Soft China, Japan data weigh on sentiment

The week starts moody in Asia, as economic data from China and Japan missed estimates early this Monday. Japanese economy grew last than expected in the Q2, although there was an acceleration in both private consumption and government spending, and capital expenditures rose sharply. Also, net exports contributed positively to the GDP, as exports increased while imports fell; the massive depreciation in the Japanese yen during last quarter certainly helped.  

In China, retail sales, investment and industrial production, all, unexpectedly fell, and an earlier rate cut from the People’s Bank of China (PBoC) could hardly improve the mood in Chinese stocks. Shanghai’s composite is slightly.  

Of course, bad data from China also weighs on recession worries for the rest of the world. Crude oil begins the week under selling pressure around the $91 per barrel. US index futures are down, but interestingly, the European futures were better bid in Asia; Asian traders didn’t price in the fact that Rhine, the biggest river in Germany where ships transport coal among other crucial goods is drying to a point that it can no longer be navigated at some parts. The water level at Kaub, which is a key water marker, will fall to 30 centimeters today – and the latter will only deepen the European energy crisis, and perhaps inflation. The EURUSD slips below the 2.50 level. 

Too early to call the end of US selloff 

In the US, Friday’s session was again a strong one. The S&P500 gained 1.73%, while Nasdaq jumped more than 2%. From a technical standpoint, last week’s advance in Nasdaq marks the end of the bear market, as the index rallied more than 20% since the June dip.  

But, it’s too early to uncork the champagne, and call the end of the market selloff. Last week’s softer-than-expected inflation data gave a glimpse of hope that things could start looking better in the second half of the year. But the Federal Reserve (Fed) members warned immediately that inflation in the US remains at a particularly high level, which needs continuous intervention from the policy perspective until the levels get back toward the policy target.  

The Fed minutes, due this week, will certainly confirm that the Fed remains focused on bringing US inflation lower; the latest softness in inflation data will unlikely change the Fed’s roadmap, at least for the next couple of meetings.  

For now, activity on Fed funds futures gives almost 50-50 chance for a 50 and a 75bp hike in September meeting. I believe we will still see a 75bp hike in September.  

The US dollar is firmer this Monday. Gold struggles finding buyers into the $1800 per ounce level, as Bitcoin tests the $25K resistance to the upside. The US delegation visit to Taiwan this week could revive tensions between the US and China, and help the precious metal amass safe haven flows. But the topside will likely remain limited around the $1835 level, where we have the 100-DMA.