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An underwhelming start to the week

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By Craig Erlam  

It’s been an underwhelming start to the week in financial markets with the eternal optimism of investors clashing with the reality of Chinese economic data.

There’s a ​ bizarre willingness to turn a blind eye to the economic reality at the moment as long as the US Fed doesn’t raise rates too fast. That doesn’t feel particularly sustainable, but as we’ve seen so often before, it can last much longer than you may expect.

Rate cut little to ease Chinese fears

The economic data from China overnight was very disappointing, to put it mildly. Combined with the lending figures on Friday, it does not paint a good picture of domestic demand or the growth outlook.

Retail sales were particularly weak, while fixed asset investment and industrial production were also well below the consensus. It seems the reopening boost was both uninspiring and short-lived.

And yet, the PBOCs decision to cut the MLF and 7-day reverse repo rates by 10 basis points overnight came as quite the surprise. It seems no one saw that coming and it’s understandable why.

Loan demand isn’t struggling because of high rates, it’s Covid lockdowns, ongoing property market uncertainty and the global environment. This rate cut won’t change any of that. But it does mean a cut to the LPR is now almost certain.

Japan recovering as inventories hold back Q2 GDP

The reopening in Japan boosted spending in the second quarter, although the GDP reading slightly missed expectations thanks to a decline in inventories which lifted the reading in Q1.

These fluctuations can largely be ignored and the underlying picture remains positive for the Japanese economy. Of course, the global picture is increasingly gloomy and uncertain which could weigh into next year.

Eye-watering profits for Saudi Aramco

Saudi Aramco is the latest oil company to report record quarterly profits and as the biggest, the numbers are that much more eye-watering. Net income rose 90% from last year to $48.4 billion but the dividend remained the same at $18.8 billion as the company remains committed to investing in further expanding production.

That, naturally, won’t stop political pressure from mounting around the world as people struggle with the concept of soaring energy costs destroying household budgets and threatening the global economy at the same time as staggering record profits.

Oil slips amid poor China data

One area where traders are paying attention to the Chinese data is clearly commodity markets, with crude off 2% on Monday.

The figures from China really are a concern and the authorities have a big job on their hands arresting flagging domestic demand. That doesn’t bode well for oil demand especially when the country remains so committed to zero-Covid. And with cases continuing to rise, the downward pressure on oil prices could intensify.

Throw in a deal between the US and Iran and we may be able to wave goodbye to triple-digit oil prices for a while. Of course, it doesn’t matter how close the two are, a deal can never be assumed to be done until it’s signed. If it does get over the line, we could see oil slip below $90 and perhaps even stay there.

A technical reversal?

Gold has tried and failed again to sustainably break above $1,800 despite closing slightly above here on Friday. The yellow metal has slipped almost 1% so far Monday to trade back around $1,785 amid a strengthening dollar.

This could just be a technical move, with the dollar seeing some support after pulling more than 4% off its highs. Similarly, it’s been a strong rebound in gold and $1,800 is looking like an increasingly significant barrier.

Can bitcoin break $25,000?

Bitcoin has tested the water above $25,000 and been pushed back on the first attempt. It seems the cryptocurrency, like many other instruments, is testing a potentially significant barrier following the recent recovery and we may be seeing some profit-taking.

Whether that becomes a full rotation lower isn’t clear yet but it doesn’t appear to have the momentum for a breakout at this time.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.