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Get Ready For More Pain In China

Get Ready For More Pain In China

By George Lei, Bloomberg macro commentator and reporter.

Lower growth, higher inflation and less stimulus.

That’s…

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This article was originally published by Zero Hedge
Get Ready For More Pain In China

By George Lei, Bloomberg macro commentator and reporter.

Lower growth, higher inflation and less stimulus.

That’s the most-likely scenario over the coming months, and possibly years, if the ruling Communist Party presses on with its “common prosperity” drive to transform China’s economy. Things will get worse before they get better.

The phrase “common prosperity” may sound like political jargon to foreign ears. Yet Beijing’s latest moves bear resemblance to left-wing policies practiced elsewhere: higher wages for gig workers, lower profits for corporations and efforts to control home prices and rent, just to name a few.

Meituan, a Chinese equivalent of Doordash, has been ordered to guarantee minimum wages and pay for insurance for delivery workers. Internet giants including Alibaba and Tencent have coughed up billions in penalties and “donations” for social aid. Doesn’t that sound similar to the calls for “living wages” “tax big tech” and “spread the wealth” from American progressives?

Similar to the West, the fruits of China’s growth over the past couple of decades have disproportionately benefited those with good education, political connections or capital to invest. Beijing’s attempts, if successful, should dampen growth in both housing prices, considered a sure-fire bet for the well-off, and the real estate sector, which together with related industries contribute almost 30% of the economy. Meanwhile, labor income is certain to rise at a time when demographic trends are already creating skilled worker shortages and pushing up wages.

“The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival,” a book written by Charles Goodhart and Manoj Pradhan and referenced by Jerome Powell in his Jackson Hole speech last month, points to a future where China’s shrinking labor force, on top of a less globalized economic system, results in higher inflation and less inequality worldwide. China’s policy drive could accelerate such an eventuality.

The crackdown on real estate and tech, combined with efforts to raise working-class pay, will “support the development of a healthier and more balanced economy,” according to analysts led by Mark Haefele, chief investment officer at UBS Global Wealth Management. What they don’t mention, however, is that falling growth and rising prices could come first before the structural changes intended by policy makers run their course and the benefits kick in. Investors should be prepared to embrace more pain in the near future.

China will be reluctant to cut policy interest rates under a new “cross-cyclical” policy framework that prioritizes long-term goals such as reducing inequality, according to ANZ Banking Group. Monetary policy “will be focused on supporting structural reforms” and interest-rate cuts “are not preferred,” wrote Raymond Yeung, the bank’s chief economist for Greater China.

UBS remains optimistic on the prospects of China’s long-term consumption growth. The focus on “lifting disposable incomes ... and supporting employment” is beneficial to the “general consumption upgrade,” favoring China’s consumer durables and services, according to the Swiss bank.

Tyler Durden Tue, 09/07/2021 - 21:30

Economics

Between a rock and a hard place

What will the Fed do? European stocks are making decent gains on Thursday, while US futures look a little flat ahead of the open on Wall Street. US equities…

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What will the Fed do?

European stocks are making decent gains on Thursday, while US futures look a little flat ahead of the open on Wall Street.

US equities rallied as the session wore on yesterday and we’re seeing Europe playing a little catchup this morning. Overall, the mood remains a little downbeat in the markets, with investors torn between the “buy the dip” approach that has fared so well in the past and the growing list of economic and market risks that are increasingly evident.

We may see more of this over the coming months as countries get to grips with winter Covid surges, higher energy prices and higher inflation, among other things. Which makes the positions of central banks all the more uncomfortable, with many seemingly determined to persevere with paring back their pandemic stimulus measures.

Of course, if they are becoming more of the view that inflation is not as transitory as they previously believed, then they’re caught between a rock and a hard place and may be forced to act. But that will only pile on the pressure and disrupt the economic recoveries that many have enjoyed.

Next week we should learn a lot more about what the world’s most important central bank thinks of recent developments and how it perceives the risks posed by inflation. It may not be surprising therefore if equities err on the side of caution between now and then as an undesirable response could trigger a nasty reaction in the markets.

US data delivers gains for stocks, yields and USD as gold tumbles

Today’s data from the US has done little to clear things up, with both retail sales and the Philly Fed manufacturing index smashing expectations while jobless claims popped a little but only just exceeded forecasts. Retail sales have been volatile for a number of months but an August increase of 0.7% was the reverse of the decline that was expected.

Philly Fed has been trending lower since March and that trend was expected to continue but a surprise jump may be cause for optimism. While new orders and employment indicators softened, firms remain optimistic about the next 6 months as current general activity and shipments saw large increases.

US futures got a small lift on the back of the data while the dollar continued to rally as US yields drifted higher once more. Gold, which has been through a rough patch over the last 48 hours, didn’t fare well with the data and continued to trend lower on the day.

Bitcoin struggling at $48,000 once again

Bitcoin has steadied once more around $48,000 which remains an interesting technical level. A rotation off here back towards $44,000 could see correction pressure grow. I say this having talked about the prospect of a correction for weeks now and yet, bitcoin has shown remarkable resilience.

It obviously hasn’t burst higher in that time either but it’s certainly dragging its feet. With that in mind, there isn’t much to add at this point. A significant break below $44,000 could make things interesting, while a move above $48,000 will put the focus back on $50,000 and may even trigger a shift in momentum that has been absent in previous rallies.

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Precious Metals

Oil pares gains, gold plummets ahead of Fed

Oil sees profit taking at summer highs Oil is pulling back a little on Thursday after enjoying another strong rally in recent days. Hurricanes hitting…

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Oil sees profit taking at summer highs

Oil is pulling back a little on Thursday after enjoying another strong rally in recent days. Hurricanes hitting the Gulf Coast in recent weeks have disrupted production in the region which has given a boost to prices. And with two more months of Hurricane season remaining, more disruption could follow.

Inventory data from EIA gave prices another lift on Wednesday, with WTI and Brent also rallying ahead of the release after API also reported a large drawdown a day earlier. With prices now back around summer highs, we are seeing some profit taking kicking in but the rally continues to look well supported.

WTI fell a little short of its summer highs around $75, stumbling around $73, while Brent saw resistance around $76. A break through these levels could see the rally gather even more momentum. If we do see a small pullback, the first test of support could come around $70 in WTI, where it had previously seen resistance.

Tough times ahead for gold?

Gold has fallen out of favour and fast, with the yellow metal slipping more than 1.5% today and below a key support level. This comes only a couple of days after it broke back above $1,800 on the back of softer US inflation data but that celebration was short-lived and it’s suddenly looking rather vulnerable.

From a technical perspective, $1,780 marked the neckline of a head and shoulders that formed over the last month, peaking at $1,833. The next major test below could come around $1,750 but further downside could be on the cards.

The fact that this has come ahead of the Fed meeting doesn’t bode well for the yellow metal. Recent data has given the Fed room to be more patient with tapering but the commentary we had late last week from officials suggested many aren’t discouraged. Gold could feel the love once more should policymakers change course next Wednesday but it could be a long week for the yellow metal in the interim.

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Economics

OIl Firm But Gold Flashes Danger

Oil prices leap higher.   Oil prices staged an impressive rally overnight having spent the week ignoring the gloom sweeping other asset classes. Official…

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Oil prices leap higher.

 

Oil prices staged an impressive rally overnight having spent the week ignoring the gloom sweeping other asset classes. Official US Crude Inventories surprised by falling by a much higher than expected 6.40 million barrels. The slow return of production and refining post-Hurricane-Ida being the main culprit. The relentless rise in natural gas prices, now starting to cause nerves to fray in Europe, is also helping to elevate oil prices and is a situation that I believe will get much worse before it gets better.

 

Brent crude carved through $74.00 a barrel on its way to an impressive gain to $75.50 overnight, rising slightly to $75.60 in Asia. $74.00 now becomes a support/pivot point. China’s announcement that it is selling some of its strategic reserves to the domestic market has had zero impact on prices and dips to the $74.00 region should find keen buyers. Brent crude has resistance near by at $76.00 and if that gives way, Brent crude should target the $78.00 a barrel area.

 

WTI leapt 2.65% higher overnight, climbing to $72.60 a barrel, advancing to $72.70 in Asia. Any dips to $71.00 a barrel should be well supported, at least until we see concrete recovery progress from the Gulf of Mexico hub. A rise through the overnight high at $73.10 suggests a test of $74.00 a barrel, which could extend to $76.00 next week.

 

Gold flashes more danger signals.

 

Gold’s price action overnight flashed more warning signs to bullish investors as prices fell despite the US Dollar weakening and US yields remaining barely changed. Gold finished the overnight session down 0.60% to $1793.50 an ounce. Gold rally on Tuesday failed at the 200-day moving average (DMA), and the uninspiring price action overnight is a huge warning signal that gold is living on borrowed time at these levels, with the path of least resistance looking more like lower by the day.

 

Gold has resistance at $1808.50, the 200-DMA which caped gains so well this week, followed by the 100-DMA at $1816.50 and a formidable series of daily highs around $1834.00 an ounce. Support lies initially at $1790.00 followed by the more crucial $1780.00 an ounce zone. Failure there is likely to see gold fall rapidly to $1750.00 an ounce and potentially lower.

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