Australian dollar bounces into China stock bash

See the latest Australian dollar analysis here:

Macro Afternoon

Forex markets were haywire last night as markets try to digest slowing recoveries in both the US and China and what authorities are going to do about it. DXY was soft and EUR lifted:

The Australian dollar climbed:

Gold fell. Oil is cooked in my view:

But there is nothing that base metals like more than a global recovery running off the rails. Say what?

Big miners to the moon on…I have no idea:

Even as EM stocks crashed through key support, led by China. That chart is fugly:

Even imperturbable EM junk is starting to trend lower:

Yet Treasury yields bounced:

And stocks were a little bid:

Don’t ask me to make sense of that little lot because there is none. These are chaotic markets with bullish and bearish signals detached from reality.

What is not in doubt is that the US and Chinese recoveries are fading. Westpac with the data:

Event Wrap

US new home sales in June surprised with a fall to its lowest level in over a year at 676k (est. 800k), from a prior reading that was revised down to 724k from 769k. Once again, surging construction costs and supply pressures were cited, although some of those supply-chain constraints appear to be easing.

The Dallas Fed activity survey fell to 27.3 (est. 32.3, prior 31.1). This still indicates a “robust expansion”, with above average manufacturing conditions (little changed at 31.0) and new orders (also unchanged at 26.8).

Germany’s IFO survey missed estimates, but readings remained above 100 indicating an expansionary economy. Business climate fell to 100.8 (est. 102.5, prior 101.7), while current assessment rose to 100.4 (prior 99.7, est. 101.8), and expectations fell to 101.2 (prior 103.7, est. 103.6).

Event Outlook

Australia: RBA Deputy Governor Guy Debelle will speak on “Outcomes of the 3-year review of the FX Global Code” at the FX Markets US Conference 2021 (Online), 10:35 AEST.

China: June industrial profits will be a story of varying experiences across the supply chain. Upstream producers are benefitting considerably from the elevated selling prices of raw materials, but downstream manufacturers will see their margins crimped by higher input costs.

Euro Area: M3 money supply should grow at a robust 8.2%yrin June. However, we have seen a slowdown in the annual pace due to the shifting base period.

US: Ahead of the July update, the Richmond Fed Index has indicated that prices paid are beginning to crest (market f/c: 20). Durable goods orders should expand a further 2.0% in June, with investment likely to remain robust over 2021. Two house price measures, the FHFA index (market f/c: 1.6%) and the S&P/CS index (market f/c: 1.5%) will indicate broad-based growth across the nation. Conference Board consumer confidence, which initially lagged the broader economic recovery, is expected to print at 124.0 in July.

Goldman downgraded US growth:

And China is still very much in restructuring mode as its stockmarket is belted:

“Everybody’s in the cross-hairs,” said Fraser Howie, an independent analyst and co-author of books on Chinese finance who has been following the country’s corporate sector for decades. “This is a very difficult environment to navigate, when over the weekend your business can basically be written down to zero by state edict, how on Earth are you to plan for that?”

China has killed the global reflation with credit clamps and the Fed is cremating it with a policy error. Thus, H2 is shaping as a reflationary bust for markets as the global inventory cycle ends and the commodities bubble pop together.

The question today for the Australian dollar (and all other markets) is will the Fed panic even before markets need to remind it of who is boss? And will that even matter if China remains on track to restructure?

Houses and Holes
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Comments

  1. Uhhhm – China has been hit with the biggest floods since the 1975 disasters which killed 20,000 people and later resulted in 200,000 deaths.

    Then in the last 48 hours the east coast has been hit with Cyclone In-Fa which has compounded the issue and shut most of the major ports including Shanghai etc.

    The global shipping supply bottle-neck has now been compounded by weeks – further there is a “third wave” sweeping much of Asia including China with Delta Plus causing panic – drug resistant, detection resistant, 60% more transmissable – AGAIN, deadly to young people and worse of all vaccine resistant.

    If the US starts stimulating into this they are completely stuffed – inflation is now hitting well above 5.4% with wage increases of 3% including the pandemic response – they are in serious trouble.

    Shipping costs are up 300%.

    • Know IdeaMEMBER

      Mate, what are you on about? If you have a debt issue then the solution is to take on more debt. If you have a fiat currency that is being debased then the solution is to print more money. Have you been living under a rock?

      • So the 1973 oil crisis which sparked massive global inflation was temporary ? What about the Yom Kipur war or the oil embargoes ?

        The current inflation adjusted oil prices are higher than the 1970’s prices and almost back to where they finished in the 1985 inflation crisis – $75 – actual gas / petrol and energy prices are well and truly there.

        On top of this you have supply bottle necks, shipping costs at 300% and rising and heading into $6 Trillion stimulus pipeline with a massive worker shortage.

        The history of rampant inflationary pressures shows us that inflation is NOT caused by a long term sustained problem – rather it is a feedback loop caused by triggers which feed through the economic system multiplying on the supply chain cost feed backs.

        Temporary or transitory is a couple of weeks, maybe a couple of months – a year long or worse a multi-year long inflationary cycle is not “transitory” and is not “temporary” by definition.

        Certainly the Fed has officially changed its stance – so have US markets – not sure why Australia a country entirely dependent on shipping and imports thinks it wont impact them.

        • However there were already inflationary conditions well before the 1973 oil shock, due to US deficit financing of the Vietnam War. Inflation was an issue at the 1970 UK election, in which Conservative Leader Heath boldly promised to reduce price rises at the stroke of a pen. However inflation kept climbing into 1971 and Heath as PM dived in the opinion polls. Similarly in Australia the 1971 Budget was anti inflationary. ”

          Treasurer Snedden in his 1971 Budget speech said:

          “”Even more than usually the Government
          has this year found it necessary to shape
          its Budget to serve an overriding economic
          purpose. Australia is in the grip of
          inflationary pressures. The rate of increase
          in costs and prices is already fast and has
          tended to become faster. This is a serious’
          condition. If allowed to develop unchecked
          it will cause increasing economic and
          social hardship to many people, add to the
          burdens of rural industries already
          depressed, disrupt developmental plans of
          great promise and undermine the rich posÿ
          sibilities of growth which our future
          unquestionably holds. So far as lies in our
          power as a government we are determined
          to combat this pernicious trend, slow it
          down and hobble it.
          Until last financial year, inflation had
          not, for almost a decade, been a matter for
          serious concern with us.””

          Regarding America, Investopaedia says:

          “The great inflation was blamed on oil prices, currency speculators, greedy businessmen, and avaricious union leaders. However, it is clear that monetary policies, which financed massive budget deficits and were supported by political leaders, were the cause. This mess was proof of what Milton Friedman said in his book, Money Mischief: Episodes in Monetary History: Inflation is always “a monetary phenomenon.”

          So I feel that there was already a bedrock of inflation in the economy before the 1973 oil crisis which just sent it into over drive.

          • The Traveling Wilbur

            That was one of the most singularly useful contributions on this site, ever.

            Thank you.

            IMO: This time is different though as: currency debasement via CBs plus massive term lending facilities extended to anyone and anything with a banking licence. So inflation does = the cost of money, but money has never been cheaper. And bonds say it’s going to get cheaper yet.