ASIA STOCKS: Tech Lead Vol as AI ETFs Under Microscope in Korea
Tech heavy bourses in broader Asia are sitting on losses for the week with the KOSPI the worst performer for the week, despite a solid rebound Friday.
Japanese equities losses were capped despite bouts of global risk aversion, with investors increasingly rotating beyond AI-related stocks into defence, infrastructure and industrial names. Semiconductor equipment stocks remained volatile as investors reassessed AI valuations, although the long-term AI investment cycle continues to support earnings expectations. The weaker yen continued to underpin exporters, while expectations surrounding the Bank of Japan's July meeting remained an important macro focus. The NIKKEI is up +1.85% Friday, but holding onto weekly losses of -1.05%
The KOSPI Vol has been extreme with the leverage in the system on full display. Authorities have woken up to the impact of the 2x leveraged AI ETFs and are now talking bans, helping the KOSPI to jump +5.3% Friday, whilst holding onto weekly losses of -5.06%. Expect the volatility to continue into next week as the BOK meets on the 16th and is expected to raise rates. This will feed into further vol and weigh on KOSPI performance and could be heightened should the outlook be hawkish.
China's bourses are leading the region with the Hang Seng up +1.8% today and +4.8% for the week whilst the CSI 300 and Shanghai hold onto modest weekly gains. China’s equity and bond markets have fundamentally decoupled from global macro trends (a thematic we have noted for some time). June CPI out this week showed that authorities have successfully protected the economy against the perils of oil related global inflation.
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GOLD: Gold Reaches Oversold on 14RSI
- Gold fell today as oil prices rose and US Yields jumped following news that the United States launched targeted military strikes against Iran. The sudden breakdown of a fragile regional ceasefire shook confidence and risk sentiment suffered.
- Gold markets are wary of hawkish US sentiment and ahead of Wednesday's CPI, a further rise in yields was enough to send gold lower by -2% to US$4,173 and new lows for the year.
- Gold is looking like it is in a bear market having fallen over -23% from the January high.
- From a technical perspective, gold prices are somewhere not seen for some time - below the 200-day EMA - for the first time since October 2023. This is widely viewed as confirmation that the multi-year bullish momentum has stalled, flipping the intermediate trend to bearish.
- Expectations for the May US CPI are that following April's jump to +3.8%, May could see a further increase to +4.2%, adding to the hawkish outlook.
- One potential factor that may cap immediate, further declines in gold is that it is now at oversold on the 14-day relative strength index.
OIL: Crude’s Response To Middle East Hostilities Limited, Deal Highly Uncertain
Oil prices rallied early in APAC trading after news of US attacks on military sites in southern Iran in retaliation for its downing of a US helicopter. They were then supported again by reports of further explosions in southern Iran, which the US confirmed were close to the Strait of Hormuz. Also Iran targeted US bases in Kuwait, Jordan and Bahrain and warned countries in the region not to allow the US to use their territory. Once the US said that its action was completed, oil prices eased and are currently slightly higher on the day and above the intraday low.
- Given the latest hostilities put a US-Iran deal in doubt, crude’s response has been limited signalling some optimism remains in the market.
- WTI is 0.6% higher at $88.75/bbl after reaching $90.00 but then falling to $88.28. Brent is up 0.7% to $92.13/bbl after rising to $93.26 and then decreasing to $91.66 – quite a narrow range given today’s Middle East developments.
- According to Bloomberg, US industry data from API showed another large crude inventory drawdown of 9.1mn barrels last week. There was also a gasoline drawdown of 1.2mn barrels but distillate build of 1.3mn. Official EIA data is released on Wednesday.
- Later US May CPI data are released and expected to show an increase in headline inflation to 4.2% y/y and core to 2.9%. There are also US May average earnings and budget balance. The BoC is expected to announce unchanged rates and the ECB’s Buch participates in a panel.
FOREX: USD - BBDXY Looking To Build On Break Above 1205, M/E Adds To Tailwind
The BBDXY has had a range today of 1209.85 - 1211.08 in the Asia-Pac session; it is currently trading around 1210, -0.05%. The USD is looking to consolidate and then build on its break back above 1205 last week. The market is much more comfortable selling US dollars, but with a rate hike now being priced in and red flags appearing in the stock market the Bears are being forced to reduce exposure. On the day, the break above 1205 looks meaningful and could keep the USD supported on dips in the short-term. The first support is back toward 1205-1207 and then the 1200 area, should this break higher be sustained then I would look for momentum to build for a test back toward the 1220-1230 area at some point.
- EUR/USD - Asian range 1.1533-1.1552, Asia is currently trading 1.1550. The pair has broken the support seen just below the 1.1600 area as the USD breaks its trend lower. The market continues to be more comfortable selling US dollars, but this break lower in the Euro will not be sitting comfortably with them for the moment. The USD continues to trade well supported as risk remains under pressure from the escalation in the Middle-east, while this continues to play out it should keep the headwinds for the EUR in place. On the day, the first resistance remains back toward the 1.1570-1.1600 area, while the price holds below 1.1650-1.1700 I would be skewed toward another test of the 1.1400-1.1500 support area. Though with what looks to be quite a lot of optionality around here not sure how likely it is to give way in the short-term.
- GBP/USD - Asian range 1.3368-1.3391, Asia is currently dealing around 1.3385. The pair has rejected the 1.3500 area again and is looking to test the previous lows toward 1.3300. On the day, I would continue to be skewed toward fading rallies. The first resistance is right here between 1.3390-1.3420 and then the 1.3500 area. Sterling Bears will be looking for this to top out again somewhere up here and have another test of the 1.3300 support. A sustained break below here implies a move back toward the 1.3000-1.3150 area.
- Data/Events: US MBA Mortgage Applications, US May CPI
Fig 1: GBP/USD Spot Daily Chart
Source: MNI - Market News/Bloomberg Finance L.P
