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Lots of noise, not much substance

The overnight session was a noisy one. The heads of the Netherlands and Austrian central banks wrung their hands about runaway European inflation, briefly lifting the euro. US Consumer Confidence fell. However, S&P/Case Shiller Home Prices rose to 19.10% YoY for June. Delta nerves and supply chain bottlenecks are impacting some data, but the unlimited zero per cent central bank money continues to pump up asset prices. In other words, business as usual.


The net result made for a noisy session, particularly in the currency and equity space, but ultimately, prices closed not too far from where they started. We can expect more of the same for the rest of the week ahead of Friday’s US Non-Farm payroll data, which is really the only game in town ex-Asia.


Turning to Asia, the first day of the month saw pan-Asia manufacturing PMIs released across the region. The ASEAN 10 came in at an average of 44.50, highlighting the impact of the groupings’ Covid-19 battle. With perhaps the exception of Singapore, I expect those effects to linger well into Q4 of this year. If the Non-Farm Payrolls prints above 1 million jobs this Friday, the taper trade will return, and many of those recent Asia FX currency gains will be reversed. If both the US and Europe move to taper in Q4 as I expect, the divergence in monetary policy (ASEAN is in no position to hike rock bottom rates right now) means I expect ASEAN FX to underperform for the rest of the year.


The North/South divide in Asia was also stark. South Korea, Japan and Taiwan Manufacturing PMIs remained firmly in expansionary territory. That is a continuation of a trend that has been well entrenched since the pandemic’s beginnings, with Northern Asia making a lot more of what the rest of the world wants, in contrast with the legacy sector-dominated ASEAN.

China PMIs continues to fall

The elephant in the room for the long North Asia, Short ASEAN view is China. This morning, the Caixin Manufacturing PMI followed yesterday’s official number south, falling under 50.00 to 49.20, contractionary territory. That rounds out a grim week for China’s PMIs as Covid-19 lockdowns and the same supply chain challenges the rest of the world is experiencing erode economic performance. Whether some of those are transitory or not, like the transitory inflation question, is just about impossible to predict. We will just have to wait and see how it plays out; it is unlikely to be good for mainland equities, though.


We would expect China to open the stimulus spigots at this point based on their past playbook. In all likelihood, they will. However, President Xi’s “Common Prosperity” drive, which involves so many sector clampdowns or “investigations,” I can’t keep up, complicates the picture. China’s government doesn’t enact policy for a few months and then drop it; when they do something, they keep doing it. Thus, any stimulus transmission this time around may have a lesser impact than previously.


The nuances of capitalism don’t appear to be high on President Xi’s agenda, although I am super happy President Xi is cutting kids’ online game time to zero. Hopefully, they start reading books instead of having their brains turned to digital mush. Slower China growth will have implications for the rest of Asia as well, and I am sure the downward revaluation exercise for China equities is not yet done.


Between the delta variant and China’s pivot to wealth inclusivity and redistribution, my view that ASEAN would be the value trade of Q4 is now in the dustbin. Asia will recover, but I expect it will be a laggard except Singapore, where the vaccination triumph and a powerful financial and high-tech manufacturing centre leave it well placed to jump ahead of the crowd.


The Manufacturing PMIs dominate the economic calendar across Europe and the Americas today. In Europe, they should be supportive, although with some ECB members becoming very vocally hawkish, further rhetoric from that quarter will dominate investors’ minds. The ECB meeting next week could be frisky. A low print by the US ISM PMI may spark some temporary selling in the greenback and lift equities as taper fears recede, but any directional moves will be temporary ahead of Friday’s jobs data.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley [4]

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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