of the UK budget. EUR/USD fell to 1.2075 on Friday, and its critical pivot-point remains 1.2000, with a failure opening more profound losses. 

In Asia, the PBOC set the USD/CNY fix slightly higher at 6.4754, but Asian currencies have rallied across the board on vaccine recovery hopes. The Yuan, Baht, Singapore Dollar and Philippines Peso are all around 0.20% higher today, ignoring weaker PMI data released earlier. As long as USD/CNY remains confined in a 6.4000/6.5000 range, regional Asian currencies are likely to continue weathering the storms seen elsewhere.

Oil recoups some losses

On Friday, oil prices fell to earth, reflecting the general market retreat that swept asset classes as the week ended. Brent crude fell 3.90% to $64.40 a barrel, and WTI fell 3.05% to $61.95 a barrel. In Asia today, the J&J news has lifted recovery sentiment in the commodity and energy space, raising prices. Brent crude rose by 1.50% to $65.35 barrel, and WTI is climbing by 1.40% to $62.40.

The rapid rebound reflects the tight physical market, and the backwardation fo the prompt and longer-dated futures curves. Asian buyers have eagerly sought the dip in prices today, with the OPEC+ Joint Technical Committee meeting on Thursday and Friday looming as oil's key event for the week. At this stage, I expect a slight reduction in production cut targets to assuage the Russians and Iraqi's, but OPEC+ is likely to remain content to kept Brent prices around $65.00 a barrel.

That should ensure that oil prices remain supported on any dips this week, whatever the noise is emanating from other financial asset classes. Brent crude has support at $64.40 and $62.50 a barrel, with resistance at $67.50 a barrel. WTI has support at $61.00 and $58.75 a barrel, with resistance at $63.80 a barrel.

Gold has broken strategic support

Friday's market rout saw gold prices collapse by 2.05% to $1734.00 an ounce, with the yellow metal trading as low as $1720.00 an ounce intra-day. Gold has now broken its strategic support at its 50.00% Fibonacci at $1760.00 an ounce.

The vaccine-driven risk rally has lifted prices today, gold rising 0.85% to $1749.00 an ounce, but it remains below the critical $1760.00 pivot point. Gold remains acutely vulnerable to further deeper losses and needs to record a daily close above $1760.00 today to alleviate those fears.

Otherwise, this appears to be a rally to sell into, which initially targets the overnight low at $1720.00, followed by the 61.80% March to August Fibonacci at $1680.00 an ounce. Failure heralds’ further losses to the $1600.00 region.