Markets 4x4: What caught our eye during Asian trade

Welcome to the inaugural edition of ‘Markets 4x4: What caught our eye during Asian trade, a post delivered daily by 4pm in Sydney detailing four macro themes from the Asian session that caught our eye.

Here’s what you need to know for Monday, October 23.

Weekend geopolitical hedges unwound

With no major escalation in the conflict between Israel and Hamas over the weekend, hedges against downside in riskier asset classes were unwound in Asian trade. Gold and crude were off smalls while US stock futures, US Treasury yields and dollar were up smalls, although none were particularly convincing when it comes to their longevity. As anyone who was involved last Monday will note, risk squeezes don’t typically last long in risk-fuelled environments such as these. Nor are gold and crude likely to remain pressured for too long in the absence of an unlikely positive resolution in the near-term to the conflict in Gaza.

Industrial metals flashing red

There’s been some rare optimism towards China’s economic trajectory thanks to last week’s GDP and monthly indicator beats, sending Citi’s China economic surprise index into positive territory for the first time since June. But that looks to be driven by the data meeting extremely low expectations rather than delivering a compelling signal that activity in the world’s second-largest economy is improving meaningfully. 

But don’t take my word for it; just have a glance at the industrial metals complex today to get the real sense as to what’s going on. Bullish iron ore and coking coal trades have been taken out the woodshed and chopped to smithereens, leading a broad push lower across most industrial commodities. Until China’s property sector woes are resolved, it’s hard to get excited about the prospects for activity, earnings or the outlook for the Chinese yuan.

US equity rally faces stern test

With four of the ‘Magnificent 7’ releasing third quarter earnings reports and the Fed’s preferred underlying inflation gauge out Friday, you get the sense this week could easily set the tone for the S&P 500 over the remainder of the year. Technically, the index looks vulnerable to further downside on the charts having broken channel support and 200-day moving average last week. With analyst expectations for earnings juiced by unproven artificial intelligence hype, any disappointment could see the index unravel given big tech remains one of the few financial assets yet to fully adjust to the starkly different interest rate environment. The near-term performance will prove crucial for US equities over the longer-term, you’d think.

No news is good news for bond market

There was so much Fed speak last week you’d be excused for thinking the committee had been expanded ten-fold. It was ridiculous watching FOMC members rush to provide as much information on anything before the start of their enforced blackout, resulting in what ended up being a muddled message for markets. But with the blackout now enforced, few major US data releases scheduled until the end of the week and no major Treasury auctions to speak off, I wonder whether the path of least resistance for yields may be lower in the near-term given stretched short positioning in futures.

Market of the day: AUD/USD

It’s going to be a big week for the AUD with Australia’s Q3 consumer price inflation report out Wednesday, surrounded either side by appearances from RBA governor Michele Bullock. Fundamentally, with concern about the global economic outlook bubbling away, interest rate differentials are one of the few positives left going for the Aussie right now.

Right now, a full 25 basis point rate hike is priced into the AUD overnight index swap curve by May with a move as soon as November deemed around 30%. But even with a full hiked factored in, market-based inflation expectations have hit the highest level since the early stages of the RBA’s tightening cycle last year, hinting traders want to see even more tightening priced in to feel confident inflationary forces are anchored.

For AUD/USD, without a hot underlying inflation figure or highly unlikely near-term improvement in the global macroeconomic backdrop, risks appear to remain biased lower right now. While RSI suggests downside is ebbing, having been rejected at downtrend resistance and 50-day MA on multiple occasions since September, the technicals suggest AUD/USD remains a sell-on-rallies play. On the topside, .6365 and .6520 are the horizontal resistance levels to watch.

-- Written by David Scutt

Follow David on Twitter @scutty