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Asia-Open: Traders expected China's regulators to tap the brakes but not reverse the momentum

Market Analysis / 3 Min Read
Stephen Innes / 17 Jul 2020

Markets

US equities were weaker Wednesday, the S&P down 0.3% following losses in Europe and Asia. Most notably, China's CSI300 fell 4.8%, the most significant decline in five months. And despite a beat on Q2 GDP, China's retail sales were weaker than expected. 

For all concerned, the miss on China's retail sales provides an unambiguously stark reminder of the arduous – not to mention long and winding – road to a full global economic recovery.

Mixed US data did little to sway sentiment: US retail sales were slightly better than expected in June, up 7.5%mom, initial jobless claims were weaker, and the Philly Fed index for July followed the Empire state survey higher.

Defensives were outperforming on Thursday in light volumes overall. However, with the weekend looming, if I was pressed for a view, it looks more like de-risking than rotation.

The action is less Covid headline-driven on Thursday. Still, like Wednesday’s session, there’s a pullback in the long momentum/growth trade while pockets within value/cyclicals are outperforming, suggesting optimism around the vaccine simmers on the backburner. 

Another day, another 'stay at home' winner downgrade; Netflix, Spotify – and now Peloton. They’re all due a breather anyway. Collectively, these three stocks have added more market cap since the March low than the current market value of Royal Dutch Shell.

In the first big test for the crowded long Mega Cap Tech/At Home basket trade, Netflix slumped after-hours, reporting that fewer subscribers came on board. However, early price action on the S&P 500 suggests this week's rotation playbook was very astute as the market is taking the Netflix miss well in its stride.

Chinese equities have been battered this week. China wants to cool the rally with the People's Daily attacking Kweichow Moutai (China's biggest domestically listed company) over liquor prices, which sent shares down 8.7%. Foreign selling continues with three consecutive days of net sales. I think traders expected China's regulators to tap the brakes but certainly not shift the momentum gear into reverse, so this is a big surprise to most foreign mainland stock pickers.

Forex markets

The FX market is in "risk-off" mode this morning, with mixed Chinese activity data and the most significant daily drop in China's CSI300 equity index since February the likely culprits and throwing a spanner into the works for some best-laid plans, But the surprising China retail sales miss was the catalyst that got the US dollar rolling "uphill".Covid-19 may also be playing its part, with record new cases in regions including Tokyo and the Australian state of Victoria.

The AUD is weaker overnight alongside lower risk appetite and perhaps left a little confused by the mixed signals from the labor market data. However, trying to interpret that notoriously noisy data set even is brutal even for veterans like myself; I don’t ever push the Aussie jobs data set into my algo.

Gold markets 

As expected, gold fell below USD1,800/oz on USD gains and profit-taking. Still, the yellow metal could correct further without threatening the long-term rally.

Although the markets were in a "risk-off" mode, as evidenced by a sharp drop in China's equities – including the biggest fall in the CSI300 equity index since February – gold still fell.

However, the Covid-19 case count continued to rise with record new cases in Tokyo, Hong Kong and the Australian state of Victoria, plus the gnarly state of affairs in the US Sun Belt which is keeping the wall of money bid on dips to $1,795.

The threat to the near-term bullish view is that positive vaccine news, including the more recent possibility of promising news of a UK vaccine, could negatively impact gold.

Thursday's "Fed speaks" from Fed officials Williams and Evans certainly imply ongoing accommodative policies are on the cards; even if inflation picks the feds will continue to fill the punch bowls which should remain supportive for gold going forward from a Fed policy perspective. But this is nothing new as the market has lower for longer in the price.

My short-term trading view runs counter to my long-term bullish impulses, thinking real yields appear vulnerable due to better US data, a declining covid-19 mortality rate, elevated equities sentiment, and, most importantly, the scary bond volumes of supply coming to market next week. It remains questionable how sustainable the "liquidity on "rally is for gold into next week. 

For more market insights, follow me on Twitter: @Steveinnes123 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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