The strangest behavior in markets yesterday was the rip higher in the euro after Mario Draghi’s press conference at the same time European sovereign bonds spiked up in price and down in yields. My only guess is the euro further priced in a tapering of QE to be announced in October and initiated in either December or January while the bond market assumed that it would remain a really slow process. The euro today is holding its gains and advancing some more from yesterday’s close while European yields are rising and getting back some of what it lost yesterday after a Reuters story this morning that said “ECB policymakers meeting on Thursday were in broad agreement that their next step will be reducing their bond purchases and discussed 4 options, 2 sources with direct knowledge of the discussion said.” They talked about to what extent to cut the monthly buys at the same time maybe extending the deadline. Either way, the ECB flow of money into European assets will slow again in coming months. I repeat again that European bonds, both sovereign and corporate (high yields down below 2.5%) are a disaster waiting to happen. BNDX is an etf to short as 56% is in Europe.
For the 2nd month in a row, Chinese exports missed expectations. In August they rose by 5.5% y/o/y in US dollars, just slightly below the 6% rise and that is the slowest rate of gain since February. Exports to the US rose by 8.4% y/o/y, to the EU by 5.2%, to Japan by 1.1% and higher throughout the rest of Asia. Imports though did beat as they jumped by 13.3% vs the estimate of up 10%. As for their demand for commodities, they held steady in copper vs July but are down almost 13% y/o/y and the price of copper is down 1.5% in response. Coal, steel, refined oil products and iron ore all rose from July. Soybean imports fell m/o/m after July’s jump but are still up 16% y/o/y and remain robust.
Bottom line, the yuan continues to rip higher, up by 2% month to date after rallying by 2% in July and this likely had some impact on export volumes but we’ve also seen some mixed production data out of Germany the past few months relative to expectations. Is there a connection? Maybe and something worth monitoring but I’m not sure yet. The stronger yuan likely have helped the import side to some extent. The Shanghai comp did not respond at all to the data as it was dead flat. The H share index though rallied .5%.
After weaker than expected factory orders and IP in July out of Germany seen earlier this week, exports were up just .2% m/o/m, well below the forecast of up 1.3%. Imports also missed the estimates. Was the export number impacted by the stronger euro? Likely but exports to non eurozone countries grew by 10% y/o/y vs the 6% rise within the eurozone.
French IP met expectations in July by the manufacturing component missed with a .3% m/o/m gain, half the estimate. Spain’s IP data also was below the consensus. I’ll repeat what I said a few days ago, the European economic data has got more mixed in July relative to expectations. UK IP met expectations with slight upside on the manufacturing side led by a bounce back in auto production.
It’s old news but Japan’s initially robust 4% Q2 GDP performance was moderated in the revision to 2.5% annualized as capital spending was revised down. Along with broad dollar weakness, the yen also is ripping higher and sits at the highest level since November 11th.
Don’t fight the markets, especially in FX. Eventually you will lose. I send this message to central bankers who try their best to battle the FX market that trades $7 Trillion per day in notional value. All the QE and NIRP that the BoJ and ECB have initiated, let alone the NIRP and QE out of the Swiss, Danish and Swedes, doesn’t always result in an FX level that you want it to be. Also, remember the history of direct failed FX interventions, particularly in Japan. Again, buy gold and it is approaching the highest level in 4 years. Unlike crypto currencies which now seemingly can be created in an unlimited fashion by anyone with a computer (there are now more than 1000 different ones), gold supply is really hard to get out of the ground, grows only about 1% per year and has been around for 5000 years. Also, why is every picture of bitcoin in the color of gold?