Chinese Tech Stocks Bounce As Beijing Softens Tone On Gaming

Okay, very good morning to you, Wednesday the 4th of August. So hope you're doing well and gonna run through some of the major news from close on Wall Street overnight in Asia because there's been some notable movements higher in Hong Kong equities specifically coming out of some renewed rhetoric on the gaming sector which we were talking about yesterday. And that's helped to lift a little bit the equity sentiment going into the UK European Open. We're then going to talk about some comments out of Fed's Bowman somewhat contradicting, contradicting, excuse me, the more hawkish commentary you've had from Fed's Bullard and Waller more recently. Then we're going to talk about something called the Bank of England shadow MPC. I'll explain more about what that is in a moment. And then we had oil inventory numbers last night which set the scene for the DOE release later this afternoon. And then we've got some important economic data as well on the calendar today, namely that being US ADP national employment, often seen as the precursor for the labor report payrolls on Friday. And we've also got ISM data as well coming out in the US this afternoon. So that's what's on the menu for today. And quick look at the charts to give you an idea and flavor for general market sentiment. And the FX market fairly flat, the dollar index trading roughly unchanged, so nothing too exciting going on, um, to get things underway at the open here in Europe. Just gone through 7 AM in the major pairs, top left, EURUSD and Cable. From an equity performance, the equity market continues to remain pretty buoyant. Yesterday, after the dip, we get met with the usual drive. So dip at the open, rally for the rest of the session. It's kind of been a fairly familiar pattern of recent months. And that recovery last night going all the way into the close, actually then running into that trend line you could see on the third test Pretty nice respect of that on that last little push-up for the final half an hour of trade, and we just faded in, in Asia-Pacific trade until Europe have come in. We're coming back up, so again, I'd probably just be keeping an eye on any further upside here back to that level on the trend line. Any break above there, obviously just looking at around that 4420 level, the previous high that we had back 2 days ago, so on the beginning of the week. And then that previous high that was printed back at the end of last week. So equity sentiment just a little bit positive going to the open. So the DAX as well up about 72, um, ticks this morning. Otherwise elsewhere, gold and T-notes pretty flat overall. As to oil, although oil did bump a little bit lower but very marginal. So if I just mark it up with a rectangle This candle here down at the bottom, that was the latest API crude oil inventories, which you can see here. We had a headline drawdown of 879,000. Analysts were looking for a much deeper draw of 3 million. It's a little bit more bearish on the top level number. Bump price just marginally lower overnight, but in context, obviously oil has been drifting lower over the last few sessions quite aggressively. Combination on the daily chart, I'd say, of profit-taking given that sharp run-up that we've had, and a reevaluation about the general state of the economic growth given the fact of COVID still— not that COVID has completely diminished any sort of recovery, it's just going to delay the timing of it given the spread we're seeing globally at the moment. And so people just reevaluating their demand implications for that in the oil market. But look, let's get straight into the news and talk about a few different things. So last night on the close on Wall Street, it was a pretty positive finish. So kind of a double whammy positive there, and then some commentary overnight in China which helped lift that specific domestic market. So closes on the S&P and Dow were around 0.8%, the NASDAQ pretty similar, up about 0.65%. Hong Kong shares rally, the Hong— the Hang Seng Tech Index was actually up in excess of 3%. And obviously that's been seeing a high degree of volatility in recent weeks given the crackdown going on from Beijing around cybersecurity. And it came after Chinese state media tempered language attacking gaming companies, which helped bolster Tencent, who, if you remember, the day before fell around 11%. Um, the People's Daily, they basically published an editorial in its overseas edition that stressed the need for government, schools, families, and broader society to work together to better protect children from excessive gaming. That sounds a little bit better than taking opium. So yeah, definitely that they've softened that rhetoric. But to me, it feels almost like watching some kind of like Netflix Mafia episode or something where the kind of the Mafia boss comes out and technology and education have stepped out of line. And they get dealt with accordingly. And that sends a message out to the rest of the people not to mess with you. And then you, you know, you say something very pleasant like what they've said overnight, but everyone knows the situation here. And what I would suggest is that, you know, the gaming industry either falls into line or Beijing will take action in the future. So yeah, it's, it's relief, I guess, in the short term. Chinese equities are highly sensitive to this. There's a lot of nervousness, I would say, in that geographic region about what sector is going to get hit next. And so, yeah, relief for now, but everyone, I think, knows— and China have made the point now— that they're serious about this. So, you know, let's see. The other thing we've had overnight is Alibaba. They did report yesterday, and notably their revenues missed estimates for the first time in over 2 years. Actually, revenue number came in at 31.8 against 32.43 billion US dollars. And then from a data perspective, we did also have some encouraging data overnight in China where the Caixin services PMI came in at 54.9. Analysts were only anticipating a 50.6 reading, so that's way and above expectations. So another positive element perhaps, but the July readings were buoyed by a successful containment of COVID-19 cases in southern China. Although remember what's happening in China at the moment, they're implementing new restrictions across several provinces, which means then the latest round of outbreaks that have been seen late July going into August is likely going to hurt that August PMI reading. So I don't think this is necessarily room to get too excited because it's probably going to pull back given those aforementioned reasons. The other thing that's been watched is this, which is I think her name is Michelle Bowman, if I'm right. Yeah, Michelle Bowman. And this is a voting member on the Federal Open Market Committee. And I thought these were quite interesting, and it kind of fits with what I was saying in the briefing this time yesterday, which was I was talking about Waller, and Waller had come out talking about, look, if we get two good jobs reports, we could do tapering as soon as October. and this was very much in fitting with the hawkish comments seen on Friday from Bullard. But then Fed's Bowman's come out and said it will take time for people to re-enter the labor force, and employment is still far below where it was despite recent gains. More work needs to be done to get the US economy back on a strong footing. Now, Bowman tends to hit— just a bit of a reminder on the hawk-dove scale, So, you know, Bullard is right out there as an outlier on the hawkish end of the spectrum. And Waller has obviously been readjusted to follow suit now sitting on that hand side. But Bowman typically sits center, very much aligned in the center group here. And so these comments are not that surprising. But I do think it goes some way again to explain the tactical approach from the Fed in order to keep the markets honest. We're having a bit of a recalculation at the moment about the impact of COVID-19 and the overall state of the global economy given the difficulties in containment of the Delta variant. And so the market, I don't think, wants to get— well, I think the Fed doesn't want the market to get too complacent. The Fed aren't ultimately going to take action at some point. So again, it's the same as what we heard before, outlying hawks saying hawkish things but the center remains pretty fixed on a predefined course at this point in time. The other thing then is something called the Bank of England shadow MPC. Now, for any students watching this, if you've never heard of this, basically the Times have always had what they call this shadow MPC, which is basically a collection of potentially former MPC, BOE officials, head economists at a major financial institution perhaps, It could even be a journalist. The Times economic editor might be on the board. It could be a person from industry, from different types of companies. Essentially, it's a collection of well-experienced people within or operate within the UK market, and they are themselves then mimicking a board in a similar fashion then to making a judgment call on policy. And they release their outcome the day before we have a Bank of England meeting. Now, back in the day, I'd say when I started my career back in, you know, 2006, the shadow NPC used to be very meaningful. It certainly did used to move the market. I've not seen the shadow NPC move the market for a long time. And at the moment, I think that's still the case, predominantly because there's quite a large disconnect here. I've been seeing a pattern over recent shadow NPC calls where they're nearly always erring on the side of being way more hawkish than the MPC are. So that definitely context needs to be applied. The Bank of England, they said, should scrap the final £50 billion of its planned QE and deliver a clear signal that it's worried about rising inflation. So again, very much on the hawkish side. It comes in a context, of course, with the BoE meeting tomorrow. We're a member down because Haldane has left, so there's only 8 of them. And the split then potentially is going to be 6-2 because Dave Ramsden, the deputy governor, Michael Saunders, an external member, have kind of hinted that they may call for an immediate end to QE because of inflation concerns. So for me, what the shadow MPC have said doesn't really make a difference. I wouldn't see it as really being too much of a fundamental element to really shift the pound today. 6-2 split come— would come as very little surprise given those comments those two guys have made in recent weeks. We've already looked at the APIs, so I'm just going to briefly talk about the oil market from a different perspective. So let me just flip over to my charts here so you can see oil again on the 30-minute and how we're trading at the moment. And aside from the oil inventory data Yesterday saw reports of at least 4 ships and tankers off the coast of UAE losing steering, with the Panama-flagged Assault Princess reported to have been hijacked. Now, the Times have noted British sources are working on the assumption Iranian military or proxies have boarded the vessel, but that has since been denied by Iran. The US military is expected to reposition at least one vessel in the vicinity of that to keep a closer eye on activity in the region. So yeah, not really moving oil, I'd say, right now, but definitely worth keeping an eye on as we go further forward in time through the session and the rest of this week. All right, quick look at calendar for today to wrap things up. So we do have the various PMIs coming out of Europe this morning and the UK, but these are all final July readings. So really the emphasis today is on the US session. ADP National Employment, of course, seen as a heavy-weighted precursor for the labor report on Friday. That's expected to come in at 695,000 on the headline print. And then we'll look out for the ISM US Service number, expected to be fairly unaltered from the prior reading, if not a small improvement. Um, but as ever, we'll keep an eye on the employment component, which did dip into contraction last time at 49.3 3 as again another value input as to our assumptions then as to how the, the jobs payrolls report will come out at. We've got the DOE oil inventories as normal at 3:30. Fed's Clarida, a voter, speaking at 3 PM London time. And then something the market's looking out for as well, just given the, the depth and breadth of issuance from the US government at the moment, the quarterly refunding announcement is happening at 12:30 later on today. Uh, but that is it. I'll leave it there. Any questions at all, feel free to drop me a comment. Otherwise, have a good day. Thanks very much.