Summary: US and Asian equities have extended the weakness seen on Friday when mixed US data left stocks weak and struggling for direction. The overnight extension being led by China’s worsening property slump driving the dollar higher while US Treasury yields move closer to the November highs. The negative sentiment has spread to commodities with crude oil and copper both trading lower. The cluster of AI stocks led by Nvidia is also something to watch in today’s session if risk-off sentiment accelerates.
Equity futures are starting the week on a nervous note as Chinese property developer Country Garden missing bond payments over the weekend. In addition, Chinese new credit data shows the slowest credit growth seasonally adjusted since 2014 suggesting the world’s second largest economy will continue to be a relative drag on the global economy this year. S&P 500 futures are trading around the 4,475 level this morning continuing their slide lower. The cluster of AI stocks had another very weak session on Friday with Nvidia closing at 408.55 down 14% from its all-time high close price set back in July, so an accelerated downside move become a reality in today’s trading if risk-off sentiment continues.
The Hang Seng Index plunged 2.4% while the CSI300 index declined by 1.3%. Chinese property developer Country Garden is poised to seek a debt restructuring after suspending trading of its onshore bonds. Adding fuel to the negative sentiment was that a Chinse trust company Zhongrong Trust, missed payments on its wealth management products which are short-term high-yield debt kind of investments sold to retail and corporate investors, and the weak July credit data released last Friday.
USDJPY has touched the 145 barrier on Friday and this morning in Asia with the surge higher in Treasury yields continuing. This week’s GDP and CPI data in Japan could be key, as will be the US data such as retail sales which if firmer could continue to push yields higher. Traders are also continuing to watch whether Japanese authorities could intervene, but lack of verbal intervention so far suggests potential patience from them. EURUSD slid further below 1.10 to touch lows of 1.0940 with fears of surge in European gas prices cooling. GBPUSD supported by strong GDP data last week but labor market and inflation data this week will be in focus.
After recording its seventh consecutive weekly gain, supported by tightening supplies, crude oil has started Monday’s session on the defensive amid fresh concerns about China and its troubled property sector. Having run out of steam above $87.50 last week, a long overdue period of consolidation may now emerge with the news from China hurting sentiment. However, the downside risks remain limited as long OPEC+ maintain production at current tight levels, not least considering IEA’s forecast from Friday that oil demand surged to a record high in June and may rise even further. However, with the bulk of the demand growth increase coming from China, any trouble there may sour sentiment. This week, oil traders will also focus on macro data from US retail sales to China’s activity indicators. A correction in Brent to $82 would be considered a small reversal within a strong uptrend.
Copper prices dropped to over one-month lows amid signs of stress in China’s property market. Concerns over liquidity of one of the country’s biggest property developers, Country Garden Holdings Co, brought back into the focus the troubled property sector, a key source of demand for copper. Meanwhile, China’s loan growth increase in July was also the smallest since the financial crisis. Overall, copper prices remain stuck within a wide range with the next level of support being the June low at $3.6625.
The US Treasury issuance bonanza continues this week, with large issuance of T-Bills. Today the Treasury will sell $132 billion in 3- and 6-month bills. The question is whether markets will continue to absorb this debt, as yields are poised to drop as we approach the end of the hiking cycle. Cash at the overnight RRP facility which offer 5.3% in annualised yield stabilised at $ 1.8 trillion, and it cash doesn’t seem happy to extent maturity to get roughly 15 basis points more. That could be bad news for financial stability as more Bills and bonds demand might come for bank reserves.
Jobs numbers are released tomorrow, with the risk to show a pick up in salaries. That could apply bearish upward pressure to Gilt yields in the front part of the yield curve.
Chinese blue chips trades down 1.4% after falling 3.4% last week while the yuan hit its lowest in a month on mounting concerns about China’s debt-laden property sector. Shares in Country Garden, once China’s largest real estate developer by sales, slid more than 17% saying it will suspend trading 11 onshore bonds starting Monday as it plans to hold a meeting on bond redemption arrangements. It is estimated the total amount of bonds suspended exceeds CNY16 billion. The company, down 70% year-to-date, said it faces a liquidity crunch that is “the greatest difficulty since our founding” and will communicate with stakeholders and consider various debt management measures to protect the rights and interests of investors.
The Agnelli family’s holding company Exor has taken a 15% stake in Philips with the deal allowing the stake to increase to 20%. Exor has stepped up its efforts to diversify its assets over the years and the Philips stake is thus a continuation of this strategy. Investors may change their views on Philips with a new long-term shareholder on board following years of troubles and a costly product recall.
After several rounds of price cuts earlier both in US and China, Tesla has now cut prices in China for some models. Price was Model Y Long-range and Model Y Performance has each been cut by RMB 14,000 ($1900). The Model Y forms part of the stable of vehicles, along with the Model 3, which are the best-sellers for Elon Musk’s company. The push for local EV makers in China has made the landscape for Tesla relatively tougher and Tesla’s China deliveries slumped 31% in July to lowest levels this year.
New aggregate financing plunged to RMB528 billion in July from RMB4,224 billion in June. While seasonally July was a slow month in credit, the number came in less than half of the RMB1,100 billion anticipated by economists. The growth rate of outstanding aggregate financial slowed to 8.9% Y/Y in July from 9.0% in June. New RMB loans were RMB346 billion in July, down from RMB3,050 billion in June, and were also less than half of the RMB780 billion expected. The growth of outstanding RMB loans fell to 11.1% Y/Y from 11.3% Y/Y. New loans to both the corporate sector and the household were weak. New loans to corporate dropped to RMB238 billion in July from RMB2,280 billion in June and RMB288 billion in July last year. New loans to households fell to net repayment of RMB201 billion in July, from new lending of RMB964 billion in July and RMB122 billion in July last year. The growth in M2 declined to 10.7% Y/Y in July from 11.3% in June.
Headline PPI rose 0.3% MoM (exp 0.2%) and accelerated from the prior 0.0%, which was revised down from 0.1%. The Y/Y rose 0.8%, up from the prior 0.2% (revised up from 0.1%) and above the 0.7% forecast. Core and super core measures were also higher than expected and steady at last month’s pace with core at 2.4% YoY and super-core at 2.7% YoY. The higher core measures suggest that the uptick is not just coming from the energy prices but a broader uptick in services inflation and could alert the Fed. Meanwhile, prelim University of Michigan saw the headline fall to 71.2 (prev. 71.6), but above the expected 71.0. Current conditions printed 77.4 rising from the prior 76.6 and topping the consensus of 76.9, but forward-looking expectations declined more-than-anticipated to 67.3 (exp. 68.1, prev. 68.3).
The weekly Commitment of Traders report which highlights futures positions and changes made by hedge funds across commodities and forex in the week to August 8 showed broad selling after the broad June to July rally faded. The Bloomberg Commodity Index traded down 1% during the week with weakness seen across all sectors except energy. Traders responded to these changes by turning net-sellers of all, but five of the 24 major commodity futures tracked in our weekly update, published later today on the trading platform and www.analysis.saxo . While natural gas and diesel saw demand the selling was being led by gold, silver, copper, soybeans and corn.
Japan’s preliminary Q2 GDP will be released tomorrow morning in Asian hours, and estimates are suggesting we could see a strong uptick. Annualized GSP is seen coming in higher at 2.9% QoQ from 2.7% in Q1 as per Bloomberg forecast. While this could rattle the JGB markets and the Japanese yen as further tightening expectations build in, most of the GDP gains will likely come from net exports and consumer spending could remain weak. This could keep the BOJ’s focus on wage growth and give them room to argue need for continued stimulus.
Earnings to watch
Our earnings focus today is on Chinese consumer companies Meituan and Xiaomi with especially latter being a key test of consumer confidence in China. Xioami is expected to deliver another quarter of negative revenue growth before resuming growth in Q3.
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