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Q2 US GDP was significantly revised up from 2.3% q/q, to 3.7%, beating expectations of 3.2%. The jump was primarily driven by stronger growth in gross fixed investment and government spending, while improvement in consumption and net exports also contributed to a smaller extent.
While the data is backward-looking, the upgrade would bolster the Fed’s view that the Q1 weakness was transitory.
This supports the case for data-dependent Fed in its rate normalisation plan. In the run up to the September FOMC meeting, every data point will be scrutinised in the broader scheme of things. Meanwhile, weekly initial claims were also lower than estimates.
All of this is providing a silver lining beneath the seemingly relief recovery in global stocks after the recent rout culminated on ‘Black Monday’. The S&P 500 rallied 2.4%, nearing the key 2000 level. Likewise, the Dow also jumped 2.3%, closing above 16500. However, the US stock indices only recouped half of the 10% losses which incurred between 19th and 25th August.
Notably, oil surged over 10%, the largest one-day gain in over six years, on the back of better US data. Wednesday’s data from the EIA showing easing US stockpiles also helped allay oversupply concerns. WTI climbed past $40, advancing almost $4 to around mid-$42. Brent leaped $4.42 to $47.56 yesterday. However, the fundamentals remained generally unchanged.
Elevated US crude inventories, higher OPEC production, and slowing global growth suggest that the supply glut may persist for the rest of the year. This means any rally in oil prices may be an opportunity to sell.
The relief rally in global stocks continued to fuel the dollar resurgence. The dollar index extended higher above the 95.0 handle, adding pressure on other majors. EUR/USD slipped below 1.1250, while USD/JPY rose above 121. In Asia, USD/SGD remained tight around the 1.40 level whereas THB remained heavy at mid-35. USD/CNY was slightly higher, remaining above 6.4000, after higher midpoint fixings by the PBOC in the past two days.
Looking ahead to Asia
We should see more investor appetite for riskier assets today, given the positive leads from the overnight markets. However, the market may be wary of putting in sizable positions ahead of the weekend. Nonetheless, it is clear that the mood has shifted to calmer waters. The CBOE VIX index fell further to 26.10.
In China, Bloomberg noted that the authorities have intervened in the stock market yesterday and have been selling US treasuries this month to defend the yuan. This was because the government wished to stabilise equities ahead of a military parade on Tuesday 3 September.
Furthermore, China announced that the debt swap quota for local governments will be expanded to CNY 3.2 trillion. What would be of interest to investors is the 10am State Council’s policy briefing where officials will be answering media questions on the recent announcement that pension funds will be allowed to invest in domestic equities.
The Shanghai Composite saw a late jump of around 5% in the last hour of trade yesterday, presumably due to state buying, and closed above the 3000 level. This level would now be a key support to watch. Another close above this level would be positive for Chinese equities going into next week.
Singapore is expected to ride on the relief rally today. The Straits Times Index (STI) was capped below 2950 yesterday and is likely to surmount this resistance today. Breaching this level would bring the 3000 barrier into view.
According to Bloomberg, Olam said that Japanese trading house Mitsubishi Corp is planning to purchase more than a 10% stake in the commodity firm. Under the deal, Olam would issue new shares to Mitsubishi. Temasek will still remain as Olam’s largest shareholder after the deal. Trading of the Singapore-based commodities trader’s shares was halted yesterday morning, pending an announcement.
Finally, Japan CPI continued to stay low, primarily due to weaker oil prices. Bank of Japan’s (BOJ) preferred inflation gauge, CPI less food, and exclude consumption tax hikes came in flat for July, from a 0.1% gain in the previous month. Forecasters were expecting a 0.2% drop.
Yesterday, BOJ governor Kuroda reiterated that the current level of monetary stimulus is sufficient for Japan to achieve its 2% inflation target, although the central bank stands ready to adjust policy if needed. In contrast, most economists expect the BOJ to ease further, as inflation trajectory continues to undershoot while the domestic economy is struggling to recover.