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  • Weekly Focus: China Delivering New Stimulus Ahead of U.S. Labour Market Report

Weekly Focus: China Delivering New Stimulus Ahead of U.S. Labour Market Report

Industrial profits in China in July combined were down by 6.7% YoY compared to 8.3% YoY in June. Chinese authorities pledged to introduce new stimulus measures to bolster local economy that was gradually slowing down after reopening from COVID-19.

Beijing said it would cut a tax on trading and indicated it planned more measures to support markets. They have also urged financial institutions to snap up equities, encouraged companies to boost buybacks, and asked mutual funds to stop selling. Other measures announced on Sunday included a cut in deposit ratios for margin financing as well as a pledge by the China Securities Regulatory Commission to slow the pace of initial public offerings. The number of stimulus measures to boost property market are also being considered by Beijing.

These measures have not impressed markets much with Hang Seng adding 0.94% and mainland stock indexes up 1.13-1.17% on Monday. Indexes lost most of their early gains, as investors are worried about a significant slowdown of China’s economy. Measures announced to improve market sentiment and property market are not enough to cope with these fears. The S&P 500 futures are adding 0.2, while U.S. 10-year Treasuries yields are down marginally to 4.23%. The U.S. Dollar is also retreating.

Overall market sentiment is improving, but investors are still digesting Federal Reserve’s (Fed) Chair Jerome Powell speech, which he delivered last Friday at Jackson Hole. Some believe that Powell’s words about a possible another interest rates hike if the inflation would continue to rise are the most important part of his message, while other see more dovish tunes in it. Nevertheless, the yields on 10-year Treasuries are very close to 2007 highs, and investors’ bets on another interest rates hike increased to 51% from 35% before the Jackson Hole symposium. This may mean that inflation risks are indeed high for the Fed, or that more hawkish rhetoric will not help to improve the situation in the debt market. This might be true if the Fed is expecting a large correction in the markets in September-October. This correction could dramatically slow down inflation or even lead to deflation. Thus, no interest rates hikes would be needed in November. If such considerations are close to reality than stocks have a couple of weeks before the correction will accelerate. This explains why the Fed is keeping its rather hawkish rhetoric. There will be enough time to sound dovish after a market drop and ahead of the Presidential elections to boost market recovery in 2024.

All this may bring the S&P 500 benchmark back to 4570-4580 points during the next 2-3 weeks to close the gap of August 2. This recovery may boost stocks globally. U.S. Commerce Secretary Gina Raimondo visit to China could also contribute to improve market sentiment. Positive statements upon negotiations may boost stocks up. Better-than-expected PMI’s in China, lower PCE Price Index readings or weaker labour market could contribute to market recovery.

Technically, the S&P 500 index continues to have a downside formation with the primary target at 4200-4300 points and extreme secondary targets at 3800-3900 points. The downside signal has been finally shaped with a short trade initiated at 4520 points. It would be better to close a part of the trade once the primary target will be reached.

Brent crude prices are recovering to conquer the resistance at $83.00-85.00 per barrel. Any upside jump above this level may lead prices to rise above $90.00 per barrel. If prices would dive below $83.00 a primary downside scenario with a support at $74.00-76.00 per barrel will be initiated. If prices would fell below $74 per barrel a recession scenario with targets at $64-66 per barrel of Brent crude will be the option. 

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But, the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed. The nearest support is set at $1890-1910 per ounce. It is unlikely that prices will dive below it next week. In the emergency case of a breakthrough, short positions could be opened after prices retest $1890 per ounce level.

The Greenback is trying to move up, but without any major success so far. If U.S. stocks would go for recovery it may push the Dollar down for a while before another rally. A risky long trade with a small amount for GBPUSD from 1.27200-1.27400 with a target at 1.29400-1.29600, and the stop-loss at 1.25300 is intact. A long trade in the AUDUSD from 0.63800-0.64000 with a target at 0.66500 and the stop-loss at 0.63200 is also open.

If these trades will be successful, a further weakening of the Greenback could be expected. It would be better to wait for a decline of the EURUSD below 1.05000 to seek out sell opportunities for the Greenback in this regard.