PMI data underwhelms but it doesn’t matter

China's Manufacturing PMI data has disappointed today, clinging to expansionary territory but increasing fears that Asia's powerhouse is slowing. On Saturday, official Manufacturing PMI fell to 50.4, well below the 50.8 expected, while today's Caixin Manufacturing PMI for July tumbled to 50.3, well below the 51.0 expected. Notably, in this morning’s Caixin number, the new export orders sub-index plunged to 47.7. 

Across the rest of Asia, Manufacturing PMIs were very much a mixed bag. Australian, Japan, South Korea and Taiwan's Manufacturing PMIs remained solidly expansive, but regional Asia sagged well into contractionary territory, with Thailand falling to 45.7, Vietnam to 45.1, Malaysia to 40.1 and Indonesia collapsing to 40.1 also. Supply chain woes are affecting everybody to some extent, especially China with semiconductors, and magnified by the US entity list. But in regional Asia. It appears that the delta-variant gripping the region is making its presence felt in the data.

That had led to an interesting divergence in the morning session, with US index futures, the Nikkei and Australia performing strongly, after Wall Street finished Friday on a soggy note, while China markets sank. The PMI data and the emergence of 98 new cases of Covid-19 on the mainland weighing on sentiment. However, much as investors started the week elsewhere in the inevitable buy-the-dip mode, so it became for China markets which have rallied strongly with a heavy flow of funds down the Stock Connect pipeline from international investors.

Sentiment may also have been helped by the unveiling of the bi-partisan US infrastructure bill at a special Sunday sitting of the US Senate. Totalling around $1 trillion, it contains $550 billion of new spending over five years.

Being the first week of the month, the data calendar is heavy internationally, culminating in this Friday's US Non-Farm Payrolls. Pan-Asia inflation data is released tomorrow. Although it is likely to show supply-chain driven upward price pressures, concern over the delta-variant engulfing the region will likely offset that data. With lockdowns spreading in Australia, with no end in sight for Sydney, the RBA policy decision should be a non-event tomorrow, with Covid-19 delta-variant giving the RBA all the excuses it needs to stay firmly in the uber-dovish corner.

In contrast, New Zealand releases employment data tomorrow. A strong result will make a rate hike by the RBNZ at its next policy meeting a certainty in the minds of most analysts. The New Zealand Dollar is likely to rally powerfully versus the Australian and US Dollars if employment data is robust.

Similarly, South Korean trade data released over the weekend show a significant jump in imports, hinting that domestic demand continues to recover. That will keep the Bank of Korea on track to hike in Q4, although the Won will stay under pressure in the shorter term as the US Dollar remains strong and the PMI data across Asia suffers delta-wobbles.

The delta-variant is likely to stay the hands of both the Reserve Bank of India and Bank of Thailand this week as well. Realistically, only the RBI was an outside chance to hike, given that inflation remains stubbornly above its target range, something that ever-higher oil prices will complicate. Thailand remains in a virus-induced slow down anyway, but the RBI is more likely to focus on supporting a post-second-wave recovery, than worrying about inflation right now. 

The Bank of England will also hold fire; as news emerges today, Britain is preparing a mass third shot booster programme later in the year. However, Brazil will likely buck the trend, hiking by anywhere between 75 and 100 basis points later in the week. Wednesday will see the release of pan-Europe plus US Manufacturing and Services PMIs, and Thursday a swath of Asian CPIs. 

There is plenty of data interspersed as well; however, I believe the week will be dominated by three themes. First, the trajectory of the Covid delta-variant, especially if cases rapidly increase in Mainland China. That could cause another bout of virus-fright in global stock markets. The passage of the now released US Infrastructure Bill, which should be a positive for US markets, particularly Dow Jones and Russel 2000 inhabitants. And finally, all roads will lead to the US Non-Farm Payrolls on Friday, with preliminary estimates hovering around the 750,000 mark. That will probably change quite a bit as the week progresses, and after so much promise of 1 million+ number earlier this year, which never happened, the risks are skewed towards a lower number. US market will likely take severe fright if it comes in under 500,000 jobs added.

Asian equities in buy-the-dip mode

Asia's heavyweight markets have started the week on a very positive note, after China initially dipped on weak PMI data. China's Shanghai Composite, CSI 300 and Hang Seng all dropped in early trade with the mainland exchanges, abruptly reversing course as foreign investors pumped nearly a billion dollars down the Hong Kong to Shanghai/Shenzhen Connect. That has seen a stunning reversal as regulatory risk has been forgotten. The Shanghai Composite is 2.10% higher, the CSI 300 has leapt by 2.50%, and the Hang Seng is 0.90% to the positive. 

Wall Street finished on a soggy note on Friday after US inflation data disappointed. That pushed US yields down, but equities could not rally as fears of peak-recovery led market heavyweights like Amazon lower. The S&P 500 fell by 0.54%, the Nasdaq by 0.71% and the Dow Jones by 0.42%. I suspect some month-end rebalancing of portfolios by institutional investors played its part as well.

With no significant event risk emerging over the weekend, however, investors could not resist piling into buy-the-dip in Asia as the week started. US index futures on the S&P 500, Nasdaq and Dow Jones are up over 0.50%, reversing all Fridays' losses. In Asia, the Nikkei 225 has leapt by 1.60%; the Kospi is 0.55% higher, with Taipei climbing by 1.10%. Australian markets have also roared higher after Square announced it would buy Australia's Afterpay. The ASX 200 is 1.25% higher, while the All Ordinaries has climbed 1.35%, with the Sydney bank holiday and the spread of state lockdowns to Queensland all but forgotten.

Regional Asia has fared less well, with investors’ attention seemingly focused on the worst performers of last week being the best performers this week. That has left regional Asia markets out in the cold, with investors focused on delta-variant nerves and a deteriorating political situation to boot in Malaysia's case. The government is rapidly running out of Teflon to slip a no-confidence vote over its handling of the economy and the pandemic.

All of that sees Singapore falling 0.65%, with Kuala Lumpur 0.35% lower with Jakarta just 0.15% higher today, as Covid-19 cases fall (its due to lower testing), and restrictions appear to have been eased. Bangkok is unchanged.

European markets are likely to look at the performance of the US futures and the Asian heavyweights today and move straight into buy-the-dip mode themselves, in a classic case of Euro-FOMO. With so much heavyweight data out, we are indeed in for another volatile week ahead. But if today teaches us nothing else, it is that there is still an ocean of capital looking for a home in a zero per cent world. Therefore, any material dips in asset prices, such as equities, will inevitably be short-lived.

The US dollar rallies on month-end flows

US Inflation data disappointed on Friday, sending the US yields lower once again. It was, therefore, surprising to see the US Dollar actually rally instead, the greenback fishing the week on a firm note versus both developed and emerging market currencies. I put the US Dollar strength down to two processes. Month-end investor portfolio rebalancing flows and haven buying to hedge weekend event risk.

The dollar index rose 0.30% to 92.09 on Friday, edging slightly lower to 92.05 in a non-descript Asian session. The dollar index is now mid-point between its breakout lower at 92.60 and structural support at 91.50, and also home to its 100 and 50-day moving averages. Versus the majors, another week of choppy range trading looms with a break of either 91.50 or 92.60, signalling the next big directional move.

EUR/USD faded at 1.1900 on Friday, with the single currency moving lower to close around 1.1875, where it remains today. A daily close above 1.1900 would signal a further rally targeting 1.2000. In the meantime, it looks supported on dips towards 1.1850. GBP/USD traced out a triple top at 1.3985 on Friday as it faded to finish at 1.3905. A fall through 1.3880 could see more of last week’s gains unwound; otherwise, resistance between 1.3985 and 1.4000 now looks formidable.

Both the Australian and New Zealand Dollars fall by 0.60% on Friday as investors reduced risk exposure into the weekend. As a proxy for risk sentiment, which seems rather more cautious among currency markets than equity markets, both are likely to start the week in the middle of their one week ranges between 0.7300 and 0.7400, and 0.6900 and 0.7000, respectively. The worsening Covid-19 situation is likely to keep the Australian Dollar offered this week. However, if New Zealand employment data is robust tomorrow, the Kiwi could potentially jump to near 0.7100 and outperform the AUD as traders’ pencil in imminent RBNZ rate hikes.

The PBOC set a neutral USD/CNY fixing this morning, leaving it trading unchanged today at 6.4640, comfortably within its recent 6.4500 to 6.4900 range. However, regional Asian currencies remain under pressure, notably my fragile four, the Indonesian Rupiah, Malaysian Ringgit, Thai Baht, and Indian Rupee. The Indian Rupee will find support from investor inflows to the equity market and low dollar purchases from oil importers. Of the remaining three, the Ringgit looks the most vulnerable. 

Malaysia's deepening Covid-19 and political crisis, with the government's latest trick to shut down Parliament because of Covid-19 infection fears, both laughable and sparking protests in Kuala Lumpur. USD/MYR should retest 4.2400 this week and could potentially fall to 4.2800 if the political impasse deepens and the Malaysian King gets involved once again.

Oil falls on weak China PMIs

Oil prices edged lower on Friday as investors reduced risk into the weekend, and upward momentum continued waning. Nagging doubts over the delta variants impact on world growth and a stronger US Dollar weighing on Brent crude prices. Brent crude fell 0.90% to $75.15 a barrel, while WTI finished just 0.30% higher at $73.60 a barrel.

In Asia today, weak China and regional Asian Manufacturing PMIs increasing virus cases on the China mainland and expanding lockdowns in Australia have weighed on prices. Reports that OPEC+ compliance had eased to 115%, not helping matters either. Brent crude and WTI are around 0.60% lower at $74.70 and $73.30 a barrel, respectively.

In the bigger picture, the price action continues to look consolidative after oil recovered all of its panic "delta-dip" the week before last. Last week saw the rebound consolidate, and after a week of range-trading, unsurprisingly, upside momentum has begun to wane. That leaves both rant and WTI vulnerable to a corrective move lower to wash out stale longs. However, I am not expecting anything like the "delta-dip", and any material fall in prices is likely to be met by an equally fast rebound.

Brent crude has resistance at $67.00 a barrel with support at $74.00 a barrel. Failure targets a fast return to $72.00 a barrel before recovering. WTI has resistance above $74.00 a barrel with interim support at $73.00, followed by $72.00. Failure could see a quick spike to retest $70.00 a barrel before recovery occurs.

Gold is back in its range

Bullish gold traders would have been disappointed with the price action at the back end of last week. Gold has traced a triple top between $183.00 and $1834.00 an ounce and fell heavily on Friday. US Dollar strength saw gold fall 0.75% to $1814.00 an ounce. In Asia today, an unwinding of weekend risk hedges, with more than a few disappointed longs out there, sees gold fall by 0.35% to $1808.00 an ounce.

The fall by gold has moved it back into its broader July range of $1790.00 to $1820.00 an ounce. The failure of gold to hold gains in the face of even modest US Dollar strength and ever falling US yields is disappointing, but as long $1790.00 an ounce holds on a closing basis, gold's medium-term perspective still looks constructive. Interim support and resistance are found at its 100 and 200-DMAs at $1802.00 and 1820.00 an ounce.

If support at $1790.00 fails, gold could return to $1750.00 an ounce, potentially quite quickly. The US Non-Farm Payrolls should answer some questions regarding the US Dollar's direction on Friday. In the meantime, patience and playing the range are probably the best strategy.

Bitcoin

A quick update on the digital Dutch tulip. Bitcoin fell by 4.0% over the weekend for reasons I know not. Nevertheless, it continues to hold on to its 100-DMA at $39,880.00 with support at Thursday's low at $38,300.00.

As long as Bitcoin holds above its triangle breakout at $34,300.00, it remains on track to rally in the coming hours, days, weeks. The target for the triangle breakout being around $51,000.00 of fiat US currency back by the tax-payer revenues of the United States.