The rebound is starting to wane
In England, in France and in Spain
But prices keep rising
With German’s realizing
They’ve not yet transcended their pain
First, some housekeeping, I will be on my mandatory two-week leave starting Monday, so there will be no poetry after today until September 7.
Meanwhile, this morning’s market activity is bereft of interesting goings-on, with very few stories of note as the summer holiday season is clearly in full swing. Perhaps the three most notable events were UK Retail Sales, German PPI and new Chinese legislation. Frankly, none of them paint a very positive picture regarding either the economy or markets going forward.
Starting at the top, UK Retail Sales (-2.4% in July) fell short of expectations, with the Y/Y reading back down to +1.8% from a revised +6.8% and the universal description of the situation as the reopening rebound is over. The spread of the delta variant continues to add pressure as closures are dotted throughout the country, and sentiment seems to be turning lower. It ought be no surprise that the pound (-0.15%) has fallen further, taking its month-to-date losses to 2.5%. Too, the FTSE 100 (-0.2%) is under pressure, although it does remain in a broader uptrend, unlike the pound. However, the first indication here is that risk is being sold off, which seems a pretty good description of the day.
Next, we turn to Germany’s PPI reading (10.4% Y/Y, 1.9% M/M) which is actually the largest annual rise since January 1975, where prices were impacted by the oil crisis! While we have all been constantly reassured that inflation is a fleeting event and there is absolutely no indication that the ECB will see this number and consider tightening policy in any way, shape or form, I suspect that the good people of Germany may see things a bit differently. The chatter from Germany is a growing concern over rapidly rising prices with a real chance of political fallout coming. Remember, Germany goes to the polls next month in an effort to replace Chancellor Merkel, who has been running the country for the past 16 years. Currently no candidate looks particularly strong, so a weak coalition seems a very possible outcome. It is not clear that a weakened Germany will be a positive for the euro, which while unchanged on the day has been trending steadily lower for the past two months and yesterday broke below, what I believe is, a key support level at 1.1704. Look for further declines here.
And finally, the Chinese passed a stricter personal data protection law prohibiting private companies from collecting and keeping data on their customers without explicit permission, a practice that had heretofore been commonplace. This appears to be yet another attack on the tech sector in China as President Xi ensures that the Chinese tech behemoths are disempowered. After all, similarly to the US, the value of the big platforms comes from these companies’ abilities to compile and monetize the meta-data they collect by using it for targeted advertising. Of course, the law says nothing about the Chinese government collecting that data and maintaining it, as that is part and parcel of the new normal in China. One cannot be surprised that Chinese equity markets continue to decline on the back of these ongoing attacks against formerly unsullied companies, with the Hang Seng (-1.85%) now lower by 21% from its peak in February, and showing no signs of stopping as international funds flow out of the country. Shanghai (-1.1%) also fell sharply, but given this index has more SOE’s and less tech, its decline from its February peak is only 9%. As to the renminbi, it softened a bit further and is pushing slowly back above 6.50 at this time, its weakest level since April.
Otherwise, nada. Equity markets are in the red everywhere, with the Nikkei (-1.0%) also slipping and we are seeing losses throughout Europe (DAX -0.4%, CAC -0.3%, FTSE 100 -0.2%) as well. US futures, too, are pointing lower, with all three indices looking at 0.4% declines. Of course, yesterday, things looked awful at this hour and both the NASDAQ and S&P 500 managed to close higher on the day, albeit only slightly.
Bonds are definitely in the ascendancy with yields continuing to slide. Treasury yields are lower by 1.5 bps, Bunds and OATs by 0.5bps and Gilts by 2.0bps. The question to be asked here, though, is, does this represent confidence that inflation is truly transitory?, or is this a commentary on future economic activity?, or perhaps, is this simply the recognition that central banks have distorted these markets so much they no longer give useful signals? Whatever the underlying driver, the reality of bonds’ haven appeal remains and given the signals from the equity market, falling bond yields are not a big surprise.
Commodity prices remain under pressure generally, with oil (-0.8%) continuing its recent decline. After a massive rally from last November through its peak in early July, crude has fallen 17% as of this morning. In this case, while I understand the story regarding weakening economic growth, it seems to me the long term picture here remains quite positive as the Biden administration’s efforts to end oil production in the US, or at the very least starve it of future growth, means that supply is going to lag demand for years to come. That implies higher prices are on the way. As to the rest of the space, gold (+0.25%) continues to trade in its 1775-1805 range since mid-June with the exception of the two-day blip lower that was quickly erased. Copper’s recent downtrend remains intact although it has bounce 0.3% this morning, and the rest of the industrial metals are either side of unchanged.
The dollar is broadly stronger this morning, with CAD (-0.7%) the weakest of the G10 currencies, clearly suffering from oil’s decline but also, seemingly, from self-inflicted wounds regarding its draconian Covid policies. The Loonie has now fallen 4.25% this month with half of that coming in just the last two sessions. But we are seeing continued weakness throughout the commodity bloc here with NOK (-0.45%) and AUD and NZD (both -0.3%) continuing their recent declines. On the plus side, only CHF (+0.2%) has shown any strength of note.
Emerging market currencies are also under pressure this morning led by ZAR (-0.6%) and MXN (-0.4%) as softer commodity prices weigh heavily here. We also continue to see weakness in some APAC currencies, with IDR (-0.35%) and KRW (-0.3%) suffering from concerns over the ongoing spread of the delta variant and the corresponding investor funds outflow from those nations. On the flipside, PHP (+0.35%) was the only gainer of note in the region after the government loosened some Covid restrictions.
There is no economic data today and only one Fed speaker, Dallas Fed President Kaplan. Of course, Kaplan has been the most vocal calling for tapering, so we already know his view, and after the Minutes from Wednesday, it seems he has persuaded many of his colleagues. But once again I ask, if the economy is slowing, which I believe to be the case, will the Fed really start to remove accommodation? I don’t believe that will be the case. However, for now, the market is likely to bide its time until next week’s Jackson Hole speech by Powell. Beware summer choppiness due to lack of liquidity and look for the current dollar uptrend to continue while I’m away.
Good luck, good weekend and stay safe