North Asia catches a Friday flu

North Asian equity heavyweights have deviated from the price action on Wall Street overnight, heading directly South this morning. Mainland China, Hong Kong, Japan and South Korean stock markets are all well and truly in the red, despite Wall Street shrugging of uninspiring US GDP and finishing higher overnight.

I cannot see any particular headlines driving the fall this morning in Asia and can only speculate that a combination of factors may be driving investor sentiment. A Friday “delta-dip” is undoubtedly one factor, with Covid-19 cases rising in Japan, South Korea and appearing in three provinces in China. China also releases official Manufacturing and Non-Manufacturing PMIs this weekend. After some middling GDP and Jobless Claims data from the US overnight, that suggests the recovery remains on course, but at a slower pace, investors may be concerned the China PMIs could signal something similar.

Finally, with mainland and Hong Kong markets enduring a torrid week on Chinese government clampdowns and restrictions, the assurances from the central government that such measures are targeted and not broad, maybe falling on deaf ears with investors pondering weekend event risk. All in all, it looks like investors are taking risks of the table over the weekend. With sentiment remaining fragile, despite some stabilisation yesterday, the fast-money herds don’t need much to spook them.

US Advance GDP underperforms

Overnight, the US GDP printed at 6.50%, impressive but well below forecasts of 8.0%+, with a fall in inventories and those inevitable supply chain bottlenecks taking the edge of the numbers. Initial Jobless Claims rose to 394,500, which was disappointing, while Core PCE Prices rose by 6.10%. None of that was enough to shake off the transitory inflation espoused by Jerome Powell the day before post-FOMC. The US yield curve flattened once again as inflation lethargy deepened, which saw the US dollar drop and gold rally.

In Asia today, South Korean Industrial Production rose 2.20% for June, higher than expected, but Retail Sales only grew by 1.60%. Similarly, Japan Industrial Production MoM for June increased by 6.20%, above expectations; but Retails Sales MoM for June rose by 3.10%, recovering from their May slump. The data shows that both countries’ manufacturing and export engines continue to fire on all cylinders, with Japan officials noting the chip shortage is easing. However, the mixed domestic retail sales data, which will have taken a Covid git in July, suggests that the ongoing pandemic and slow vaccination rates will delay a full recovery by Asian economies ex-China over the coming months. It was clearly not enough to overcome weekend risk nerves for both stock markets.

German and Eurozone GDPs will be the highlights of the European session, along with Eurozone Inflation. German flash GDP should rebound by 2.0% for Q2, with Eurozone GDP rising 1.50%. Eurozone Inflation for July is expected to come in at 2.0%, right on the ECB’s target. The Euro’s recovery accelerated overnight, and strong reading from the data could see the single currency stage another powerful rally into the end of the week.

US Personal Spending is expected to rise 0.70% this evening, with Personal Income falling -0.30%. Core PCE Prices, a favourite Fed measure, are expected to increase by 0.60% MoM. With nothing seemingly able to shake US bonds markets out of their low inflation stupor, the weak side into the end of the week seems to be the downside. If the US data comes in higher, the US dollar, stocks and bonds are unlikely to react. However, if the data comes in lower, the US dollar is likely to take another fall, bond yields will move lower again, and the FOMO gnomes of Wall Street will buy everything.

Don’t discount delta, though. The US CDC published some scary data about infectiousness overnight, and US daily cases rose to just shy of 100,000. Countries such as Israel, meanwhile, are offering their over 60’s third Pfizer shots. A weekend delta discount is being applied in Asia today, and I don’t discount the discounting continuing into the US session close.

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