China's 'targeted' clampdown acquires new target

China's definition of targeted moves and the financial markets definition of what it thinks China's definition continues to be different. That is probably because investors put lower stock prices, FOMO, and buy-the-dip into their equation, while the Chinese Government does not. Today, China's Securities Times fired another salvo at the online gaming industry, citing teenage addiction and favourable tax treatment. I actually don't disagree; I'd rather the kids read books, even if it is online.

Now admittedly, China's online gaming industry is part of the broader tech space, but this is the second government mouthpiece to take a shot at the sector this week, and you ignore the non-too subtle warning at your perils. From IPOs to tech to after school education, the list of "targets" seems to get longer every week. Unsurprisingly, China equities have headed South today, bucking the trend in Asia. It seems we still have some way to go before the price discount on China equities offsets the regulatory risk from China's Government.

Elsewhere, the US saw some decent whipsaw price action overnight. The ADP Employment number missed severely, coming in at 330,000, less than half the expected result. That saw US bonds rally, the US Dollar fall, stocks rise and gold fall. However, ISM Non-Manufacturing and its sub-indices, such as prices, new orders, and employment, impressively outperformed. That turned markets around, and it was left to US Federal Reserve Vice-Chairman Richard Clarida to administer the coup de gras. 

Mr Clarida said the Fed would signal tapering before the end of the year, taper right through 2022, and then start hiking interest rates in 2023. Not exactly a surprise but timing is everything. Equities fell, the US Dollar rose along with US bond yields and reversed all of its impressive intra-day gains, while oil also fell. More on both the latter later.

In the background, markets are increasing, humming, "Delta, Dawn, what's that virus you got on?" The list is seemingly lengthening every day of countries wilting under the latest variant. Australia's New South Wales has extended lockdowns to Newcastle and the Hunter Valley. Japan's cases are exploding. Now that Indonesia has increased testing again, cases are rising once again here. The critical regions to watch, though, in my mind, are the big three of the United States, Europe and China. Most particularly China, where a seriously widening outbreak would have negative repercussions for the rest of Asia and require a reassessment of the global recovery. 

The appetite for lockdowns in the US and Europe being precisely zero now. One thing is for sure, the global recovery will be one of haves and have nots and will be uneven. And if the US and Europe/UK go down the booster shot route, you can pencil in an even longer recovery time scale for the developing world. In the shorter term, though, China is the one to watch.

Asia's calendar today contains a few snippets. Australia's Balance of Trade came in at an impressive AUD 10.50 billion, with the commodity machine firing on all cylinders. That has been enough to balance out escalating virus nerves in the lucky country and keep Australian equities marginally in the green. Philippine’s Inflation eased to 4.0% to the relief of the central bank, which can keep monetary policy supportive going forward while putting stagflation thoughts to bed for now.

Thailand inflation will be equally benign at around 1.0% later today, with stuttering exports and domestic consumption being crushed by its virus situation. The Bank of Thailand will likely remain at record low rates well into 2022, and the Thai Baht will continue to be a regional underperformer. Singapore's Retail Sales have probably slumped under its virus lockdowns. However, DBS has followed OCBC and UOB yesterday and delivered a record result for H2, limiting any fallout in equity markets. Singapore big banking remains one of my favourite Asia recovery plays.

The Bank of England will announce its latest policy decision later today. Increasing delta-variant cases in the UK and a wait-and-see approach to its reopening should ensure the BOE continues its QE programme with rates unchanged. I also doubt any new signals will emerge as to tapering or future rate hikes. US Initial Jobless Claims will be of passing interest, with a print well North of 400,00o likely to spur another drop in US bond yields again, and probably the US Dollar.

Overall, I expect markets across asset classes to enter a holding pattern today, with only headline risk moving volatility intra-day, as the street awaits the week's main event tomorrow, the US Non-Farm Payrolls.

Asian equities are mixed

Equities are mixed in Asia after Vice-Chairman Clarida's comments on tapering and rate hikes sent equities lower overnight on Wall Street. The S&P 500 fell 0.46% while the Nasdaq clung onto some gains, closing just 0.13% higher, while the Dow Jones fell by 0.92%. Sentiment was not assisted by the ADP Employment data, which rose by much lower than forecast, raising fears that tomorrow's Non-Farm Payrolls will disappoint.

In Asia, futures on all three US indices have recovered slightly, rising by around 0.20%. That has lifted the Nikkei 225 by 0.50%, helped along by some strong earnings by local heavyweights, while Japan's spiralling virus caseload is being ignored for now. The Kospi, though, has edged lower by 0.10%, while Taipei is unchanged.

In China, the Securities Times article admonishing online gaming has sparked another sell-off in some equity markets, with fears that more government clampdowns on the tech sector are imminent. The Shanghai Composite is unchanged, but the more tech-heavy CSI 300 has fallen by 1.05%, while Hong Kong, somewhat surprisingly, is unchanged on the day.

Regionally, markets are toying with each side of unchanged, with Singapore down 0.10% while Kuala Lumpur is up 0.10%. Jakarta has risen 0.45% ahead of GDP data later today, with Bangkok climbing 0.35% and Manila also just 0.10% higher. Australian markets are much the same, with the ASX 200 and All Ordinaries also 0.10% higher.

The modest recovery by the US futures should be enough to generate a slightly positive start for European equities. However, as previously stated, equity markets look like they are settling in to wait for tomorrows US employment data.

Clarida sends US Dollars higher

The US Dollar reversed intra-day losses to finish the day higher after the Clarida comments signalling a timetable for Federal Reserve tapering and eventual rate hikes starting in 2023. The dollar index rose 0.23% to 92.28, edging higher to 92.31 in Asia. The index remains in a broader 91.50 to 92.60 range, and I await a break of either side to signal the US Dollar's next medium-term move. That said, a disappointingly low Non-Farm Payrolls print tomorrow should see structural support at 91.50 tested by early next week.

EUR/USD and GBP/USD retreated modestly to 1.1833 and 1.3891 as of this morning in the face of US Dollar strength overnight but remained in range-trading mode ahead of Friday's US employment data. USD/JPY climbed 0.40% to 109.40 overnight as US bond yields firmed post-Clarida, edging another 25 points to 109.65 in Asia as US 10-year futures fell this morning. (Yields rose) USD/JPY remains a purely US/Japan yield differential play at the moment. 

Deteriorating risk sentiment saw both AUD/USD and NZDUSD give back some intra-day gains. AUD/USD fell 0.20% to 0.7380, and NZD/USD finished 0.66% higher at 0.7050 after blockbuster employment data. Notably, NZD/USD failed ahead of 0.7100 overnight, where the 100 and 200-day moving averages (DMAs) have converged. The 0.7100 level marks formidable resistance for the Kiwi in the short term, but a daily close above it will signal a rally that should target 0.7300.

In Asia, the PBOC set a neutral CNY fix today, leaving USD/CNY marooned at 6.4640, where it has spent most of the past week. Only a rise through 4.4900 again, or a fall through notable support at 6.4500, will signal that USD/CNY is on the move. Except for the Thai Baht, which remains near 17-month lows on today's inflation data and its virus situation, the rest of the Asian FX has continued to quietly carve out gains versus the greenback these past few days. Some China rotation by investors into regional stocks could explain some of the gains, with viral loads priced-in, to some extent, and lower US yields assisting those dirty pegs. 

Asia is not out of the delta-variant woods by any measure, and an escalation in virus cases in China will undoubtedly weigh on regional currencies. After soft inflation data, the Philippine Peso gave back some of its recent gains, rising 0.70% to 50.08. I remain most concerned with Thailand and Malaysia. Both are struggling with virus cases and also political disruption. Of the two, the Malaysian Ringgit looks the shakier as its virus, and the political situation goes from bad to worse. USD/MYR has based around 4.2200, and lower oil prices will be another kidney punch. I expect a retest of 4.2400 sooner rather than later, before rising to 4.2800 next week. Asia's best outcome tomorrow would be a very low Non-Farm Payrolls pushing US yields and the US Dollar lower.

Overall, I expect today to be a quiet session for currency markets as they, like equities, head into a pre-Non-Farm Payrolls holding pattern.

Crude Inventories and Clarida clatter oil

Vice-Chairman Clarida's overnight comments pushed the US Dollar higher, weighing on an already nervous oil market looking at the global delta-variant numbers. However, the official US Crude Inventories delivered the knockout punch as they surprised markets by rising by 3.626 million barrels. (-4.1 Mio exp) Markets completely ignored an equally significant tumble in gasoline stocks of -5.3 million barrels, sending Brent crude 2.80% lower to $70.30 a barrel. WTI, meanwhile, collapsed by 3.10% to $68.05 a barrel.

Some bargain hunting is occurring in Asia today, with both contracts rising by 0.50% to $70.60 and $68.40 a barrel, respectively. The enthusiasm of Asian buyers suggests we are now in the zone where the physical market sees value, although the technical picture tells more of a dead cat bounce. 

I continue to believe that material sell-offs in oil will be short-lived and followed by equally vigorous rallies; a powerful US Non-Farm Payrolls tomorrow would deliver that scenario. Brent crude has support at $70.00 a barrel, and then its 100-DMA just below at $69.70 a barrel. Failure of the 100-DMA could see another reactionary spike lower, potentially reaching the 20th of July low at $67.50 a barrel; however, this is not my base case. 

Similarly, WTI has support at $68.00 a barrel, followed closely by its 100-DMA at 67.10 a barrel. Again, failure of the latter could see a snap reaction lower targeting the 20th July low at $65.10 a barrel. Fortune favours the brave, and in the bigger picture, the delta-variant is only slowing and not halting the global pandemic recovery. With that in mind, if we see those latter reaction targets, I could think of worse places to get long.

Gold has a tumultuous overnight session

With the resulting falls in US yields and the greenback, the soft US ADP Employment data sparked an aggressive gold rally overnight. Gold rose by $21 intra-day to $1831.50 an ounce before the Clarida comments sparked a rapid fall from grace. With US yields and the Dollar whipsawing higher, gold gave back all of its gains to finish almost unchanged at $1812.00 an ounce.

To say that gold's price action was a disappointment is an understatement. Gold investors clearly have zero appetites for any sort of intra-day losses, as the price action demonstrates. It also highlights that gold has become a purely inverse US Dollar/yield play and that traders would probably find more joy trading them than gold at the moment. 

The price action was so disappointing that I cannot help but feel that the balance of risks has now shifted to further downside corrections, which robust Non-Farm Payrolls will likely deliver. 

From a technical perspective, gold has traced out six daily highs between $1830.00 and $1834.00 an ounce over the past month, suggesting that this zone now forms formidable resistance. Gold has nearby support at a series of daily lows around $1805.00 an ounce, traced out over the past week. That is followed by the 100-DMA just behind at $1804.00 an ounce and then the critical $1790.00 an ounce region.

Gold is unchanged in Asia, but given the price action overnight, failure of $1804.00 will probably spark more selling from nervous longs. A daily close below $1790.00 signals a deeper correction, targeting $1750.00 an ounce. Gold looks like it is a sell on rallies above $1820.00 now.