It was not China's aggressive foreign policy that was the source of the disturbance in the capital markets, but its aggressiveness at home as it asserts control over parts of the tech sector and toughens its anti-trust efforts.
Hong Kong shares were bearing the brunt. The Hang Seng fell by 10% in the three sessions, including today. The Shanghai Composite was off nearly 5.5% in the same period. A few of the other larger markets in the region, including Japan, South Korea, and Australia, posted small gains.
Moody's affirmation of a stable credit outlook helped lift Philippines' stocks by 2.4%, the most in a couple of months and recouped most of Monday's slide. Europe's Dow Jones Stoxx 600 was off around 0.5%, led by financials and energy. US futures were trading with a heavier bias.
Benchmark bond yields are lower. The 10-year Treasury yield was hovering near 1.25%, off more than three basis points. European yields were 1-2 bp lower. The dollar was bid.
The yen continued to be resilient. Emerging market currencies were retreating as an expression of the risk-off mood. The JP Morgan Emerging Market Currency Index was off 02%.
Industrial metals were knocked back by reports suggesting China was considering new export tariffs on steel. Oil was sidelined, and the September WTI contract was little changed, around $72 a barrel. Gold was not drawing much of a bid. A stronger dollar may offset the lower yields as a consideration. If the yellow metal does not recover, it may close below $1800 for the first time in three weeks.
Asia Pacific
Beijing is fighting a two-front battle. Domestically, the new drive that began last year with the Ant IPO and crackdown on Alibaba (NYSE:BABA) has broadened. Stronger regulatory efforts, anti-trust, and IPOs in foreign markets, and now private education companies are killing the proverbial goose that lays the golden egg by underscoring international investors' concerns about investing in China.
The capital inflows were to create conditions under which Beijing could ease capital outflow restrictions. The other front of the battle is in foreign policy. Yesterday's high-level meetings with the US appeared to have failed to break new ground. While reports suggest that there is still scope for Biden and Xi to meet in October, with the March and July contentious meetings, the chances of an agreement seem remote.
Reports today suggested China was considering a 10-25% tariff on steel exports starting in Q3 to rein in the sector. This is separate from its regulatory initiatives. This seems more in the containing commodity prices and rationalizing the steel sector. It appeared to have an immediate effect of sending iron ore and steel rebar prices lower. However, nickel, which is needed in the new batteries, proved resilient and was at new multi-year highs. Separately, China reported industrial profits moderated to 20% year-over-year from more than 36% in May.
South Korea reported slightly softer than expected growth in Q2. GDP rose by 0.7% on the quarter after a 1.7% pace in Q1. This was broadly consistent with what had been perceived as a maturing of the Asia economic recovery.
The government was quick to reaffirm its expectation for 4% growth this year, indicating that today's report will have no impact on monetary policy. The central bank meets in late August. The market has fully discounted a 25 hike in the next three months. Separately, South Korea and North Korea agreed to re-establish formal relations, including the hotline.
A record number of COVID cases in Tokyo did not offset the flow into the yen today. For the first time in four sessions, the dollar slipped below JPY110.00. Initial support was seen in the JPY109.80 area, but recall last week's low was slightly above JPY109.00. It appeared that the same considerations that weigh on US Treasury yields boosted the demand for the yen.
COVID cases in Sydney were still rising, and the risk-off was pushing the Australian dollar lower. It has met resistance in the last three sessions in front of $0.7400, and expiring options were set at $0.7380 today and $0.7390 tomorrow. On the downside, yesterday's low near $0.7330 was holding, and a break could see a test of last week's lows (~$0.7290-$0.7300).
The nearly 0.25% rise in the dollar against the Chinese yuan was the largest in almost a week and a half. The greenback spiked to CNY6.5125 earlier, which was the highest level since April. The 200-day moving average was found by CNY6.5170. The greenback has not traded above this moving average since last July. The PBOC set the dollar's reference rate at CNY6.4734, a bit softer than the median projection in Bloomberg's survey for CNY6.4741.
Europe
Interest in the eurozone's money supply figures waned, perhaps as a result of the ECB's asset purchases and negative interest loans. June M3 rose 8.3% year-over-year, largely in line with estimates. However, it was the underlying lending figures that drew more interest.
Loans to households rose 4% after a 3.9% pace in May, while loans to companies rose 1.9%, matching the previous month's rise. The economic highlights of the week still lie ahead. At the end of the week, the preliminary July CPI and Q2 GDP will be reported. We see upside risk to the Bloomberg median forecast for 2.0% CPI. The median forecast calls for a 1.5% increase in the GDP quarter-over-quarter.
Hungary hiked its key rate by 30 bp in June to 0.90%. It is expected to follow up with another 20 bp hike today. The overnight deposit rate has stood at minus 5 bp since March 2019, when it was lifted from -15 bp, where it had been since August 2017. Inflation runs above 5%, the highest in nine years, and the core measure is at 16-year highs. As a result, Hungary may lift the deposit rate out of negative territory today to 10 bp.
The euro was trading inside yesterday's range (~$1.1765-$1.1815). The 20-day moving average was slightly below $1.1820, and the euro has not traded above it since June 11 and has not closed above it since June 7. Although a base was carved out in the $1.1750-$1.1760 area, the single currency has not been able to distance itself from it. A break targets the year's low set at the end of March near $1.1700.
Reports of falling COVID cases in the UK may have helped spur sterling's gains yesterday to a six-day high near $1.3835. Recall last week's low was close to $1.3570. However, the recovery stalled, and sterling was consolidating today, straddling the $1.38 level. A break of the $1.3765 area could signal a move into a support band in the $1.3700-$1.3730 area.
America
The US 10-year TIP yield was at a record low today, near minus 1.14%, which seemed incredible given that the US is expected to report Q2 GDP around 8.5% at an annualized clip and a deflator of almost 5.5%. The decline in the real yield yesterday was cited as a key force behind the greenback's heavier today.
Meanwhile, states that have had low vaccination rates were seeing strong spikes in the virus. The latest figures showed about 60% of the 18+ cohort have been fully vaccinated, and 69% have been given one of two shots. That means a little more than 49% of the population was fully vaccinated, which has been fairly stable. Ironically, even as the US secures more vaccines, a sizeable minority does not want it. Meanwhile, efforts to reach a bipartisan deal on infrastructure were still being stymied.
The US reports June durable goods orders today. The headline (~2.1%) will be lifted by aircraft, without which a modest gain (~0.8%) is expected. Shipments of non-defense and non-aircraft goods may have slowed to 0.8% from 1.1%. However, more attention may be on house price reports today.
The FHFA reports its monthly house price index. It has been rising by more than 1% a month since last June without exception. In April, it rose the fastest over this period, posted a 1.8% month-over-month increase. S&P CoreLogic Case Shiller index of house prices in the largest 20-cities and nationwide are expected to have accelerated in May.
This comes as the FOMC's two-day meeting begins, and several officials share our concerns about the optics, if not the impact of the central bank continuing to buy mortgage-backed securities. The Conference Board's July consumer confidence measure is expected to soften from elevated levels. Lastly, note that Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), among others, report earnings today.
Canada reports June CPI figures tomorrow, and the year-over-year rate may decline 3.2% from 3.6%) for the first time this year. Mexico reports June's trade balance. A $2 bln surplus is expected, which would be the largest for Q2. Last year, the monthly trade surplus averaged $2.8 bln a month, up from $446 mln in 2019 and a $1.1 bln deficit in 2018.
In the first five months of 2021, the average monthly surplus has fallen to $66.5 mln. Separately, we note that the dispute over measuring domestic content for autos and auto parts under the USMCA has not been resolved.
The US dollar was firm against the Canadian dollar but within the recent range (~CAD1.2525-CAD1.2610). There is an option for $550 mln at CAD1.26 that expires today. The 20-day moving average was near CAD1.2515, and the greenback has not traded below it since mid-June. On the upside, the 200-day moving average was around CAD1.2610. A move above it would target the CAD1.2680 area initially.
The greenback was also confined to yesterday's range against the Mexican peso (`MXN19.99-MXN20.1650). The risk-off mood warns of the risk of a stronger US dollar. Last week's high was near MXN20.25.