It was a weak start to the week in financial markets with the eternal optimism of investors clashing with the reality of Chinese economic data.
There is a bizarre willingness to turn a blind eye to economic reality these days, as long as the Fed doesn’t raise rates too quickly. That doesn’t seem particularly sustainable, but as we’ve seen so often before, it can take a lot longer than you might expect.
Tariff reduction does little to ease Chinese fears
China’s economic data overnight was very disappointing, to say the least. Combined with the lending figures on Friday, it does not paint a good picture of domestic demand or the growth outlook. Retail sales were particularly weak, while fixed investment and industrial production were also well below consensus. It appears that the reopening boost was both uninspired and short-lived.
And yet the PBOC’s decision to cut the MLF and 7-day reverse repo rates by 10 basis points overnight came as a complete surprise. It seems no one saw that coming and it’s understandable why. Loan demand is not struggling because of high rates, it is the Covid lockdown, continued uncertainty about the property market and the global environment. This tariff will reduce none of that. But it means that a cut to the LPR is now almost certain.
Japan recovers as inventories hold back Q2 GDP
The reopening in Japan boosted spending in the second quarter, although the GDP reading slightly missed expectations thanks to a drop in inventory that lifted the reading in Q1. These fluctuations can largely be ignored and the underlying picture remains positive for the Japanese economy. Of course, the global picture is increasingly bleak and uncertain, which could weigh into next year.
Eye-watering profits for Saudi Aramco
Saudi Aramco is the latest oil company to report record quarterly profits and as the biggest, the numbers are far more eye-popping. Net income rose 90% from last year to $48.4 billion, but the dividend remained the same at $18.8 billion, as the company remains committed to investing in further expansion of production. That naturally won’t stop political pressure from mounting around the world as people grapple with the concept of rising energy costs destroying household budgets and threatening the global economy while reeling from record profits.
Oil slips amid bad data from China
One area where traders are paying attention to the Chinese data is clearly commodity markets, with crude off 2% on Monday. China’s figures are really worrying and the authorities have a lot of work to do to arrest the weak domestic demand. That does not bode well for oil demand especially when the country remains so committed to zero-Covid. And with cases continuing to rise, the downward pressure on oil prices could intensify.
Throw in a US-Iran deal and we might be able to wave goodbye to triple digit oil prices for a while. Of course, no matter how close the two are, you can never assume a deal is done until it’s signed. If it goes above the line, we could see oil slide below $90 and maybe even stay there.
A technical reversal?
Gold tried and failed again to sustainably break above $1,800 despite closing slightly higher here on Friday. The yellow metal has slipped nearly 1% so far today to trade back around $1,785 amid a strengthening dollar. This could just be a technical move, with the dollar seeing some support after pulling more than 4% off its highs. Similarly, it was a strong rebound in gold and $1,800 looks like an increasingly significant barrier.
Can Bitcoin break $25,000?
Bitcoin tested the water above $25,000 and was pushed back at the first attempt. It seems that the cryptocurrency, like many other instruments, is testing a potentially major barrier after the recent recovery and we may see some profit. Whether that becomes a full rotation lower is not yet clear, but it doesn’t seem to have the momentum for a breakout at the moment.