The week features a busy calendar with manufacturing data from several major economies, as well as several central banks making rates statements. China manufacturing came in lower than expected and the market watches US unemployment figures as the countdown to a September Fed rates hike continues.
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World Indexes and Forex Rates
In the Calendar This Week
Sun 2 August
China Caixin Final Manufacturing PMI (actual: 47.8 expected: 48.3 previous: 48.2)
Mon 3 August
UK Manufacturing PMI (expected: 51.6 previous: 51.4)
US ISM Manufacturing PMI (expected: 53.6 previous: 53.5)
US Trade Balance (expected: -3.06B previous: -2.75B)
Tue 4 August
Australia RBA Rate Statement
UK Construction PMI (expected: 58.6 previous: 58.1)
Wed 5 August
UK Services PMI (expected: 58.1 previous: 58.5)
US Non-Farm Employment Change (expected: 218K previous: 237K)
Canada Trade Balance (expected: -2.8B previous: -3.3B)
US Trade Balance (expected: -42.6B previous: -41.9B)
Thu 6 August
UK Official Bank Rate (expected: 0.50% previous: 0.50%)
US Unemployment Claims (expected: 269K previous: 267K)
Australia RBA Monetary Policy Statement
Japan BoJ Monetary Policy Statement
Fri 7 August
BOJ Press Conference
Canada Building Permits m/m (expected: 2.6% previous: -14.5%)
Canada Employment Change (expected: 5.7K previous: -6.4K)
Canada Unemployment Rate (expected: 6.8% previous: 6.8%)
US Non-Farm Employment Change (expected: 224K previous: 223K)
US Unemployment Rate (expected: 5.3% previous: 5.3%)
Sat 8 August
China Trade Balance (expected: 53.4B previous: 46.5B)
China CPI y/y (expected: 1.5% previous: 1.4%)
Making The News
The globe's two largest economies dominate economic news this week, as China faces - and responds to - growth slowdown, and the US dollar resumes a rally into the expected Fed rates hike of 0.25% next month. Commodities take the brunt as markets and expectations shift.
US Dollar Strength
Despite a non-committal FOMC statement, last week, it is apparent that the Fed is grooming markets for a rates hike during the fourth quarter: a "leaked" staff memo conveniently revealed the details of the intended hike, and several Fed spokespersons are appearing in the media with the message that a September rates hike is a Good Idea.
The prospect of higher rates in the US has made the US dollar more attractive to investors and the US Dollar Index is once again approaching the significant 100 points mark.
The US dollar increased 7.75% against the world's major trading currencies in 2015, after a 12.8% rally last year.
Emerging market currencies, on the other hand, are feeling the impact of US dollar strength and expectations of a US interest rates increase for the first time in a decade.
In response, EM currencies have hit a thirteen year low, with he Brazilian real, the Australian and Canadian dollars, the Turkish lira, and South African rand being worst affected.
Besides the well-known crash in gold, copper declined 10% during July, hitting its lowest level since June 2009. Most commodities are priced in US dollars, and greenback strength is causing a general decline in commodity markets. WTI crude fell by 20% in July and Brent crude by 18%.
OPEC production is running at full throttle - up by 1.5 million barrels/day since the start of 2015, and US domestic production currently outputs 9.7mil barrels/day, the highest since 1971, according to the U.S. Energy Department.
Martijn Rats, a Morgan Stanley analyst is quoted by Reuters:
If Saudi Arabia and Iraq keep running full tilt and Libya and Iran get their oil production back on track, crude prices could languish below $60 for the next three years. On the current trajectory, this downturn could become worse than 1986.
China Contraction and Stimulus
China Purchasing Managers Index (PMI) conducted by Caixin Media and Markit Economics was released on Sunday and fell to a worse than expected 47.8, thus indicating that Chinese manufacturing is contracting. The state National Statistics Bureau cites "weak overseas and local demand".
In response, Premier Li Keqiang has just announced major government spending on infrastructure, specifically new airports construction and an overhaul of outdated metropolitan drainage pipelines.
A domestic factory index released on Saturday fell to a 5-month low in July, reflecting the drop in new manufacturing orders and jobs. Factories will, no doubt, benefit from government construction spending, but the odds are stacking up for Chinese economic growth: decreasing PMI data, a near $4tril tumble in Chinese stocks, and decreasing vehicle sales.
Not featured in the popular media and away from the market's eye, is the fact that Bitcoin mining based in China dominates the 57% of block chain hashrate. China has cheap subsidized electricity and, generally, has a cool climate - ideal factors contributing to the success of mining pools F2Pool, Antpool, BW, BTCChina and Huobi.
Although China's international bandwidth is currently sub-standard, things look set to change when a major cable consortium, FASTER, comes online in 2016. Backed by Google, China Telecom and others, FASTER anticipates offering a capacity of 60 Terabits/second, making it the highest capacity data link ever created across the Pacific.
Readers can click on the above image for an interactive map and view Google's participation in FASTER here.
China had soared to the world’s second-largest economy under the previous leadership of Hu Jintao and Wen Jiabao, who "gifted" the country with a booming equities market. The current team of Premier Li and President Xi Jinping are saddled with the other side of the bubble.
The Shanghai Composite Index fell 10% last week, after making three weeks of corrective gains. According to Bloomberg, the China Automobile Dealers Association has warned that continuing equities decline could result in China experiencing its first annual drop in vehicle sales in 17 years.
Remedy: More Credit
In an effort to stimulate cheap lending, PBoC Governor Zhou Xiaochuan has lowered minimum required reserve ratio twice in 2015. Additionally, the central bank has cut benchmark interest rates four times since November 2014.
Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, told Bloomberg:
We have seen no sign of recovery in the manufacturing sector. We may see manufacturing bottom in the third quarter...
Also In The News
Greece Out Of The Limelight
A fracturing Syriza party delayed a referendum that was scheduled for Sunday 2 August until September. Hard-liners are dissatisfied with what they view to be betrayal on the part of PM Tsipras's bowing to creditor demands after the nation voted for an end to austerity.
A party referendum could see a vote of no confidence in Tsipras and potentially derail negotiations with the IMF, ECB and EC (and, now, also the ESM). Had this emotive referendum gone ahead, yesterday, the world would have woken up to lots of red candles in market charts today, principally in the Eur/Usd rate.
GEO Commodities & Indices Early Warning System
Gold 1-Day Chart - Trading Below Channel Support
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