The schizophrenic range trading seen across multiple asset classes in recent times showed no signs of ebbing overnight. The geopolitical front, however, looks to be a busy one today. The details of Hong Kong’s new security law to be enacted into Basic Law by Beijing will be fully unveiled today ahead of the handover holiday tomorrow. In response, the US has withdrawn Hong Kong’s special economic status while China retaliated by announcing visa restrictions on Americans who didn’t like the new law. India, meanwhile, banned a swath of Chinese mobile apps on national security grounds. Most notably, ByteDance’s Tik Tok social app.
Japan is allegedly considering imposing new measures on South Korea goods as part of the two sides mini trade war dispute. But it is the usual suspects, China, the United States, Hong Kong and to a lesser extent, India, who will hold the market’s attention.
Its conflicts with China aside, India may have a point. I have until now declined to Tik-Tok with Mrs. Halley, mostly because front-row rugby players like myself are not usually gifted with natural “rhythm.” However, I have always had nagging doubts about where Tik Tok’s data is stored. Apart from a select group of countries, it just states it is held by “3rd parties.”
Circling back to schizophrenic markets, the tardiest in taking its medications, the equity markets on Wall Street, of course, continue to suffer aggressive mood swings. Sentiment on Friday approached the end of days levels as the US sunbelt states reaped the fruits of their incompetent handling of COVID-19 with an explosion of new cases. All was forgiven yesterday though, with Housing Sales coming in above expectations. As anticipated, the certification flight of the Boeing (NYSE:BA) 737-Max with an FAA pilot on board, saw Boeing’s stock jumped 14% yesterday. Who will take delivery of, pay for, or want to fly in them, being conveniently overlooked details, as is the September timeline.
Overall, the impression is of an equity market continuing to lose momentum and falling into the day-trader trap of tail-chasing markets intra-day, driven by flip-flopping sentiment. Readers should keep one eye on the S&P 500 this week, which has been flirting with it’s 200-day moving average—yesterday at 3021.00—over the past few sessions. It will be its the second visit to its critical support zone in as many weeks.
It has also traced out a triple top around 3155.00 over the same period, a lower high than previously. We have plenty of tier-1 data to keep the tail-chasers busy this week, ahead of the US holiday on Friday. A weekly close below the 200-DMA, though, will be a dangerous technical development for the V-shaped FOMO gnomes of Wall Street, suggesting that a deeper correction may finally be upon markets. By default, that will imply downward revisions to stock markets across the globe.
Lifting the clouds slightly, China has followed up an improved Industrial Profits data release with an equally impressive official PMI release today. Manufacturing PMI for June climbed further into expansionary territory, rising to 50.9. Non-Manufacturing also impressed, rising to 54.4. The unofficial Caixin PMIs tomorrow will hopefully confirm the story that China is leading Asia in a gentle if unspectacular recovery.
That is tempered though, by Japanese and South Korean Industrial Production data released this morning. Both sets of figures disappointed, highlighting that a global recovery will be uneven, even regionally. Voters in both countries should perhaps question the wisdom of their respective governments in escalating the trade dispute between the two parties.
Boosted by China’s data, Asia is in a broadly positive mood today after Wall Street took its happy pills. Hong Kong concerns though are likely to be top of investors’ minds. It has the potential to deliver some potentially negative headlines later in the session.
Equities are positive in Asia
Wall Street shrugged off last week’s doom-and-gloom to post a robust overnight session, lifting Asia stock markets into positive territory today. Nothing in the world has materially changed, but the urge to keep the party going rolls on. US Housing Sales and Boeing boosted US markets overnight. The S&P 500 rose 1.47%, the NASDAQ rose 1.20%, and the Dow Jones jumped 2.32%.
Asia has followed Wall Street higher after China’s official PMI’s outperformed. Japan and South Korea shrugged off trade tensions, the Nikkei 225 has climbed 1.70%, and the KOSPI is 1.60% higher. China’s Shanghai Composite is up 0.40%, with the CSI 300 0.90% higher. Singapore has jumped 1.20%, and in Australia, the All Ordinaries and ASX 200 are both 1.40% higher. Regional markets are all reporting much the same story.
Hong Kong’s Hang Seng is up 0.90% today, ahead of the full release of Beijing’s new Hong Kong security law, and the handover holiday tomorrow. Ghoulishly, the prospect of no more protests in Hong Kong is being perceived as a market positive. That said, as details are released, and the true scope of the law is apparent, sentiment may wilt somewhat. The response of the international community after that may also weigh on sentiment.
Hong Kong aside, equity markets continue to range trade globally, albeit near the top of their monthly ranges. Critical to sentiment will be the ability of the S&P 500 to maintain the 3,000 regions. Until that clarifies, equity markets will continue to wildly chase their tails back and forth depending on the sentiment flavor of the day.
Currency markets continue to be sleepless in Seattle
Currency markets continue to be almost becalmed, with the US dollar barely changed against the G-20 currencies overnight. The Dollar Index edged higher by a minuscule 0.07% to 97.50, reflecting the nadir of late.
With most of the majors sitting mid-range versus the greenback, the lack of trading winds looks set to continue. More than likely, currency markets will await cues from the equity markets, most notably the S&P 500, before strongly reengaging. Geopolitics, and the wait for tier-1 data releases elsewhere in the world this week, also appears to be sapping the willingness of currency traders to position firmly, one way or the other, for now.
Oil markets rally on a state of denial
Energy markets rose impressively overnight, but in the bigger picture, continue to range trade noisily at the upper end of their monthly ranges. Despite the waves of increasing COVID-19 cases sweeping the US sunbelt states, energy markets chose to concentrate on US housing data, doing what they do best, ignoring what doesn’t suit the plate of the day narrative.
In fairness, however, there are some underlying signs that oil consumption continues to recover. Brent futures spreads remain tight at the near end of the curve, China’s recovery remains on track, and Europe also appears to be making a steady progress.
Airline travel is increasing, domestically at least, with Europe preparing to reopen its borders to a select group of countries. Nothing beats intelligence on the ground, and some friends of mine from Denmark, yesterday departed on their family summer holiday in Malaga, Spain. So, there are definitely green shoots around. All of this, for now, appears to be offsetting fears of a double-dip in the United States due to COVID-19.
Brent crude rose 2.40% to $41.70 a barrel and is now comfortably perched in the middle of its monthly $40.00 to $44.00 a barrel range. WTI rose an even more impressive 3.80% to $39.65 a barrel. Its price action being an act of denial that has left even this wizened author shocked. WTI now sits in the middle of its monthly range as well between $39.60, and $41.50 a barrel.
Both contracts have retreated modestly today, driving by profit-taking flows after the robust New York session. Although the ranges overnight were impressive, it is essential to note that oil markets are range trading and not trending.
Gold remains becalmed, supported by negative US real yields
Much like currency markets, gold traders appear to be content to await further developments from the side-lines; the overnight session producing yet another range-bound day. Given golds sudden intra-day drop on Friday as US stocks tanked, traders may be fearful of being caught out at the highs if equities take another sudden leg lower. That fear is well-founded, as recent stock market selloffs have usually generated profit-taking in gold to raise cash.
Those fears, however, are not yet enough to undermine the bullish thesis, which is supported by two compelling drivers. Negative real yields across the US curve and the consequent weaker US dollar. An uncertain COVID-19 and geopolitical outlook supporting haven inflows.
Gold finished the New York session unchanged at $1772.00 an ounce. It remains anchored there in Asia today. Resistance lies at $1780.00 an ounce, followed by the multi-week rampart at $1800.00 an ounce. Gold still sits comfortably near 8-year highs, with only a daily close below $1750.00 an ounce likely to provoke a reduction in bullish positioning.