Retail sales ex-auto and gas were in line with expectations, jumping 0.4% from -0.1% previously. Reaction to the number was evident, from US equity markets finishing in the green after spending most of the morning in the red, to US 10-year treasuries yields jumping 10 basis points.
Although the number was not impressive, reaction to the number - from the dollar strength to US equity and treasuries - proved the investment community expected the Fed to address the market expectations of tapering by the end of this year at the very least.
PPI tonight will further drive the theme of predicting when tapering will occur. If numbers are weak, this will fuel further debate on the Fed’s stance. This theme will continue until next Thursday, 22 August, when the Fed releases minutes from the FOMC.
In China, we continue to see activity from the government. This morning’s highlight was the country’s plan to cut capacity a year earlier than originally planned (Bloomberg). Looking at the CSI300, Chinese stocks seemed to have bottomed out in mid-Jun. The recovery over the past week was largely due to positive reactions to activities from the government and data that showed industrial activities have stabilised.
Premier Li Keqiang has taken targeted steps to support the economy, such as providing credit and tax breaks for small companies and supporting infrastructure projects which we see as meaningful reforms in keeping the economy going. Further upside is likely in the Chinese equity markets given the low valuations of price earnings ratio of 10, when the average over the past four years was 15, and continued efforts from the government in their reforms to move China towards a stabilised economy.
Copper futures prices continue to hold up on the levels we are watching. Global growth appears to be in a better footing, with Europe coming out of recession and the US showing signs of recovery. China’s copper production showed a drop at the end of July, and copper imports rose. There could be consolidation towards the support level of $320 unless we see further catalysts.
Brent prices rose overnight on supply issues from Libya, Sudan and the North Sea. It tested the resistance level of $110, and fundamental concerns could see this level tested again. WTI retreated slightly on higher US stockpiles. Technically, WTI continues to test the $106 support level, possibly consolidating to $105.