A look at the coming day in the European and international markets from Wine Cole.
It was a jittery start to the week in Asia as concerns about China’s heavily indebted real estate sector weighed on stocks and the yuan, which hit a one-month low despite aggressive reform from the People’s Bank of China.
Chinese blue chips lost 1.1%, on top of a 3.4% decline last week. Shares of Country Garden fell more than 12% to an all-time low after the real estate company suspended trading on 11 of its internal bonds.
Data on bank lending and credit on Friday was the latest terrible read, though all the talk of deflation was a bit premature. One month of negative consumer prices is not actually deflation, which is defined as a sustained decrease in the price level across an economy.
Core inflation actually doubled to 0.8% year-over-year, and the decline in consumer prices has been largely driven by the volatility in pork prices over the past year. While pork is important in China, it hardly represents the entire economy.
However, Western analysts argue that Chinese consumers need to save less and spend more to get the economy moving, and Beijing seems to take an almost moral view on consumption, as if it is a sin. This puts the focus on retail sales on Tuesday where a 4.7% rise is expected, although a wide range of estimates from +2.8% to +10.8% suggests the possibility of a surprise.
The same was true for US retail sales on Tuesday, which averaged a 0.4% increase, but Bank of America was hovering 0.7% based on credit and debit spending for the month. The strong result should be positive for corporate earnings, but also challenges the market’s bullish view of the Fed, with futures holding a 70% chance that the tightening cycle will end.
This wouldn’t be good news for Treasury coffers, which are being forced into licenses to maintain demand as the government borrows heavily to fund its $1.6 trillion budget deficit.
10-year yields rose to 4.18% on Monday and within striking distance of the 2023 high of 4.206%, a break of which would be bearish to test last year’s high of 4.337%.
With the Bank of Japan holding Japanese government bond yields at 0.62%, the widening spread lifted the dollar to a fresh 2023 high of 145.22 yen on Monday. Anything above 145.00 risks a Japanese intervention, but bulls have their eyes on the top from last October at 151.94.
The dollar is also flying over the Australian and New Zealand dollars and a host of emerging Asian currencies, which are being dumped as proxies for China risk.
Key developments that may affect the markets on Monday:
– German wholesale prices for July appear in a blank notebook
(Writing by Wayne Cole; Editing by Jacqueline Wong)