The dust settles

An air of calm has returned to Asian markets today after the China equity sell-off after escalating government clampdowns on the technology and education sectors. Helping things along was Wall Street trading sideways as equity markets moved into wait-and-see mode ahead of US big-tech earnings results and this week’s FOMC meeting. Despite the calm this morning, the repricing of China regulatory risk is likely to continue for some time yet.

South Korean Advanced GDP for Q2 rose by 0.70% QoQ this morning, notable for its significant increase in imports as the domestic economy improves. That follows the extra budget approved over the weekend, with direct payments to most households as the country attempts to overcome its Covid-19 hiccup and keep its recovery on track. In totality, this should be enough to keep the Bank of Korea on track for its 4th quarter rate hike, and the Won has duly rallied this morning, although USD/KRW remains near 9-month highs.

China Industrial Profits rose by 66.90% (YTD) YoY for June, near consensus but lower than last month 83.40% as 2020 baseline effects fade. Profits rose across both state and private companies. The data suggests that China's recovery continues, albeit with the same supply chain and material cost challenges the rest of the world is experiencing. The data impact will be low as investors remain transfixed on China regulatory risk and are likely to for some time.

Bitcoin fell from $40,500.00 to $36,500.00 this morning after Amazon denied it was looking at either issuing its own digital coin or was going to start accepting tokens as payment. Bitcoin's 100-day moving average, today at $40,603.00, capped the rally last night. Despite today's retreat, the digital Dutch tulip is still holding onto most of its gains from yesterday. A move higher through the 100-DMA will signal the next leg higher.

I received a few vitriolic emails yesterday about calling Bitcoin nonsense. One odd Chappy from America sent me about 200 links on blockchain and called me a loser for not buying Bitcoin a 1 dollar. Fair play, but it is an opportunity cost, not an actual loss. I did not buy Tesla in 2017 either and I sleep soundly at night, no FOMO-itis here. To clarify for all my readers, I believe digital currencies and their equally smelly un-stable coin brethren are indeed digital Dutch tulips.

To be fair, though, and as I have said before, Bitcoin and its ilk are tradeable assets, if we must use that word, but are not investable assets. There is a difference. As for the blockchain, it is indeed an exciting frontier. But show me a buyer of Bitcoin in 99.999999999999999% of circumstances who says, "I'm buying it because I believe in the potential of the blockchain," and not "I want to double my money in 24 hours," and I'll show Elvis Presley alive and well and living in Bali.

Looking ahead, the data calendar is relatively thin across the globe today, leaving markets to the tender mercies of headline-driven volatility for the rest of the session. US Durable Goods is unlikely to move markets as the street awaits earnings from Apple, Alphabet and Microsoft today, and the FOMC outcome early Thursday Asian time.

Asia equities mixed

A sense of calm has returned to Asia today as the China sell-off has abated and investors pause for breath and reflection. Overnight, the S&P 500, Nasdaq and Dow Jones traded sideways to be almost unchanged but still at record highs ahead of heavyweight technology earnings. Tesla's record after-hours result has failed to lift US futures, though, with S&P 500, Nasdaq and Dow futures down around 0.15% in Asia.

The pause for breath has produced a mixed result for Asian markets. The Nikkei 225 is 0.50% higher, while the South Korean GDP release has lifted the Kospi by 0.60%, helped by Industrial Profits remaining firm in China today. In China itself, the Shanghai Composite is just 0.15% higher, while the CSI 300 has fallen by 0.35% after plummeting by 4.0% yesterday. Hong Kong is still suffering China technology and credit nerves as the Hang Seng falls by 1.0% today. 

Around the region, Singapore has risen 0.50% after the government hinted at a September reopening date for borders. Taipei has fallen 0.40%, while Kuala Lumpur and Jakarta have crawled to a 0.15% gain. Bangkok has fallen by 0.45%, with Manilla jumping 1.60% higher. Australian markets have followed Wall Street's modest 0.25% gains, with the ASX 200 and All Ordinaries rising by 0.50%, helped by Victoria and South Australia signalling the end of their recent virus restrictions.

European markets are likely to follow regional Asia and open modestly higher once again. Still, I expect volatility to be modest as we await the Q2 earnings from Apple, Alphabet and Microsoft. Strong performances will greenlight more gains for Wall Street tonight.

US Dollar falls on Euro strength

Not much has changed in currency markets overnight, as US bond yields remained almost unchanged in the overnight session. The dollar index retreated by 0.30% to 92.62, led by EUR/USD strength. The index has interim support just below 99.55, and failure on a daily close basis will signal a further pullback to 92.00 initially. Strong US tech results could be the catalyst.

The Euro outperformed overnight, EUR/USD rising 0.30% to 1.1805. It looks like impatient shorts, initiated after a dovish ECB last week, have thrown in the towel, and the resulting short-squeeze has lifted the single currency out of the danger zone for now—a range of 1.1750 to 1.1850 looks to be the story for the week. With Covid-19 cases falling rapidly in the United Kingdom, GBP/USD continues to trade constructively, rising 0.50% to 1.3825 overnight. Any dips to 1.3750 should find strong buyer interest now. Sterling looks set to retest 1.3900 this week as long as the Covid-19 situation maintains an appearance of being under control, allowing the UK to reopen smoothly.

USD/CNY remains stranded in a 6.4500 to 6.4900 range, with a daily close above or below those levels signalling its next directional move. The topside remains the weaker side, with authorities quietly drawing a line under further Yuan appreciation some time ago. 

Although the Australian and New Zealand Dollars continued to trace higher overnight, a daily close above 0.7400 and 0.7000 respectively is required to signal an extension to the rally. Both remain highly correlated to the travails of regional Asia, with my fragile five of Won, Baht, Rupee, Ringgit and Rupiah still at the mercies of the region's Covid-19 delta-variant situation. They are also vulnerable to FOMC tapering nerves, keeping ASEAN currencies offered until the FOMC passes. However, all may gain some temporary respite after the China stock market meltdown as investors move capital out of China and redeploy to other parts of Asia. 

Overall, the US Dollar looks like it will track lower in the near term, but lingering fears of tapering statements from the FOMC will temper any selling pressure. If the FOMC passes without incident, the US Dollar will come under pressure into the week's end.

Oil rises but ranges

Oil prices crept higher overnight, with Brent crude rising 0.80% to $74.80 a barrel and WTI finishing just 0.20% higher at $72.20 a barrel. The non-descript session is in keeping with my thesis that oil prices are set to range this week after recovering all of the "delta-dip" losses from the last Monday week. 

The $74.00 region for Brent crude, and $72.00 for WTI, look like equilibrium levels. Both contracts should continue to consolidate their gains, with volatility much reduced from last week. As such, I am not expecting any fireworks until after the FOMC conclusion. Brent should trade in a $73.00 to $75.00 a barrel range, and WTI should remain in a broader $71.00 to $73.00 a barrel range.

Another surprise increase in US API Crude Inventories this evening could spark a few nerves and see oil prices marked down. I expect any sell-offs to run out of steam ahead of the lower mentioned ranges.

Gold eases on FOMC nerves

Gold eased back below the $1800.00 an ounce mark overnight, edging 0.25% lower to $1797.50 an ounce in another day of dull range trading and consolidation. Residual fears that the FOMC may mention the taper world is mainly responsible for the selling pressure, and gold is unlikely to rally significantly until the FOMC decision and statement.

Gold remains mostly off investors' radars, with most of the action occurring in other asset classes. It remains confined in a broader range bounded by its 100 and 200-DMAs at $1798.00 and $1823.00 an ounce, respectively. Gold has also traced out clearly denoted support at $1790.00 an ounce, while it has interim resistance at $1810.00 an ounce.

A daily close below $1790.00 an ounce would suggest a deeper correction to the critical support at $1750.00 an ounce. However, the charts indicate that gold is, in fact, quietly consolidating at these levels in preparation for a resumption of the longer-term uptrend. A close above the 200-DMA would signal this has started. In the meantime, playing the range and patience are the orders of the day until the FOMC outcome.