MNI EUROPEAN MARKETS ANALYSIS: PBoC Easing And Soft Chinese Data Drive Markets In Asia

US TSYS: Tight Session, Even With The PBoC Easing

TYU2 trades +0-03 at 119-11+, sitting 0-01+ off the peak of its 0-05 overnight range, on light volume of ~41K. Cash Tsys are -0.5 to +0.5bp across the curve, with the belly cheaper and the wings richer, at the margins.

• Tsys experienced a rangebound round of Asia-Pac trade, initially looking through weekend news flow which was headlined by 5 U.S. lawmakers travelling to Taiwan less than 2 weeks after House Speaker Pelosi’s visit (and shortly after Friday’s reports of plans being drawn up for a Biden-Xi meeting in November).
• The PBoC then livened things up with a surprise 10bp rate cut to both the 1-Year MLF and 7-Day reverse repo rates, alongside a CNY200bn drain in medium-term liquidity, with the latter in line with wider expectations. That applied very modest cheapening pressure to the space, before a softer than expected round of Chinese economic activity data put a bottom on the space, before a modest bid to crept in alongside a pullback from best levels in Chinese equities and e-minis.
• The combination of softer than expected economic activity data and Friday’s very soft Chinese credit data were touted as the tipping points for the PBoC when it came to today’s easing, while the liquidity drain came at a time whereby money market rates are trading sharply below policy rates, with banks seemingly unwilling to channel liquidity out to the economy, while the ZCS policy in China may be limiting demand for credit, to a degree.
• Looking ahead, Empire manufacturing and NAHB housing market data headline the NY docket on Monday.

JGBS: Futures Lead The Bid In The Afternoon

The previously outlined softer than expected Chinese economic activity data has helped support JGB futures (and wider core global FI markets) during the Tokyo afternoon after a fairly limited morning session. That leaves JGB futures +9 as we move towards the bell, while cash JGBs run flat to 1.5bp richer across the curve, with 7s leading on the bid, which was quite futures-centric.

• Preliminary Japanese Q2 GDP data provided a downside surprise, rising by 0.5% Q/Q & 2.2% in annualised terms vs. BBG median exp. Of +0.7% & +2.6%, respectively, although Q1 data was revised higher, with the previously outlined 0.1% Q/Q fall adjusted to 0.0%. Misses in private consumption and inventories seemingly provided the most notable contributions to the headline miss, with net exports flat, in line with expectations, and business spending beating expectations
• Elsewhere, following the previously announced meeting re: inflation, Japanese Prime Minister Kishida noted that he has asked the trade minister to come up with plans to curb fuel prices, in addition to formulating extra steps when it comes to rising energy and electricity bills. Kishida also instructed the agriculture minister to make no changes to imported wheat prices from October. Further measures are set to be announced in September.
• Looking ahead, 5-Year JGB supply headlines Tuesday’s domestic docket.

AUSSIE BONDS: Just Off Best Levels

Aussie bonds are a little off session highs, catching a bid in the wake of soft Chinese economic activity data prints midway through the Sydney session. The move higher more than unwound the cheapening observed after the PBoC’s rate cuts & liquidity drain (fleshed out elsewhere), building on the initial richening impetus from Friday’s move in longer-dated U.S. Tsys. Cash ACGBs run 2.5-6.0bp richer across the curve, bull flattening. YM is +4.0 and XM is +6.0, through their respective overnight highs, while Bills run 2 to 4 ticks richer through the reds.

• There was little else of note re: drivers for ACGBs with U.S. cash Tsys sticking to a tight range, while there were no domestic data releases. Looking to issuance matters, the SAFA is set to price its May-32 bond today, while IFC launched a 3.5-Year A$ bond.
• Tuesday will see CBA household spending data for July hit the wires ahead of the release of minutes for the RBA’s August policy meeting.

CROSS ASSET: Disappointing China Data May Weigh On Broader Risk Rebound

Today's disappointing China activity data, which was weaker across the board, casts somewhat of a shadow over the broader risk outlook, at least if 2022 correlations continue to hold.

• The first chart below plots the Citi China EASI against global equities. The correlation has been stronger between the two series in 2022. This is likely to reflect the concern around the broader global growth backdrop, particularly as monetary policy started to normalize in major developed economies.
• Today's data outcomes in China are likely to weigh on the EASI levels, which has generally been on an uptrend in recent months. On-going covid related restrictions, with current case numbers at multi-month highs, which may continue to weigh on the domestic demand recovery.

Fig 1: Citi China EASI & Global Equities

Source: Citi, MNI/Market News/Bloomberg

• The table below presents the correlations for Citi China EASI against global equities and other key macro variables for 2022. For comparison’s sake with have included the equivalent correlations with the US and EU EASIs.
• The China EASI correlation is the same as the US EASI with respect to global equities and slightly higher compared to the EU EASI. Note in 2021 the China EASI correlation with global equities was -35%.
• In terms of other macro variables, the China EASI has had a flat correlation with global commodities, which perhaps owes to supply issues being a greater driver than the demand backdrop.
• The correlation with base metals is firmer though and not surprisingly inversely related with the USD. Interestingly though, the same applies for the US EASI. The EU EASI has the largest negative correlation with broader USD FX performance.
• In any event, renewed concerns around the China growth backdrop are something to be mindful of in terms of expecting a continuation of the risk rally that has unfolded in recent months.

Table 1: Citi EASI Correlations With Major Macro Variables

Source: Citi, MNI/Market News/Bloomberg

FOREX: Underwhelming Chinese Data Weighs On Risk

Participants shied away from risk after Chinese activity indicators undershot forecasts. This amplified selling pressure to offshore yuan, which had earlier suffered as the PBOC unexpectedly cut the interest rates applied to its 1-Year MLF and 7-Day Reverse Repo operations.

• The BBDXY index followed USD/CNH on two legs higher in response to PBOC action/Chinese data. The greenback was the second-best performer in the G10 basket, with U.S. Tsy yields little changed as we type.
• The yen remained the frontrunner after good demand for the Japanese currency emerged into the Tokyo fix. USD/JPY moved away from its session lows on the back of greenback purchases linked to the Chinese catalysts.
• Regional risk barometer AUD/JPY gave away ~50 pips as Friday's gains virtually evaporated, with Antipodean currencies pacing losses.
• U.S. Empire State Manufacturing Survey will take focus later in the day.

FX OPTIONS: Expiries for Aug15 NY cut 1000ET (Source DTCC)

• USD/JPY: Y133.80-00($950mln), Y135.35($660mln)
• EUR/GBP: Gbp0.8535-50(E1.2bln)
• USD/CAD: C$1.2950($655mln)
• USD/CNY: Cny6.75($655mln)

ASIA FX: Weaker CNH Spills Over To The Rest Of The Region

USD/Asia pairs are higher today. Taking their cue from a weaker CNH, which came after the unexpected MLF cut and weaker than expected July activity data. Most betas with respect to CNH moves have been lower than 1, except for THB, which has fallen by just over 0.8% as Q2 GDP came in below expectations.

• CNH: USD/CNH is up just over 0.5% at the time of writing versus the Friday NY close. This puts the pair back above 6.7700. A surprise MLF cut and weaker than expected China activity data are the main drivers of today's move. Recent highs in the 6.7700/6.7900 region could be tested in coming sessions.
• KRW: South Korean markets have been closed today, but the 1 month USD/KRW NDF has pushed higher in line with USD/CNH moves. We are now above 1305, which is +0.30% above NY closing levels from the end of last week.
• IDR: Spot USD/IDR has added 60 figs so far and last changes hands at IDR14,728. The rate has been creeping higher from the open but has struggled to break out of last Friday's range. Trade balance data was better than expected for July, with the surplus just above $4.2bn, versus the market estimate of $3.949bn.
• PHP: Spot USD/PHP trades +0.228 at PHP55.853 at typing, with bulls looking to a move through Jul 28 high of PHP55.975. This would open up historic highs at PHP56.500. Bears look for a dip through the 50-DMA, which intersects at PHP55.120. Global funds were net sellers of Philippine stocks last Friday, shedding a net $105.2mn in local equities in the largest outflow since May 24.
• THB: Spot USD/THB is noticeably higher today. The pair has surged nearly 0.80%, to be back close to 35.50. Disappointing Q2 GDP weighed. The outcome was weaker than expected at 0.7% QoQ versus 0.9% expected. Topside technical focus falls on Jul 21 cycle high of THB36.945. Conversely, bears look for a slide through Jun 29 low of THB34.960, followed by the 100-DMA at THB34.759.

EQUITIES: Japanese Stocks Outperform; Chinese Data Disappoints

Major Asia-Pac equity indices are mixed, with Chinese and Hong Kong equity index benchmarks whipping from gains to losses as an initial bid from the PBoC’s cut to the MLF rate was countered by weak Chinese activity data for July (fleshed out elsewhere).

• The Hang Seng index is off its extremes, sitting 0.3% worse off at typing. The property (-0.6%) and finance (-0.7%) sub-indices contributed the most to losses, neutralising shallow gains in consumer and industrial stocks as sentiment in China’s property sector remains weak (with Chinese new home prices for July falling for an 11th straight month).
• The Chinese CSI300 deals 0.1% weaker at typing, erasing gains of as much as 0.7% earlier on the aforementioned miss in Chinese activity indicators, mainly on weakness in richly-valued sectors such as consumer staples and healthcare. Elsewhere, the tech-heavy ChiNext (+1.1%) was an outlier, with a strong showing from heavyweight CATL Ltd (+3.3%, after having announced plans for a ~$7.6bn car battery plant in Hungary with Mercedes-Benz Group AG) offsetting weakness across more than half of the index’s constituents.
• The Nikkei 225 leads gains amongst regional peers, dealing 1.0% firmer at typing, putting the benchmark narrowly in the green (+0.1%) for the YTD, outperforming most major Asian benchmarks (MSCI Asia Pacific Index ~-15% YTD). Large-caps and major exporters lead gains in the index, with the broader TOPIX (+0.5%) lagging.
• E-minis trade 0.2% lower apiece at typing, operating a little shy of their respective multi-month highs made on Friday.

OIL: Lower In Asia on Soft Chinese Data; Saudi Oil Output Pledge Eyed

WTI and Brent are ~$0.80 firmer apiece, operating around session lows, having briefly tracked the earlier two-way trade in e-minis and Chinese & Hong Kong equity index benchmarks after an initial bounce from the PBoC’s surprise cut to the MLF and reverse repo rate was countered by softer-than-expected prints across all Chinese activity indicators (apart from a marginal downtick in the surveyed jobless rate).

• Crude has also come under pressure after Saudi Aramco on Sunday announced their readiness to increase production to 12.0mn bpd at “any time”, while announcing progress towards raising “maximum sustainable capacity” from 12mn bpd to 13mn bpd by 2027.
• The recent pull lower in major crude benchmarks comes as worry re: the persistent feed of disruptions to global crude supplies earlier in the year has receded (e.g. Libya’s political crisis, Shell’s Gulf of Mexico disruption last week, and the threat of halts in Kazakhstani crude through the Caspian Pipeline Consortium (CPC) pipeline).
• On the latter topic, RTRS source reports have pointed to Kazakhstan’s state oil firm potentially exploring ways to export crude without crossing Russian territory.
• Elsewhere, progress towards a U.S.-Iran nuclear deal remains scant, with the Iranian parliament due to review a “final draft” from European negotiators following the conclusion of indirect talks

GOLD: Lower In Asia; $1,800/oz In The Balance

Gold sits ~$6/oz weaker to print $1,796/oz, backing away from last Friday’s late session highs ($1,802.8/oz) at typing amidst an uptick in the USD (DXY) on the PBOC’s MLF and reverse repo rate cut, as well as the broad miss in Chinese activity indicators.

• To recap, gold added ~$13/oz on Friday to close above $1,800/oz for the first time in over three months, capping a fourth straight week of gains. The move higher in gold came despite an uptick in the DXY, as the latter ultimately ended the week lower for a third week in four, extending a pullback from cycle highs observed in mid-July.
• Sep FOMC dated OIS now price in ~62bp of tightening for that meeting from ~60bp prior to Fedspeak from Richmond Fed Pres Barkin (‘24 voter) on Friday (fleshed out elsewhere), pointing to nearly even odds for a 50bp vs. a 75bp hike. Looking ahead, focus will turn to minutes of the Fed’s July meeting, due to be released on Wednesday.
• Elsewhere, total known ETF holdings of gold continue to trend lower, hitting its lowest level in over five months on Friday despite the recovery in the price of gold from lows witnessed in June.
• From a technical perspective, previously-flagged technical levels remain in play for gold. Initial resistance is located at $1,807.9/oz (Aug 10 high and the bull trigger), while support is seen at $1,754.4 (Aug 3 low, key short-term support).