China data spooks Asia

China’s data dump today contained some unpleasant surprises as each release missed expectation, darkening the mood across Asia, already nervous after a soft close on Wall Street following soft inflation results. China’s Fixed Asset Investment fell to 8.90% in August, just below 9.0% expectations but a retreat from last months 10.0%. Industrial Production for August fell to 5.30% versus 5.80% expected but the worst surprise was Retail Sales. These slumped to just 2.0%, a huge miss on pre-release 7.0 % expectations.

Government officials tried to put a brave face on the data, blaming flooding and lockdowns in August.  Admittedly, the Industrial Production data was likely affected by rising input costs, semi-conductor shortages and logistical disruptions, the same issues afflicting the rest of the world. With regards to the Retail Sales data though, one can’t divorce slump in consumer confidence from the ongoing shared prosperity multi-sector government crackdowns, where job losses are an inevitability.

China is unlikely to hit the red button and open the fiscal spigots immediately. Another month of weak data next month may change that narrative though. And we can pencil in a RRR cut by the PBOC sooner rather than later. The expectations of government largesse may be limiting the fallout in China equities today. But with the sectorial clampdowns, the Evergrande sage and withering domestic consumer confidence, the downward repricing of China equities could be far from over, that’s certainly what I believe.

Overnight, US inflation data came in below expectations with headline Inflation for August MoM rising by 0.30%, and Core Inflation August MoM printing at 4.0%. That has further reduced Fed tapering nerves for next week’s FOMC meeting. However, a look below the bonnet of the data shows that although used car prices and airfares retreated, food, energy and rental prices increased. Notably, housing related items are 30% of the CPI basket and rents typically lag rises in house prices. Readers can do the maths on that one. A look at natural gas prices globally, and we haven’t even got to the Northern Hemisphere winter yet, also makes unnerving reading. US gas price increases are the best of a bad bunch, but you wouldn’t bet against energy become a major concern for inflation readings ahead. Stagflation anyone? Sticky inflation may have taken a few punches from transitory inflation overnight, but it is definitely not out for the count.

Apart from US Retail Sales on Thursday evening, the rest of the world’s data calendar is second tier for the remainder of the week. Next week is a central bank policy decision frenzy, with the FOMC as the main event, with more potential for thematic moves. That will leave markets this week trading on sentiment and headlines. At this stage that sentiment is somewhat glum, dominated by growth and recovery concerns. Equities are likely to struggle for the remainder of the week on that basis, and haven-orientated trades such as a higher US Dollar enjoying a few days in the sun.

Asian equities lower on Wall Steet and China

Asia was always set for a tough day at the office after the lower inflation data darkened the recovery mood in the US and sent Wall Street into a negative close. The poor China data set today has confirmed the risk aversion mood and Asian markets are mostly lower today. Thinking about the low US inflation data overnight, ostensibly receding tapering fears as an aftermath should have been positive for equities at the margins. Instead, Wall Street fell, and the US Dollar remained firm. That is probably a warning side that the downside is the path of least resistance for the remainder of the week. One wonders if the talk about impending hikes in US corporate tax rates is also permeating US equities.

The S&P 500 fell by 0.57% overnight, while the curse of the Apple product release struck again, with the Nasdaq closing 0.45% lower. The cyclical-orientated Dow Jones suffered the most, slumping 0.82% and is in serious danger of breaching an upward support line going back to the lows of March 2020 and falling through its 100-day moving average. Futures in Asia have risen on all three by around 0.20% though, as short-covering meets low liquidity in Asia.

The rise in US futures appears to have limited the fallout in Asia of the China data, as has the relatively benign negative reaction by Mainland exchanges post-the China data. China’s data dump may have also raised expectations of more fiscal stimulus. The Nikkei 225 is 0.50% lower with the Kospi actually climbing into positive territory, now 0.16% in the green.

In China, the Shanghai Composite has fallen by just 0.22%, although the narrower blue-chip Shanghai 50 is down by 0.90%. The CSI 300 has fallen by 0.35%. China’s latest target, Macau’s casinos, saw the Hang Seng slump initially, the Hang Seng tumbling by 1.50% in a perfect storm of gaming chips and China data today.

Singapore is 0.65% lower with Kuala Lumpur falling by 0.25% and Taipei by 0.35%. Bangkok is flat while Jakarta is bucking the trend after Indonesia’s trade data today showed massive recoveries in exports and imports and a larger trade surplus. That has sent the Jakarta Composite higher by 1.50%. Australian markets are tracking Wall Street and Asia, the ASX 200 falling by 0.35%, while the All Ordinaries is 0.25% lower.

Europe will struggle to shake of the US and China data reactions today and I expect markets there to open slightly lower. Wall Street is likely to get another dosh of growth wobbles tonight after China’s Retail Sales missed so badly today.

The US dollar holds firm

Although the US Dollar dipped on the US inflation miss, the greenback quickly recovered its losses with the dollar index closing almost unchanged at 91.63, where it remains in Asia. The US Dollars strength even as bond yields eased is strongly suggesting that risk-aversion flows are in play as sentiment globally sours. That should also benefit the Swiss Franc and Japanese Yen over the rest for the week.

Elsewhere, EUR/USD’s rally quickly petered out leaving it unchanged at 1.1800 in Asia. The 1.1750 and 1.1850 levels remain the ones to watch for Euro’s next directional move. GBP/USD has risen just 10 pips to 1.3815 on the just-released UK inflation, core inflation and PPI data. The MoM and YoY metrics have all come in much higher with inflation alive and well in Her Majesty’s Kingdom. The statistics office, like the BoE, has urged caution about the numbers, saying inflation is temporary. Looking at natural gas prices, I am not so sure. The definition of temporary is increasing different to different people.

GBP/USD failed ahead of its 100-day moving average (DMA) at1.3915 overnight, before plummeting to 1.3805 close overnight. Sterling is looking more vulnerable than Euro at the moment, and support at 1.3790 really needs to hold to avoid a retest of 1.3700. Given the reaction to the UK inflation data, that may be false hope for bullish Sterling traders.

Perhaps the biggest signal that risk sentiment remains fragile this week is the performance of both the Australian and New Zealand Dollars overnight. Both Antipodeans finished lower overnight and did not rally temporarily in the posy-US-inflation Dollar sell-off. AUD/USD and NZD/USD have retreated once again in Asia, falling 0.10% to 0.7320 and 0.7095 with Kiwi looking especially vulnerable if 0.7075 breaks. Until positive momentum returns to AUD and NZD, it will be hard to call a top in the greenback’s rally overall.

Asian currencies have barely reacted to the China data today, being mostly unchanged, having retreated only slightly on US Dollar strength overnight. The best I can surmise is that AsiaFX is determined to remain in a holding pattern until next weeks FOMC meeting. The low inflation print from the US overnight should have been bullish for Asian currencies, pushing back as it did, the timeline for the Fed taper. Instead, Asian currencies faded slightly implying that lower AsiaFX is the path of least resistance in the days ahead.

Oil remains near its recent highs

Oil prices remained firm overnight, despite the lower than forecast US CPI data. Both Brent crude and WTI recorded small increases leaving them at the top of their September ranges. The energy component of the US CPI basket rose overnight, despite other components dragging the overall number down, with no real sign in physical markets of lower demand leading to softer prices. Additionally, Tropical Storm Nicholas has disrupted oil production and refining recovery in the Gulf of Mexico, coming after the devastation of Hurricane Ida. In the bigger picture, natural gas prices are rocketing in the Northern Hemisphere ahead of winter, especially in Europe and Asia. I believe that will provide some indirect support to oil prices going forward, given the ominous look to the natural gas rally. It could well be a winter of discontent.

Brent crude rose by 0.40% to $73.90 overnight, adding 0.30% to $74.15 a barrel in Asia. Having cleared resistance at $74.00 a barrel, and with Europe arriving, Brent crude is poised to rally to $75.00 and possibly $76.00 a barrel in the days ahead. Only a fall through $72.75 a barrel invalidates the bullish outlook.

WTI rose by 0.20% to $70.75 overnight, before climbing by 0.30% in Asia to $71.00 a barrel. WTI should now target $72.00 and potentially $74.00 a barrel in the days ahead. Only a failure of $70.00 a barrel will invalidate the bullish outlook.

Gold, the reverse-inflation hedge

It is ironic that as US inflation underperformed overnight, that gold traced out a 0.60% to $1804.50 an ounce. Apart from partially confirming that gold only really hedges Latin American style inflation, much of gold’s rally was due to the intraday spike lower by the US Dollar. That said, it held onto all those gains even as the US Dollar clawed back all of its losses, hinting that some new buyers had been entered the market.

Gold has faded in the Asia session though, falling to $1801.00 as Europe starts its day. With the US Dollar expected to remain firm as risk-sentiment sours, gold may have had its one day in the sun, much like Chinese equities these days. The underwhelming performance of gold of late, has not changed.

Gold rose to initial resistance at its 200-DMA at $1809.00 overnight but retreated from there. The 200-DMA resistance remains intact therefore and is followed closely by the 100-DMA at $1816.50 an ounce and the formidable series of multi-day tops around $1834.00 an ounce. Support remains clearly marked at $1780.00 and failure will signal deeper losses to $1750.00 an ounce.