Overview
The dollar and US rates remain firm. The greenback rose to new highs for the year against the Japanese yen and Australian dollar before steadying. Outside of the Swedish krona, which is off nearly 0.5%, the G10 currencies are nursing small losses late in the European morning, mostly less than 0.1%. Most emerging market currencies are also lower. The Chinese yuan gapped lower for the second consecutive session and is also approaching this year’s low amid property market and wealth management woes. Gold is pinned near last week’s lows (~$1910). It has not closed once this month above its five-day moving average (~$1916). September WTI reversed lows last Thursday after reaching almost $84.90. It fell to a four-day low today a couple of cents below $82.00 and has recovered back to $83.00.
Nearly all the large equity markets in the Asia-Pacific region sold off. The Nikkei, Hong Kong, and Taiwan fell by more than 1%. India is bucking the regional move to post minor gains. After opening lower, Europe’s STOXX 600 has recovered and is up about 0.25% in late morning turnover. US index futures also recovered from earlier losses and are up slightly. Rising global yields tugged Japanese 10-year yields higher. The 10-year yield settled near 0.58% before the long holiday weekend and rose to 0.62% today, a three-day high. The 10-year US Treasury yield is slightly above 4.15%. It reached 4.18% earlier today, which is the highest since August 4 when it saw 4.20%. European benchmark 10-year yields are mostly softer, with the 2-3 bp decline in Italy and Greek yields leading the way. UK 10-year Gilt yield are steady to slightly firmer.
Asia-Pacific
After a year of dripping feeding measures to support the property market, Chinese officials are facing a new challenge as one of the biggest developers, Country Garden (OTCPK:CTRYF, OTCPK:CTRYY, OTCPK:CTRGF), suspended almost a dozen of its onshore bonds today. This follows Country Garden Holdings failing to make a coupon payment last week and a 14% drop in share prices before the weekend (in HK) and another 19% today. It has a 30-day grace period on two dollar bonds and is now seeking to extend a maturing bond (yuan payment due September 2). Adding to the tension, one of China’s largest private wealth managers missed a payment on an investment product. The CSI 300 has nearly unwound all the gains since last month’s Politburo meeting, and nearly all of stocks (80) on the Hang Seng Index were lower.
China could cut its benchmark 1-year Medium-Term Lending Facility rate tomorrow, but it is unlikely. And even the PBOC were to cut the 2.65% rate, it might not have much impact. Since the end of 2021, the rate has been cut three times, each by 10 bp. It is more a signaling device than material in and of itself. Many outside economists argue that the only way to boost China’s economic performance is to address longstanding “structural issues.” We suspect that may prove to be more wishful thinking that pragmatic analysis. Xi is going nowhere, and he will continue to roll out more measures until something works within confines of Xi-thought, which shares with the views in some parts of the political spectrum among high-income countries that see “welfare” or “entitlements” fostering laziness. It is like Churchill said about the Americans, that they will do the right thing after exhausting the alternatives. China has not exhausted its alternatives. We suspect that that recent July data, and more to come tomorrow (industrial output, retail sales, fixed asset investment, residential property sales, and the survey jobless rate), is old news in the sense that officials have already taken on board the disappointing economic performance. The pressure on the yuan is coming from the policy divergence and the dollar’s broad uptrend since the middle of last month.
Japan’s markets were closed for “Mountain Day” last Friday, but full liquidity may not return for the next several days amid the Obon period that runs through Wednesday, which is the customary mid-summer break. During the period, equity market turnover tends to be lighter than usual. The greenback settled slight below JPY145 before the weekend and traded a little above JPY145.20 today for a new high for the year. Since the high was recorded, the low has been about JPY144.65. The Australian dollar trades poorly and settled last week below $0.6500 for the first time since last November. Follow-through selling took it to a marginal new low for the year a little below $0.6460. It is recovered to test the $0.6500 area. Resistance is seen in the $0.6520-30 area. The Aussie peaked at $0.6900 in both June and July. A low of $0.6600 was seen between the two peaks. The potential double top has a measuring objective of about $0.6300. The greenback gapped higher before the weekend against the Chinese yuan and gapped higher again today. Friday’s high was about CNY7.2395. Today’s low was close to CNY7.2485. Domestic woes and the US dollar’s broad gains warns of a test of the high for the year set at the end of June slightly below CNY7.2690. The dollar rose to CNH7.2815 to approach the year’s high set at the end of June against the offshore yuan near CNY7.2855. The PBOC set the dollar’s reference rate at CNY7.1686. The median forecast in Bloomberg’s survey was for CNY7.2354.
Europe
The week is off to a quiet start in Europe. Tomorrow is a different story. Germany’s August ZEW investor survey is due. It is hard not to imagine continued deterioration in the assessment of the current situation and expectations. This month, the DAX is giving back three-quarters of the gains recorded in June and July. The benchmark 10-year Bund yield is up nearly 15 bp so far here in August. The euro is off 3% since peaking in the middle of last month. The economy stagnated in Q2 after contracting in the previous two quarters. June retail sales were off more than twice the 0.3% decline expected. Exports grew less than expected, while imports fell more than projected. June industrial output tumbled 1.5%, three times more than the median forecast in Bloomberg’s survey.
The UK will issue its employment report tomorrow. We know from the end of last week that the UK economy was more resilient than expected in Q2. The economy grew by 0.2%, whereas the median forecast was for a flat quarter following the 0.1% expansion in Q1. However, it is not because of strong growth in the labor market. In fact, the number of people on payrolls rose by an average of 10.8k a month in Q2, the least since Q4 ’20. Moreover, the number actually fell in June and likely fell in July. In the current environment, the market will likely be more sensitive to the earnings data, and here, a new acceleration is likely. The median forecast in Bloomberg’s survey is that average weekly earnings rose by 7.4% (three months year-over-year), which is up from 6.9% in May. It would be a new high since mid-2021. Last June, it stood at 5.1%. It would be the fourth consecutive increase. Short-term interest rates look vulnerable to such a report. The swaps market no longer has a quarter-point hike next month fully discounted. The swing of the pendulum back favoring a more hawkish BOE could also help lift sterling.
The euro came off sharply from the US CPI-inspired knee-jerk bounce to $1.1065 last Thursday and posted a six-session closing low around $1.0950 before the weekend. The losses were extended to almost $1.0925 today. This month’s low is closer to $1.0910. A break of it may target $1.0880 and then last month’s low near $1.0835. There are options for about 1.55 billion euros that expire today and another set of almost 1.2 billion euros tomorrow at $1.10. Sterling recorded a bearish outside down day last Thursday, but stronger-than-expected GDP figures on Friday minimized the follow-through selling to a few hundredths of a penny. It is holding the lows from last week today and is probing the $1.2700 area in quiet European turnover. Given that the speculative market (futures) still is long, we suspect the burden is for the bulls, who led a 13.5-cent rally from the early March lows to the mid-July high, to demonstrate that they are still in control. That may require a move above $1.2825-50. Otherwise, a break of $1.2600 will look ugly.
America
The sentiment has moved, it seems, in contradictory directions. On the one hand, the market thinks the Fed is done hiking rates. There is a residual chance in the futures market of about 25% of a hike this year and better than a 50% chance of a cut in Q1 ’24. On the other hand, many economists have now capitulated on a recession. The dramatic swing in market sentiment is illustrated by the new buzz that the economy is re-accelerating. The Atlanta Fed’s GDP tracker says Q3 is coming in at 4.1% as of August 8. Next month when the Fed meets, it will update its economic projections. In June, the median forecast was for the economy to expand by 1% this year. It will likely rise with the new projections. However, blunting this may be a lower inflation forecast. In June, the median forecast was for 3.2%. It stood at 3.0% in June. Although it likely rose in July (like CPI), it is likely to slip below 3% later this year.
A spokesperson for the National Security Council argued that President Biden’s comments last week that China’s economy was a “ticking time bomb” did not represent a new escalation of rhetoric. Biden says that the Communist Party leaders were “bad folks” and that the Belt-Road Initiative was a “debt and noose.” These are arguably judgment calls, and there was no attempt by the spokesperson to correct factual mistakes of the president’s remarks. Biden said the Chinese economy was growing close to 2% year. China targets 5% growth this year, and the median forecast in Blomberg’s survey and IMF sees it growing by 5.2%. It is the US economy that is not seen growing 2% this year. Biden also said that there are more retirement-age people in China than working-age. This was “off by hundreds of millions of people,” according to Bloomberg.
The US dollar has a four-week rally in tow against the Canadian dollar. Indeed, it has risen for six of the past seven weeks. Last week’s high was set near CAD1.35, which it has not seen since June 1. The US dollar recorded a high of about CAD1.3470 today before slipping back to CAD1.3440 in Europe. WTI has moved higher for the past seven weeks, which appears not to have done much for the loonie. The correlation between changes in the exchange rate and WTI has eased to about 0.40 over the past 60 sessions, the lowest in three months. We suspect the main driver of the Canadian dollar’s weakness is the greenback’s broad strength. Falling inflation, a central bank maintaining its 11.25% overnight, and stronger-than-expected June industrial production (0.6% vs. median forecast in Bloomberg’s survey for a 0.1% gain) helped push the dollar below MXN17.00 last Thursday and Friday. The greenback continues to straddle the MXN17.00 level today. However, the greenback has not closed below it since August 1. Last week’s intrasession low was around MXN16.9120. Last week, Brazil reported the first rise in the IPCA CPI (to 3.99% from 3.16%) since June 2022. Separately, June retail sales were also stronger than expected. Still the real has fallen out of favor. Last week’s 2/3rd of a percent decline came after the nearly 3% loss the previous week, the largest weekly decline this year. US dollar support is seen around BRL4.84. The BRL4.94 area capped the greenback last week and last month. A move above BRL4.96 could signal a return to the BRL5.00-5.03 area and possibly a test on the 200-day moving average (~BRL5.0780). Lastly, note that in Argentina, the populist outsider congressman, Javier Milei, unexpectedly won yesterday’s primary. Investors may respond negatively to the political development. Milei has made several controversial economic proposals, including dollarizing the economy. The uncertainty ahead of the October 22 election may also weigh on sentiment.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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