SVET Markets Weekly Update (July 17–21, 2023)

23 Jul 2023 by rate3

On Week 29, NASDAQ formed a bearish candle as traders anticipated the Fed rate rise in the following week. Meanwhile, BTC stayed under 30K for a month, still waiting for retail investors’ attention. On the macro side, the Chinese economy slowed down, while wheat and oil soared due to geopolitical tensions. In the crypto world, Republicans have introduced a new crypto bill, giving the CFTC more authority over cryptocurrencies.

Notable Macroeconomic Updates:

NY Empire State Manufacturing Index (July): 1.1 (fact), 6.6 (previous); -4.3 (consensus);
Retail Sales (June): 0.2% (fact), 0.5% (previous); 0.5% (consensus);
Building Permits (June): 1.44M (fact), 1.496M (previous); 1.49M (consensus);
Philadelphia Fed Manufacturing Index (July): -13.5 (fact), -13.7 (previous); -10 (consensus).
On Monday, The Nasdaq Composite index opened up 0.3%, as traders prepared for a week of corporate earnings. Meanwhile, disappointing economic data from China weighed on investor sentiment. BTC is flat, lingering below 31K. The economic calendar is light and Fed officials will be muted ahead of the FOMC monetary policy decision next week.

Details

The NY Empire State Manufacturing Index fell from 6.6 in June to 1.1 in July 2023. This is a decline of 5.5 points, but it is still better than market expectations of -4.3.

Comment: Overall, the NY Empire State Manufacturing Index for July 2023 suggests that business activity in New York State is flattening out. However, there are some positive signs in the report, such as rising demand for goods and easing supply chain disruptions. It remains to be seen whether these positive signs will be enough to prevent a recession.

Macroeconomy

Nigeria: Annual inflation rate accelerated for a sixth month to 22.79% in June, the highest since September of 2005. The biggest upward contribution came from the cost of food and non-alcoholic beverages (25.3% vs 24.8% in May), namely oil and fat, bread and cereals, fish, potatoes, yam, fruits, meat, vegetable, milk, cheese. The Nigerian government has taken some steps to address the rising cost of living, such as declaring a state of emergency and providing farmers with fertilizers and seeds.

Comment: The removal of fuel subsidies, the depreciation of the naira, and the ongoing war in Ukraine have been major contributors to inflation. For example, fuel prices have risen sharply, which has led to higher transportation costs and increased the cost of goods and services that rely on transportation. However, it is more likely that the monopolization of the food industry in Nigeria has led to higher prices in the long term, rather than just the rising costs of fuel (see my analysis in How Blockchain and Cryptocurrencies Can Reduce Food Inflation).

The Chinese economy grew by 6.3% year-on-year in Q2 2023, faster than Q1 but below market expectations. In June, economic indicators presented a mixed picture: retail sales rose at a much softer pace, while industrial output growth accelerated. The urban jobless rate remained unchanged at 5.2%, but youth unemployment reached a new high of 21.3%. Earlier released data indicated that China’s exports declined the most in three years.

Comment: The slower-than-expected economic growth in Q2 is a cause for concern, as it suggests that the Chinese economy is facing headwinds. This reverberate through the world economy as China is one of the world’s major consumers of natural resources. The decline in exports is particularly worrying, as it is a sign that global demand for Chinese goods is weakening. The rising unemployment rate is also a worrying trend, as it suggests that the Chinese economy is not creating enough jobs enough even for its declining population.

Commodities

Wheat: Futures soared (+4%, past USD 6.8) after Russia refused to extend the deal guaranteeing a safe trade corridor for vessels to export Ukrainian grain out of Black Sea ports.

On Tuesday, retail sales increased less than expected, and industrial production decreased for the second month. NASDAQ opened down 0.4%, as traders assimilated corporate results and economic data. BTC is still edging down in a continuing correction following the XRP-induced short-term price hike.

Details: Retail sales rose 0.2% in June, below forecasts but still signaling resilient consumer spending. Core retail sales surged 0.6%.

Comments: The detailed retail sales report showed that retail sales rose 0.2% month-over-month, below forecasts of a 0.5% rise. However, the core retail sales, which exclude automobiles, gasoline, building materials, and food services, surged 0.6%. This suggests that consumer spending remains resilient, even in the face of rising inflation.

Commodities

Oil: Prices rose above $75 per barrel on Tuesday, recovering from two straight sessions of losses. The rise was driven by signs of tightening US oil supplies, as well as the resumption of production at two Libyan oil fields.

Comments: It is too early to say whether the rise in oil prices will be sustained. However, despite weaker Chinese economic growth, the factors that drove the rise (such. f.e. as tightening oil supplies) are likely to remain in place for the foreseeable future, which could lead to further price increases.

Tin: Prices hit a 5-month high on supply concerns. Mining to be suspended in Myanmar, Indonesia to ban tin ingot exports.

Comments: The recent rise in tin prices is being driven by supply concerns. The demand side for tin is also somewhat uncertain. Global semiconductor sales have been declining, which could lead to lower demand for tin soldering. However, other sectors, such as packaging and electronics, are still growing, which could offset some of the decline in semiconductor demand. Overall, the outlook for tin prices is uncertain. The supply concerns are likely to keep prices elevated in the near term. However, the demand side could weigh on prices in the longer term.

On Wednesday, building permits declined indicating weaker economy and NASDAQ ended up slightly in the red. Investors focused on corporate results. BTC continued its sideways trajectory.

Details: Building permits in the United States fell in June 2023, with the biggest decline in multi-segment approvals. Single-family authorizations increased, but permits were down in all regions except the Midwest.

Comments: The decline in building permits is a sign that the housing market may be cooling off even further. The drop in multi-segment approvals is particularly concerning, as this category includes commercial and industrial projects. A decline in these types of projects could have a negative impact on the economy. The increase in single-family authorizations is a positive sign, as this category includes homes. However, the increase was not enough to offset the decline in multi-segment approvals. The decline in permits in all regions except the Midwest is also concerning. This suggests that the housing market is cooling off nationwide.

Macroeconomics

China: The People’s Bank of China (PBoC) maintained the one-year loan prime rate (LPR) at 3.55% and the five-year rate at 4.2%. The move comes after the GDP grew faster in Q2, but still lower than market forecasts. For the first half of the year, the economy expanded by 5.5%, higher than the government’s target of around 5%.

Japan: Imports fell 12.9% in June, the steepest decline since September 2020. The decline was driven by a sharp drop in imports of mineral fuels, electrical machinery, and chemicals. Imports of manufactured goods and raw materials also fell, but purchases of others rose. Arrivals from China, the US, Taiwan, Malaysia, Russia, and Australia all fell in June. However, imports from Hong Kong, South Korea, India, and the EU rose. The decline in imports is likely due to a number of factors, including the weakening Japanese yen, the ongoing war in Ukraine, and rising global commodity prices.

On Thursday, Philadelphia Manufacturing Index come out with no improvements as unemployment benefits fell. Nasdaq reacted by extending its decline with shares of Netflix -8% after the company’s revenue missed forecasts. Also, Tesla tumbled about 5%, as Elon Musk signaled slowdown in production. BTC stumbled indicating a weakness, potentially leading to a sharp downward correction (“Bart Simpson” patter).

Comments: The Philadelphia Fed Manufacturing Index showed little improvement in July, remaining negative at -13.5. This suggests that manufacturing activity in Philadelphia is still declining. New orders and shipments subsided, while employment remained mostly steady. However, prices paid and received indexes improved, suggesting that input and output prices are rising. On the other hand, future indicators also improved, suggesting that businesses are more optimistic about the future. Also the number of Americans filing for unemployment benefits fell to a two-month low, reinforcing the Fed’s plans to raise interest rates.

Macroeconomic

Hong Kong: The annual inflation rate in Hong Kong edged down to 1.9% in June 2023, which is in line with market forecasts. This is a slight decrease from the 2% inflation rate in May 2023. The decrease in inflation was driven by a number of factors, including easing prices for food, electricity & utilities, alcoholic drinks & tobacco, clothing & footwear, transport, and miscellaneous services. However, inflation did increase for housing and miscellaneous goods. The underlying inflation rate, which excludes volatile items such as food and energy, also slowed slightly to 1.7% in June 2023 from a prior 1.8%. On a monthly basis, the CPI went up 0.2% in June 2023, following a 0.3% drop in May 2023.

Commodities
Comment on the Wheat Market situation:

Wheat futures have been rising for three straight days as geopolitical tensions threaten grain exports from Ukraine. Russia has warned that any ships traveling to Ukraine’s Black Sea ports will be seen as possibly carrying military cargoes, and Russian forces have attacked critical infrastructure in the Ukrainian port of Odesa. This has raised concerns about the safety of shipping grain out of Ukraine, and has led to a sharp increase in wheat prices.

In addition to the geopolitical risks, wheat prices are also being supported by a renewed wave of dryness in key US growing regions. This has hampered yield expectations on the ongoing harvest, and has led to doubts about the USDA’s forecast of higher production.

The combination of these factors has pushed wheat prices to a three-week high. If the geopolitical situation in Ukraine does not improve, and if the US drought continues, wheat prices could continue to rise. This could have a significant impact on global food prices, and could lead to food shortages in some parts of the world.

Steel: Rebar futures rose in July as supply cuts outweighed concerns of lower demand. However, the rise was capped by low hopes of Chinese government stimulus. The lack of water as a result of dryness in Sichuan, a major hub for steel production, forced authorities to reduce and shut down steel mills until at least August. This caused a rise in steel prices, but hopes of a significant stimulus package from the Chinese government to boost the economy were dashed, capping the rise in prices.

Notable Crypto Updates:

Gary Gensler referred to the crypto market as the “Wild West” and urged for an increase in the agency’s budget to deal with the challenges posed by the market. He has urged for an increase in the agency’s budget to deal with the complexities of the crypto market.

The UK has abandoned its plan to regulate cryptocurrency like gambling and is now considering a “financial services regulatory framework” for crypto. This decision was made after a consultation period that ended in March 2021. The UK government had previously proposed to regulate cryptocurrencies under the Gambling Act, which would have required crypto exchanges to obtain a license from the UK Gambling Commission. However, this proposal was met with criticism from the crypto industry, which argued that it was inappropriate to regulate crypto in the same way as gambling. The UK government has now decided to take a different approach and is exploring a regulatory framework that is more tailored to the unique characteristics of cryptocurrencies.

Kuwait ban all cryptocurrency-related activities to combat money laundering and terrorist financing. The ban is absolute and applies to all individuals and companies operating within Kuwait.

The US Securities and Exchange Commission has accepted six proposed spot Bitcoin ETFs.

On Friday, Empire State Manufacturing Index was down less than expected. NASDAQ was fluctuating as many options were expiring ahead of the Index rebalance on Monday. Traders were also continuing to process corporate results while anticipating the FOMC decision next week. BTC tested a key short-term support (USD 29.5K), increasing the likelihood of a break.

Details: The NY Empire State Manufacturing Index fell to +1.1 in July 2023, but beat market expectations of -4.3. Business activity in New York State flattened, even though new orders inched up and shipments expanded. Delivery times shortened and inventories continued to decline. Employment levels edged higher, though the average workweek was little changed. Input and selling cost increases continued to moderate. Planned increases in capital spending remained weak. Looking ahead, while firms expect conditions to improve, optimism remained muted.

Macroeconomics

Russia: The Bank of Russia raised its key rate to 8.5% per annum (by 100bps instead of 50bps as was expected) on July 21, 2023. The decision was made in response to rising inflation, which is now above 4% year-on-year. The Bank also raised its GDP growth forecast for the year to 1.5–2.5%. Here are some of the factors that led to the decision to raise the key rate: seasonally adjusted monthly price growth continues to pick up; the economy has reached its pre-crisis level; there was an increase in transfers of funds from the population to foreign accounts last year; the unemployment rate has again updated a historical low mostly on a growing demand from the government sector; the rapid recovery of imports, which, along with the decline in exports, has contributed to the weakening of the ruble; an increase in demand for cars.

Crypto

House Republicans have introduced a new crypto market structure bill (House Agriculture Committee Chair Glenn Thompson, R-Pa., alongside Rep. French Hill, R-Ark., and Rep. Dusty Johnson, R-S.D., introduced the Financial Innovation and Technology for the 21st Century Act). The bill’s primary goal is to give the Commodity Futures Trading Commission (CFTC) more authority over cryptocurrencies. This includes control over digital asset commodity markets and the definition of crypto assets as “securities” or “commodities.” House Democrats are not supporting the bill and have called it a “handout”. The bill is facing an uphill battle to gain Democratic support.

Week 30:

The upcoming week will be a busy one for markets, with a number of important economic releases scheduled.

Investors will be focused on the Federal Reserve’s interest rate decision, which is expected to be announced on Wednesday. The Fed is widely expected to raise interest rates by 75 basis points, in an effort to combat inflation.
Other important releases include the advance estimate of Q2 GDP growth, which is due out on Thursday, and earnings results for several major corporations.
In addition to these releases, there will also be a number of other important economic data points released during the week. These include personal income and spending, the PCE price index, durable goods orders, and S&P Global PMI readings.
Investors will also be watching closely for releases from other major central banks, including the European Central Bank and the Bank of Japan. The ECB is expected to keep interest rates unchanged, while the BoJ is expected to maintain its ultra-loose monetary policy.
Inflation data from Germany, France, Spain, and Australia will also be released during the week. Investors will be looking for signs that inflation is starting to peak in these countries.
Finally, Q2 GDP growth rates for South Korea, France, and Spain will be released. These releases will provide an update on the economic performance of these countries.
Investors will be closely monitoring all of these releases, as they will provide important insights into the state of the global economy. The upcoming week is expected to be a volatile one for markets, and investors will be looking for any signs that the global economy is starting to slow down.