Economic Data, Masks and Hong Kong
The economic figures that will be released now and going forward can surprise us positively or negatively in a big way. The headline numbers can be always misleading and may require some digging in to get a good grip of the ground reality.
The ISM manufacturing index rise yesterday was the biggest rise on a month over month since August 1980. The inflation component of this report (the ISM prices paid) was really strong. After such a strong lock down, when you turn demand on, buyers are no longer in a position to negotiate price. This could get more worse in the coming days especially with wage prices going up and with bottle necks in the supply chain.
The rebound in May durable goods was a positive sign for the economy. Economists view this as a vote on a strengthening economy as consumers and businesses tend to buy things which has a shelf life of three years or more, meaning they feel confident about the economy. But after crashing to a 10 year low in April this is no big thing. In absolute terms it doesn’t look that great. The rise of $194 billion is less than the $200 billion and more that it has been since 2011.
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The NFP numbers one of the most watched economic numbers of the month will be released today and is expected to be anywhere between a rise of 3 to 5 million. The previous figures were a rise of 2.5 million. But unlike the NFP report, which is based on a survey, the employment to population ratio is important as it’s a lot less manipulated. It just captures those who have jobs vs those who don’t have jobs. With only 52.8% of the people employed of the 260 million above 16 years in US, it is close to the lowest since the BLS (Bureau of Labor) statistics started tracking these numbers since 1948.
Finally, it looks like wearing a mask or not wearing a mask will decide who will be the next US president. Several think tanks have concluded based on studies on various other nations, that a national mask mandate could be used as a substitute for further lockdowns and potentially offset a 5% hit to the economy. Never expected matters will get to this level. This should all add further pressure to President Trump’s campaign for a second term.
Meanwhile Senator Marco Rubio a prominent China hardliner is seeking to ban Chinese firms from accessing US capital markets. Rubio is the acting Chairman of the senate select committee on intelligence. If you have not heard or seen his position on China, pls look up his video on YouTube. It is worth your time.
China has enacted the National Security Law in Hong Kong. Many leading countries of the free world are stepping up to offer permanent residency for Hong Kong citizens which includes even Japan who has maintained a very conservative approach towards immigration and citizenship.
China can turn very hostile to this offer from other countries and prevent citizens from leaving the country. There is nothing much Hong Kong sympathizers can do.
Equities
The S&P 500 has clearly exceeded our expected retracement levels of 3085 but that doesn’t change our overall bearish view on the markets.
Market breadth was very flat yesterday. The NYSE up/down volume ratio was negative with about 59% of total volume to the downside and 41% to the upside. While the S&P 500 closed higher by half percent, the buying power came mainly from stocks such as Netflix, Facebook, Amazon, and Amgen. The current buying should top under 3155.
Bonds
The high in bonds at 179^17 must have competed a corrective pattern. If so, the move down soon could turn out to be sharp.
Euro
There is not much change to our Euro analysis. A move below 1.1170 the low of June 21 should give more confidence to further weakness.
Gold
Gold is in its final stages of a major bear market rally that goes all the way back to 2015. The recent move up from 1670 to 1790 is in five waves meaning that it is an impulse wave. The termination of this top could result in a culmination of many subdivisions leading to a fractal top. The coming days price action will be extremely critical.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.