The China Caixin manufacturing PMI, which is more export-oriented, rose to 51.2 in June from 50.7 in May, the most robust improvement rate recorded since December 2019, which is signaling that the manufacturing sector continued to recover in a post-epidemic period.
The key is that the upturn was supported by further relaxation of epi controls, which enabled more firms to resume the regular order of business. Indeed, business confidence rose to a four month high, while firms expanded their purchasing activity at a quicker rate.
But the new export orders continued to be a sore point, suggesting external demand remains weak. This may be due to anti-China sentiment or nothing more sinister than consumer uncertainty around the pandemic overseas; we’ll find out soon enough.
We’ll likely need several months of improving data to bridge the consumer's dichotomy between current buoyant conditions and subdued future expectations, but one needs to ask if portfolios are ready for a 55 or 60 PMI print in the coming months?
Still, China's string of data beats supports the notion that global economic recovery is well underway.
Gold market conversation
For the last week or so, the discussion on how to hedge against inflation has been nonstop. No one expects a massive breakout, but everyone realizes portfolios are well under positioned for even a modest uptick in inflation.
There’s a definite pushback against using TIPS, which trade with negative yield; in other words, traders don’t want to pay for inflation protection.
This is where gold shines: even if the US dollar does not cooperate, gold remains a fantastic non-USD hedge.
The consensus has been that the dollar will decline, as inflation (the right kind) would represent recovery and lead to the global rotation trade. I remain reticent to the view and when we return to all systems go – or at least as close to all orders go as systematically possibly – the US markets will be the only game in town. Simply put, US exceptionalism will reign supreme and the dollar will remain supported by inflation.
It was initially a somewhat choppy session overnight in the G10 space with JPY crosses bid into month/half year-end, although the USD gave up ground against GBP, AUD and the EUR as risk sentiment remained a touch supportive.
The Euro remains supported. While Covid-19 concerns in Europe remain, they don’t seem as acute as in parts of the US, potentially adding some support to the cross-Euro plays.
Heavy selling pressure over the past week or so was notably lighter overnight, and calendar-related flows and positioning undoubtedly played a part in the rebound. Monday's lows towards 1.2250-55 remained intact overnight with the pair seemingly finding support around 1.2260 earlier in the session. Comments from the BOE's Haldane predicting a V-shaped recovery and stating the UK is rebounding faster than expected perhaps added a touch of support; as the USD began to slip, GBP outperformed into the close of the US session.
The Aussie was suitably under pressure during the latter part of the APAC session, finding supply from 0.6885 with the pair trading as low as 0.6833 in early Europe before decisively turning bid from those lows and accelerating to the topside into the European close as risk rebounded convincingly and risk sentiment flourished. Still, calendar-related flows and positioning undoubtedly played a part in the AUD zig zag.
The good news for risk markets is that oil prices are stabilizing higher after the API survey, but, on a more sombre tone, not much can be gleaned from overnight price action as the two most active sessions for the global oil markets were a tale of two trends.
Oil prices at the New York open surged as a tailwind from OPEC’s extraordinary compliance and improving cyclical data shot prices higher, only to get knocked lower between the most actively trading hours due to Covid-19 headwinds.
In the meantime, expect the bid to be bought on the improving inventory backdrop and if the API survey is confirmed by the EIA, prices higher is one of the two bullish market conditions that have been met, which is the inventory draw. The other is a drop in virus case counts in at least one of the most populous US states, although that argument is falling into the heads I win tails you lose file at the moment, it's just that unpredictable to forecast over the near term.
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Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot