Let’s attribute the global equity market rally (and bond and gold selloff and dollar rally) to a modestly toned down situation with North Korea at least for a day. The weird market action took place in Japan where a better than expected Q2 GDP figure led to a 1% fall in the Nikkei and a selloff in the yen. So the yen rallies on the possibility of nuclear war but sells off after Japan reports the best quarterly growth in 2 years? Yes, it remains the safety trade I guess. The upside to the 4% SAAR GDP report came from both personal and business spending and also a sharp increase in government spending (up 5.1% q/o/q and 22% SAAR). The disappointment remains wages as unit labor costs were down .3% y/o/y. Net exports were a modest drag. While this is just one quarter and Japan has a history of lumpiness in its data, this news proves that higher inflation doesn’t lead to faster REAL growth and in fact does the exact opposite. Low inflation lead to higher spending. JGB yields past 10 years did not respond at all to this data as the yield on the 40 yr was dead flat at 1.06%. As the 10 yr yield is being bullied, 40 yrs out is the least manipulated.
I reiterate, don’t trade gold as a geopolitical safety play because it never lasts. Buy or sell gold based on one’s view of it as a monetary vehicle compared to fiat currencies and the opinion of central bank policy. I remain bullish for the latter reasons.
In reverse of the upside in Japan’s economic data, the Chinese figures missed expectations. July retail sales grew by 10.4% y/o/y, down from 11% growth in June and was below the forecast of up 10.8%. Industrial production was higher by 6.4% y/o/y vs 7.6% in the month prior and less than the estimate of 7.1%. Lastly, fixed asset investment was up by 8.3% y/o/y ytd and that too was below the expectations of up 8.6%. This data follows the weaker than expected trade date seen last week for July.
I want to emphasize that some of the moderation is state driven in that factory excess has been ordered closed and the government plays whack a mole with trying to temper the residential property markets. On the latter, China also reported that value of new homes sold was up by 4.3% y/o/y which is the slowest rate of gain in two years. Also, if China is trying to get serious about limiting the excessive credit growth by cracking down on the massive buildup of off balance sheet bank lending, well growth will then slow too. Chinese stocks shrugged off the data with a rally but the yuan traded lower on the heels of its big run of late. Copper prices are down about 2/3 of a percent, actually responding as one would think to the softer Chinese numbers.
In Europe, after seeing some moderation in the industrial production figures of a variety of countries over the past two weeks, the aggregate IP figure for the eurozone fell .6% m/o/m in June, one tenth weaker than expected and May was revised down by one tenth. The y/o/y gain of 2.6% though was still pretty good. As this is a June number and thus somewhat old, it’s never market moving when it comes out.
With respect to the euro, the CFTC said for the week ended Tuesday that the net speculative long position reached its highest level since 2011. As I’ve been a bull on the euro since $1.05, I have to cool my bullishness until this sentiment moderates. See chart
NET SPEC LONG POSITION EURO
Lastly, I’ve reflected the difference between the big cap market weighted indices with the broader equal weighted indices in expressing a clear divergence this year. Specifically looking at the S&P 500 vs the equal weighted Value Line geometric index of 1700 stocks. Here is another state, as of Friday, there were just 53% of NYSE stocks closing above their 200 day moving average which is the lowest since November 7th, the day before the US election.
PERCENTAGE OF NYSE STOCKS CLOSING ABOVE 200 DAY MA