China will allow provincial governments to raise about 1 trillion yuan ($139 billion) by selling bonds to pay off the massive debt burden of local governments. Although many analysts are unaware of it, China's massive debt problem, combined with falling property prices, remains one of the biggest threats to the world – including to China's financial stability. Property development giant Country Garden Holdings predicted a multi-billion dollar loss for the first half of this year, raising questions about how to solve the debt and property crisis. Chinese stocks fell sharply again, weighing heavily on other Asian indexes as well as Europe.
In addition to China concerns, we see expectations for rate cuts falling in light of some hawkish comments from Fed officials and the risk of a slowdown in recent disinflation.
The USD is on track for a fourth week of gains, showing increasing concerns about the global economy and investors' flight to the USD safe haven. The USD is also supported by higher Treasury yields and expectations that the Fed sees little reason to cut rates anytime soon.
Despite the deterioration in risk sentiment, oil prices have continued to rise this week, reaching their highest level since November yesterday. Demand for oil remains robust despite signs of a slowing economy and weak production.
The UK surprised with faster than expected growth – but instead of providing a tailwind, expectations rose that the Bank of England may raise interest rates further to combat persistently high (but cooling) UK inflation. GBP benefited from these rising rate hike expectations. The BoE's policy rate is now only 0.25% away from the Fed's policy rate of 5.5%.
I expect temporary USD weakness in response to likely cooling producer prices. A sharp drop in China's PPI may have contributed to a drop in producer inflation in the US as well. I think it is more likely that the data will be slightly cooler than expected or in line with expectations (0.2% month-over-month for both PPI and core PPI). However, after a short-term downturn, the USD will regain strength. Equities, especially rate and China-sensitive stocks, will remain under pressure. Price gains will be met with profit taking. We expect increased profit-taking towards NYSE closing.
👁 ROB'S MARKET OVERVIEW:
August 11, 2023
🇺🇸 US Markets ↕️/↘️
Cyclical Stocks ↕️/↘️
Tech/Growth Stocks ↘️
Financial Stocks ➡️
Defensive Stocks ➡️/↗️
Energy Stocks ➡️ (remains bullish medium term)
Materials Stocks ➡️/↘️
💱 Forex
GBP ↗️ (Benefits temporarily from increased expectations of rate hikes following solid UK growth data)
USD ↘️/↕️/↗️ (weakening on likely cooling PPI – but regaining strength towards eod)
EUR, CAD ➡️
AUD ↗️/↕️/↘️ (will lose initial gains towards eod)
JPY, CHF ➡️/↘️ (safe haven demand only supports USD, due to higher Fed rates & US economy outperformance)
⚒ Commodity Markets ↕️
Oil prices ↕️/↗️
Natural Gas prices ↕️/↗️
Metal prices ↘️
Precious Metal prices ➡️/↘️ (as rate hike expectations rise, gold will remain under pressure)
⚡️Cryptos ➡️/↘️ (risk-off, stronger USD and higher yields weigh on cryptos)
(*↗️ bullish, ↘️ bearish, ➡️ sideways / stable, ↕️ mixed / volatile)
Yours, Robert
