The dot plot thickens

FOMC day finally arrives with markets already being buffeted by a variety of inputs. Although I expect the FOMC to not give too much away on the tapering front, the best we can expect I believe is a signal that they will make a firm decision on whether to start at the November meeting, we could in for a surprise on the latest dot plot. The dot plot, which charts FOMC members timelines for rate hikes or cuts could see more members moving hiking expectations into 2022. We may not get a taper tantrum lite from tapering comments, but we could from a more hawkish dot plot. I’ve long given up hope that US bond yields will react materially, but we could see a further extension to the US Dollar rally and equities and commodities probably won’t have a good day at the office.

It is a busy day for central banks anyway with the Bank of Japan announcing its latest policy decision this morning. Like Indonesia yesterday, I expect no change from the BOJ, with a new Prime Minister to be chosen next week and an election to held in the next couple of months. They may downgrade growth expectations and hint that more stimulus is ready should the economy slow, which should be supportive of Japan equities. Paraguay sneaked in a 0.50% rate hike this morning Asia time, and Brazil this evening, after the FOMC looks set to hike rates by another 1.0%. With Russia also on a hiking path, parts of the EM world could become attractive carry propositions if Mr Powell keeps the dovish hat firmly on. Turkey should be hiking, but that is a quick path to unemployment if you are the central bank governor.

Mainland China returns to work today although Hong Kong markets are on holiday in a game of tag. China has left its one and five-year Loan Prime Rates unchanged at 3.85% and 4.65% respectively as expected. Another RRR cut, probably early in Q4, is my favoured easing path for the PBOC. With one eye on the Evergrande saga, which has captured the worlds attention, the PBOC has injected a chunky liquidity injection today of CNY 120 billion via the 7 and 14-day repos. Whether that is enough to soothe frayed nerves in China remains to be seen.

What has soothed nerves is Reuters reporting that Evergrande’s Hengda Real Estate unit will make coupon payments on onshore bonds that was due tomorrow. That saw an immediate jump in the risk-correlated Australian and New Zealand Dollars, and some buying coming into early Asian equity markets. However, the Evergrande story will keep on giving with the Financial Times reporting yesterday that Evergrande issued wealth management products sold to Chinese retail investors were used to plug financial holes in various subsidiaries. Concerns also swirl around its stake in a regional Chinese bank and whether it has been borrowing from itself effectively. The coupon payment story is likely only a temporary reprieve with no signals from the Chinese government over what steps, if any, it will take to assist an orderly wind down or restructuring.

US markets are contending with their own challenges in addition to the FOMC. The House of Representatives passed a vote to extend the US debt ceiling until after next year’s mid-term elections and will vote on a full bill today. It will likely be dead on arrival in the US Senate though, with Mitch McConnell as much as saying so, forcing the process into reconciliation to pass. The tiresome gamesmanship over the debt ceiling from both sides should be another reason for the Fed to stay on the cautious side of things this evening.

Natural gas prices continue to make headlines with European gas prices having climbed by over 400%. Most of the noise is around the 10-20% of gas that producers keep for the spot market and here it seems Asia is winning the bidding war. Gazprom is reluctant to increase export volumes to Europe above contracted amounts, meaning no spot gas. Bemusingly, signals from Russia suggest that a quick approval and certification of the new NordStream2 pipeline could result in an immediate increase. All Europe and Asia, to a lesser extent, can do, is hope for a mild winter at this stage. Europe is paying the price for its naivety in tying energy security to Russia in the hope that it would be a reliable partner. That’s like me turning structurally bullish on cryptocurrencies and starting to call them an investable versus tradeable asset class. In the meantime, I think I’ll go and look at used cars with genuine low miles and three previous lady doctor owners.

For today, Evergrande has knocked the FOMC meeting into second place in the attention of Asian investors. I expect regional markets to be buffeted by headlines emerging from that situation and the price action after the coupon payment news suggests dip buyers hungrily await in everything if even tenuous positive news arrives.

China equities bashed on return to work

Wall Street had a very noisy and choppy session overnight, buffeted by an impending FOMC, Evergrande, slowing growth prospects, Covid-19, the US debt ceiling, and the future of the Democrat’s $3.5 trillion spending bill; chose your crisis. When the dust settled, a few day traders were probably licking wounds, but the main indexes closed not too far from where they finished the day before. The S&P 500 closed just 0.08% lower, the Nasdaq rose 0.22% in a tech-safety play, and the Dow Jones edged 0.14% lower. US futures are almost unchanged in Asia, erring to the heavy side.

The return of Mainland China markets hasn’t been a happy one. Despite a CNY 100 bio liquidity injection from the PBOC, and news that a local Evergrande unit will make a local bond coupon payment tomorrow, equity markets have headed south. Evergrande is due to also make an offshore coupon payment tomorrow and there has been no word on whether this will happen, and that could be keeping local equities subdued. The Shanghai Composite has fallen by 1.90% today as Evergrande contagion fears take centre stage. The CSI 300 is 1.10% lower while Hong Kong markets are closed for a public holiday.

The negative day for China has spilled over to regional markets. The Nikkei 225 is 0.50% lower after the BOJ left policy unchanged. After two days of holidays, South Korea remains closed, but Taipei is playing catchup after a return from holidays, the TAIEX slumping by 2.20%. Singapore is 0.60% lower while Kuala Lumpur is down 0.40% while Jakarta is bucking the trend, helped by rebounding commodity and energy prices, rising 0.90%.

Rebounds in iron ore and copper, along with surging energy prices has lifted Australian markets by mid-session, after a slow start. The Evergrande local unit coupon payment news has also lifted sentiment, although Australian markets, seizing on any snippet of good news could be getting ahead of themselves, as no news has emerged on whether an offshore coupon, also due tomorrow, will be paid. Nevertheless, Australian markets are now solidly in the green, the ASX 200 jumping higher by 0.70%, and the All Ordinaries rallying 0.90%.

Given the neutral finish by Wall Street, and the negative tone pervading Asia, and with the FOMC to come later today, European stocks are likely to adopt a cautious stance this afternoon, remaining vulnerable to negative headline emanating from China. The increasing noise surrounding the gas price rally is also likely to dampen spirits in today’s session.

Currency markets sharply unchanged

Currency markets are steadfastly refusing to get drawn into the noise surrounding the US debt ceiling and the ongoing Evergrande saga, remaining laser-focused on tonight’s FOMC meeting. The dollar index closed barely changed at 93.20 overnight, having probed the downside intraday. Some modest strength in Asia has seen the dollar index creep higher to 93.27.

That has left the major currencies drifting, content to range trade ahead of the FOMC. USD/JPY has drifted 20 points higher to 109.50 after the BOJ left policy unchanged but downgraded its export outlook, but otherwise remains confined between 109.00 and 110.00. EUR/USD and GBP/USD have edged slightly lower from their New York closes to 1.1720 and 1.3650. USD/CAD continues to consolidate its recent gains, hovering at 1.2795 with a commodity rebound offset by political nerves and the FOMC outcome.

AUD/USD and NZD/USD remain anchored near the bottom of their recent ranges at 0.7240 and 0.7010, with the Melbourne earthquake this morning having little to no impact. Both antipodeans remain vulnerable to further drops in risk sentiment. Of the two, NZD/USD looks the most vulnerable. A loss of 0.6980 signalling a potential unwind of the RBNZ inspired rally and could see NZD/USD fall to near 0.6800 if the global fear mood darkens.

Asian currencies also look to be on FOMC watch after USD/CNY trading resumed today leaving USD/CNY opened higher today at 6.4755, only to edge lower to 4.4740 in narrow trading. That is still somewhat higher than todays PBOC fixing at 6.4693, suggesting markets are nervous about Evergrande-driven currency weakness. However, the stability of both the onshore and offshore Yuan’s today overall, has dampened any nerves in Asia FX, leaving USD/ASEAN barely changed.

Oil rallies on API Inventories

Oil prices rose overnight in line with the general rebound in commodities seen over the past 24 hours. The return of greater China has seen oil prices continue to rise in Asia today. Oil prices were boosted overnight by a dramatic fall in US API Crude Inventories by 6.108 million barrels. But the continuing rise in gas prices is also a supportive factor that will limit losses going forward. Additionally, Reuters reported overnight that OPEC+ compliance had risen to 116% in August and that the grouping was struggling to pump enough crude to meet demand.

Brent crude rose by 0.60% to $74.70 overnight, continuing 0.55% higher in Asia to $75.10 a barrel. WTI rose by 0.40% to $70.85 and has climbed another 0.60% higher to $71.25 a barrel in Asian trading.

Notably, WTI held support at its 50 and 100-day moving average (DMA) support zone between $69.25 and $69.50 a barrel overnight, a positive technical development. Another large fall by official US Crude Inventories this evening could see WTI test resistance at $73.00 and $74.00 a barrel.

Brent crude has support near its overnight lows at $73.30 a barrel, followed by its 50 and 100-DMAs which have converged at $72.00 a barrel. A rally through resistance at $76.00 sets up Brent crude for further gains targeting $78.00 a barrel.

Given the variety of supportive factors in the energy space, notably sky high natural gas prices, which increase oil’s appeal as a substitute, and robust physical demand, dips in prices right now are likely to be short-lived.

Gold continues to find haven bids

Gold prices rose once again overnight as investors continued to hedge a variety of potential market risks this week including Evergrande contagion concerns, the FOMC, the US debt ceiling and the US spending bill. Gold climbed 0.57% higher to $1774.50, edging up to $1776.65 an ounce in Asia.

Notably, the intra-day rally in New York overnight though, failed ahead of formidable technical resistance at $1780.00 an ounce. That now becomes an even more important pivot level that could trigger renewed algorithmic buying and see gold retest $1810.00 an ounce if overcome. Gold has support at $1767.00 and then the double bottom near $1740.00 an ounce.

Despite gold’s return from the dead, thanks mostly to Evergrande fears, I remain sceptical about the longevity of the rally. A hawkish FOMC dot plot release tonight, or any signs that China is moving to resolve the Evergrande saga will likely see gold’s rally this week reversed in its entirety.