A mixed start to the week in Asia where Chinese PMIs dampened the mood as the reopening boost to activity quickly faded.
The country was already facing an uphill challenge, to put it mildly, with regards to its growth target this year and the fact that manufacturing activity is slowing again doesn’t bode well. While the non-manufacturing survey is much healthier, it also experienced a deceleration last month which further suggests the economy is struggling to get back to full strength.
One positive from the surveys was the improvement in supply chain conditions which should aid the inflation fight around the world. Of course, it is more than just a supply chain problem at this point but every little helps as central banks are forced to hike rates aggressively for fear of inflation becoming entrenched.
The PMI theme continues throughout the European session on Monday, with final manufacturing and services data being released throughout the morning session followed by the US later where the ISM is always of particular interest.
There was a lot of debate last week about whether the US is in recession or not, with one camp pointing to the technical definition of two consecutive negative quarters of growth and the other the strength of the labour market and the consumer. Naturally, the proximity to the midterms aided the discussion.
The same debate is unlikely to rage if (or when) Europe slips into recession and the surveys are expected to highlight the broader weakness this morning. The war in Ukraine is undoubtedly taking its toll; not the mention the constant disruption to gas flows which could lead to rationing this winter, with countries already committed to cutting gas usage by 15%.
With the PMIs expected to post contraction numbers across the bloc, a recession is looking increasingly likely which will be compounded by the ECB being forced to hike rates and stop inflation from getting further out of control. Winter is coming and it promises to be hazardous. Europe will be hoping it just isn’t too cold.
An earnings beat but not all good news
HSBC surpassed analyst expectations, reporting profits of $5 billion in the second quarter while assuring investors that it will return to pre-pandemic quarterly dividends early next year. Profits were lower than last year in the first half though as a result of $1.1 billion in expected credit loss and impairments due to the challenging economic environment. While the company is confident in the progress made in its transformation program, there’s still clearly some way to go to keep investors on board amid a drive to spin off its Asia business.
Attention turns to OPEC+ meeting
Oil prices are lower at the start of the week as traders eye the next OPEC+ meeting on Wednesday. With the previous agreement having expired as the group has theoretically unwound all of the pandemic production cuts, attention will now shift to how OPEC+ plans to actually hit those targets and whether any further increases will be announced going forward.
Not many have the capacity to do that but some potentially do and President Biden will be hoping his Middle East trip will have helped secure some form of boost – or at least appear that way – that could prove important heading into the midterms in a few months. ​ One US official last week sounded optimistic although reports suggest no increase is likely even if it will be discussed.
Gold recovery may have legs
Gold is a little lower, paring gains after rebounding strongly in the second half of last week. The Fed’s data-dependent shift was the latest catalyst for a decline in US yields as traders pared back their expectations for rate hikes going forward. The 10-year is now well off its highs from a couple of weeks ago which is triggering the latest relief rally in the yellow metal.
I’m not entirely convinced by the recent rebound we’re seeing throughout the markets as inflation is still extremely high, central banks are far from done with their tightening and the recession narrative just doesn’t cut it. Gold is potentially the outlier here as it could benefit from safe-haven flows if countries are thrown into recession and central banks are left to choose between hitting inflation targets or the economy.
A bear-market rally in cryptos?
Bitcoin is another example of an instrument that is performing well and yet I’m struggling to get on board with its justification. It has all the feeling of a bear-market rally, as we may be seeing in equity markets, but that doesn’t mean it won’t have further to run. It showed a lot of resilience below $20,000 at times as conditions were far from ideal, which may provide some confidence that the worst is behind it but I’m not convinced it is. There may be a few shocks to come in the broader markets this year and cryptos will not be immune to them.
