China recovery stays on track

Being the first Monday of the month, today is Purchasing Manager Index (PMI) Day. China's Caixin Manufacturing PMI has confirmed that its steady recovery remains on track, rising to 52.8, well above the 51.3 expected. Fellow heavyweights, Japan and South Korea also posted improving numbers, although both a still in modestly contracting territory. 

The picture was less clear across regional Asia though. Taiwan climbed back above 50, with Thailand also improving, however, both the Philippines and Vietnam and Malaysia went backwards. The recovery continues to be uneven across the region, although markets can take heart that the major players are making steady improvements.

Germany, France, Italy and the United Kingdom and the United States all release their manufacturing PMI's today. Again, the story should be that of consistent improvement, notably in Europe and the United Kingdom. The United States data is an increasing risk point due to their inability to mitigate the spread of Covid-19. Combined with no progress on a follow-on stimulus package from Washington DC, the odds of a double dip in economic activity is increasing. 

On the subject of Covid-19, Australia's Victoria State announced a return to draconian restrictions for Melbourne yesterday, with slightly milder ones for the rest of the state. That has weighed on both Australian stock markets and the currency this morning. Okinawa in Japan also declared an emergency over the weekend with nagging doubts remaining the Tokyo may be forced to follow suit. Covid-19 either remains rampant or is making worrying localised comebacks across the world. Although not priced into financial markets yet, it remains the critical risk factor to global recovery. Particularly if key economies that had previously controlled Covid-19 are forced back into large scale lockdowns again.

From a central bank perspective, we have the Reserve Banks of Australia and India, as well as the Bank of Thailand and Bank of England rate announcements this week. Of the four, only India is likely to ease further, with the other three unchanged but affirming dovish guidance. 

The week's data highlight will be this Friday's US non-Farm Payrolls. After a blowout jump of 4.8 million jobs last month, this month's data is expected to show a still impressive rise of 2.2 million jobs for July. The market risk is that number severely underperforms due to a renewed Covid-19 slowdown. Fears of a double dip would likely boost the US Dollar but see momentum wane in stock markets, albeit probably temporarily.

Geopolitical noise from the US increased a notch over the weekend. President Trump is threatening to ban Tik Tok and an unspecified number of Chinese apps. It does highlight the challenge Chinese companies will have to emerge from their domestic market, when, by law, China's government can order an entity to hand over all its data theoretically. Byte Dance being the latest aspirational Chinese company to run afoul of the Americans and others on this significant point. Given that the great firewall of China blocks anyone who is anyone from doing business on the Mainland; another asymmetric point of tension; the fallout from China's government should be relatively modest. Even China will struggle to spin their way out of that one with such a blatantly uneven playing field.

The great rotation out of US Dollars appears to be pausing for breath this week, led by a massive jump in USD/JPY. It rose from 104.70 to 105.80 on Friday, on no discernible news. It has now traced out an impressive outside reversal day that signals more gains to come for the greenback. That seems to have been the cue for profit-taking to set in on other currency pairs. This week may feature more sideways price action than previous ones, although only Covid-19 can undermine the underlying bearish case against the US Dollar.

Asian equities paint a mixed picture

Asian stock markets are painting contrasting pictures today. Strong China PMI's has seen the Shanghai Composite and CSI 300 jump by 1.0%. A 1.20% fall by the Japanese Yen on Friday has boosted the export facing Nikkei 225 by 1.95%, with South Korea's Kospi flat on the day. 

The picture is rather glummer elsewhere. Covid-19 movement threats are weighing on Kuala Lumpur, down 0.85%. The fallout on bank dividends as negative corporate news over the weekend sees Singapore falling 1.15%. A renewal of strict Covid-19 restrictions in Manilla has seen the PSE1 plummet 3.75%. The story is less draconian in Hong Kong, but a one-year delay of local elections and increasing Covid-19 restrictions see the Hang Seng falling 1.15%.

A similar story is playing out in Australia with Melbourne escalating its Covid-19 lockdowns to just short of maximum over the weekend, with more restrictions across the rest of Victoria. Local stock markets have been surprisingly resilient, given that Victoria is 25% of Australian GDP. For that, Australia can probably thank a more positive US session on Friday, with the ASX 200 and All Ordinaries up 0.10%. Nevertheless, the situation in Victoria and the possible escalation of the outbreaks in Sydney are eroding confidence in the Lucky Country.

With big-tech earnings out of the way, US markets may well pause for breath also this week. The Nasdaq must take out its double top at 11,007.00 to keep momentum across the major indices from flagging. A failure to do so will increase the noise from the correction drums. The Dow Jones is flirting with support at its 200-day moving average here at 26,228.00. Meanwhile, the S&P 500 has been stubbornly locked between 2200.00 and 2300.00 for all of July. It falls to the Nasdaq to provide the music to keep the party going. 

The US Dollar finally finds some friends

The US Dollar rallied strongly versus the major currencies overnight, notably against the Japanese Yen, which weakened by over 1.20%, USD/JPY closing at 105.80 on Friday. That said, I cannot find one piece of news to explain the sudden rally. What is notable is that a bullish USD/JPY outside reversal day was traced out. Today, USD/JPY spiked above 106.00 before returning to 105.80, likely on stop-loss buyers and thin early morning liquidity. USD/JPY should target a return to 106.60 initially.

In a volatile session, the dollar index rose o.53% to 93.46, narrowly avoiding tracing out a bullish outside reversal day itself. The dollar index is unchanged in Asia after spiking higher in early trade but is targeting a return to 94.00 before we reassess direction. 

EUR/USD touched 1.1900 before sellers emerged, pushing the single currency back to 1.1775. Sterling also rallied, reaching 1.3170 before falling to an unchanged 1.3070. Selling in the EUR/GBP cross appears to have exaggerated the Euro's fall while limiting the damage on Sterling. From a technical perspective, both seem poised to retreat further, with initial targets at 1.1700 and 1.3000 respectively.

A stronger US Dollar and Covid-19 fears have torpedoed the Australian Dollar, dragging the New Zealand Dollar with it. The AUD/USD has formed a formidable top at 0.7200, as has the NZD/USD at 0.6700. Both look likely to ease further in the first half of the week.

Regional currencies, having only bought into the US Dollar rotation late in the day, has outperformed as a result. Across Asia, having eased only slightly on Friday, Asian currencies are almost unchanged today. It appears that a Dollar correction will fall heaviest on the G-10 family.

Overall, the underlying reasons for the US Dollar sell-off remain firmly intact. However, nothing moves in a linear fashion forever, and this week seems likely to feature more Dollar strength than last. A weak Non-Farm Payrolls print on Friday could extend the Dollar strength into next week on haven flows.

Oil's summer doldrums continue

Oil's long summer holiday continues, with both Brent crude and WTI rallying modestly on Friday, but still firmly ensconced in their one-month ranges. Asian trading has been directionless, with Brent crude easing 40 cents to $43.45 a barrel, and WTI is edging 30 cents lower to $40.05 a barrel. The net effect has been to erase Friday's modest gains.

Of the two, WTI looks more vulnerable to a downside correction. A fall through $40.00 a barrel is perhaps signalling a retest of support at $38.80 a barrel. Its 200-DMA is creeping lower, today residing at $42.90 a barrel, and likely to cap any rallies in the near-term. 

Brent crude, on the other hand, has support at $41.50 a barrel, but only a fall through $40.00 a barrel will suggest a deeper correction lower is upon us. With evidence that US oil production is falling faster than expected, Brent crude should continue to find willing buyers on material dips.

Worries about the trajectory of US growth continue to cap price rises on oil, and those fears are well-founded given the pandemic's inexorable march across the sunbelt states to the Midwest. A weaker Dollar has supported the downside in recent weeks, but if US Dollar strength continues this week, downside pressures may increase on both contracts. That aside, oil markets look balanced for now. The summer holiday is looking likely to continue for some time yet.

Gold makes new highs before retreating

Gold rose 1.0% on Friday as haven buyers hedged weekend risk. Gold climbed from $1955.00 to $1983.00 an ounce. Asia saw gold briefly trade at $1986.00 an ounce, a new record high, before easing modestly to $1973.00 by midday.

A stronger US Dollar this week may make an assault on $2000.00 challenging. Traders may prefer to await dips to the $1940.00 to $1950.00 an ounce support zone to add to long positioning, rather than chase prices higher at these levels. 

Gold's momentum, although slightly diminished today, remains firm, as it does on Silver. A fall through $22.3000 by Silver could signal a deeper correction on gold, although this remains unlikely. US real yields remain negative across the curve, and nagging Covid-19 doubts stay to the forefront. Both factors will support precious metals. This week though, maybe characterised by range-trading rather than the buzz of new record high prices.