• Asian stock markets climb as Chinese authorities recall they have a bunch of policies at their disposal aimed at boosting domestic demand
  • PBoC devalues onshore yuan to the most since more than a year
  • Google (GOOG.US on xStation5) easily beats expectations as for Q2 earnings
  • Japanese manufacturing PMI slows down in July

Beginning with equity markets one may notice than Asian shares are experiencing heavy gains during Tuesday’s session (the Hang Seng is up more than 2%) which might be related to overnight revelations coming from the China’s State Council. It signalled that it has a substantial toolbox containing various policies aimed at boosting domestic demand. There are an issuance of bonds for infrastructure investment, more proactive fiscal policy (better coordinated with financial policy) as well as tax cuts. On Monday we were offered further indications that the PBoC has room to further cut reserve requirement ratios (RRR) in the second half of the year. By and large, given remarkable underperformance of Chinese equities over the recent weeks one may suppose that time to use some tools to restore confidence in the economy might come in relatively soon. Equity investors have not been spooked by another appreciable devaluation of the onshore yuan. The People’s Bank of China set the reference point for the USDCNY at 6.7891 compared to 6.7593 yesterday. It is the highest level for the pair since 11 July 2017.

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The Hang Seng (CHNComp) is surging today breaking out its crucial resistance placed nearby 10900 points. From this point of view one may expect the rise to continue should the price manage to close the day above this area. Source: xStation5

Looking across equities it’s worth focusing on Google as the company released its Q2 earnings. Both EPS and revenue surprised to the upside. EPS totalled $11.75 in comparison to $9.59 expected (based on Reuters calculations) whereas revenue amounted to $32.66 billion while the consensus had pointed to $32.17 billion. Shares jumped 5% after a few minutes when the market closed. The other details showed that operating income grew just $2.81 billion meaning a substantial decrease compared to the corresponding period in the prior year ($4.13 billion) which resulted in a fall of operating margin (notice that this move was yet more exaggerated by an increase in revenue) to 9% from 16% – these numbers include all fines, when fines are excluded operating margin decrease from 26% to 24%. Notice that a 22% decline in ad pricing was more than offset by a 58% pick-up in paid clicks. Splendid moods surrounding Google spread over other tech stocks and we saw a massive surge across all FAANG. Expect Google’s shares to open substantially higher later today.

On the currency front we may notice relative calmness. The Swedish krona is losing 0.18% as of 6:53 am BST being the largest mover in the morning while the greenback is slightly rising (the index is up less than 0.1%). The US dollar was shored up on Monday by a huge rally in yields which could have been a side effect of an increase of Japanese yields spurred by expectations as for reducing ultra-loose monetary policy there (quite baseless conjectures in our eyes). The US 10Y yield soared 8bps yesterday crossing 2.96%. Currently it is trading at 2.95% while the Japanese 10Y yield has been able to retain its yesterday’s rise and it is hovering subtly above 0.08%.

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Japanese manufacturing PMI slipped noticeably in July but it held in the expansion area. Source: Macrobond, XTB Research

The Asian session did not abound with many macroeconomic releases and essentially just Japan’s manufacturing PMI seems to deserve any attention. It slipped in July to 51.6 from 53 last month brining the lowest value in 18 months. The details illustrated that the new orders subindex dropped to 50.1 from 52.7 while the new export orders subindex climbed to 49.7 from 48.9. It is quite different suggesting that Japanese industrial companies have yet to face impediments is collecting new export orders despite risks related to trade wars.

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The USDJPY drew quite an encouraging candlestick at the daily time frame (a long wick suggesting fading power of bears). Thus, until the price keeps moving above its trend line bears could struggle to move much lower. It may change once the US dollar index breaks its crucial support line (currently at around 94). Source: xStation5