It was a downbeat day across Asian equity markets (Wednesday)with the major bourses following the negative Wall Street lead. Risk assets have been given a reality-check this week. The latest raft of Chinese data confirmed that the PBOC has plenty of work ahead of them if they want to right the ship(so to speak) of the world’s second largest economy, meanwhile elevated US bond yields are serving as a reminder that interest rates probably won’t be heading south anytime soon.
On Tuesday, Chinese authorities did appear to pre-empt the bad data dump by cutting interest rates, and initially this did serve to neutralize the initial reaction to the quadruple dose of disappointment (with Industrial Production, Retail Sales, Fixed Asset Investment and Unemployment all missing the mark). However, the incremental approach to tackling the economic troubles which the PBOC has seemingly adopted is falling short of the ‘all in’ approach which investors have become accustomed to seeing from central banks in other parts of the world. This gap between stimulus expectations and reality isa reason why foreign investors (by and large) remain underweight on China and why risk-assets are facing renewed headwinds.
On the US macro front, better than expected retail sales data (0.7% verses 0.4% expected verses 0.3% prior) was offset by a woeful Empire State Manufacturing Index reading (-19 verses -0.9 expected verses 1.1 prior). US bond yields were mixed but largely held their ground, while the DXY initially did slip slower with the euro and sterling posting gains. However today, the DXY is pushing higher again on risk aversion with the greenback receiving most of the safe haven buying flows. Meanwhile the AUD has continued to decline with the currency slipping below 0.6450. The Aussie Dollar is still feeling the effects of the weaker Chinese data.
Elsewhere, the gold price is looking rattled as a result of ongoing demand for the USD. Gold is being pressured around the US$1900 level with traders looking elsewhere for yield. So far, gold has survived one brief dip below the $1900 level (much like it did at the end of June) with buyers stepping in at this key technical and psychological level. However, if strong demand for the USD persists and $1900 were to finally give way this could prompt a larger breakout move lower.
Over the last several weeks, oil had been showing great resilience despite the long run of disappointing Chinese numbers. However, the combination of further Chinese macro weakness, continuing USD strength and slowing momentum indicators have now resulted in the oil price ceding some ground. The WTI contract is clinging to the US$80 level for the time being but how long this can be maintained will depend on the longevity of the latest bout of risk aversion in the market.
Attention now turns towards the upcoming release of the FOMC Meeting Minutes. If the wording of the minutes hints at the FOMC needing to maintain interest rates at elevated levels for longer, this could further sour the mood in financial markets. On the flip side, if there is evidence that the more dovish members of the board are now making a stronger case given the disinflation trend, this could provide a reason for a potential USD pullback.