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Power of the Apes, ISM Slips, China’s big-Tech Crackdown, Oil Hits 6-Year High, Gold Rallies

Like my vacation, all good things must come to an end, and so must the S&P 500 index winning streak. Risk appetite is fleeing as investors return from the long holiday weekend with some jittery headlines on more crackdowns from Beijing, nervousness about the goldilocks period for stocks, and expected further hawkish notes from FOMC minutes that are due on Wednesday.

Softer ISM Services data with a decrease in prices paid supported the inflation is transitory argument and helped send Treasury yields lower. The 10-year Treasury in early trade was 6.9 basis points lower at 1.355%.
AMC

The power of the apes is nothing to mess with. AMC CEO Aron tweeted “It’s no secret I think shareholders should authorize 25 million more AMC shares. But what YOU think is important to us. Many yes, many no. AMC does not want to proceed with such a split. So, we’re cancelling the July vote on more shares. And no more such requests in 2021.”

AMC is mostly held by retail traders and this reversal in issuing more shares should keep his diehard followers happy for now. AMC may decide to issue shares next year, but for now the CEO is closely listening to his retail shareholders.
Services Data

Today’s services PMI data showed a slight deceleration in June. The ISM services index posted a noticeable drop from the record set in May. The headline index fell from 64.0 to 60.1, while all the components except for backlog of orders and imports had declines. The ISM employment component fell into contraction territory which supports the struggle employers are having filling vacancies.

The final reading of Markit Services PMI was also revised lower from 64.8 to 64.6.

The US service sector is still strong and while pricing pressures remain, this report does not provide any new signals that support the argument that tapering should happen sooner than early next year.

China

China’s cybersecurity crackdown is dragging down Didi and a few more firms (Kanzhun Ltd.,and Full Truck Alliance Co) , along with most Chinese tech stocks. Regulators imposed their will against the ride-hailing giant which led to the halting of the heavily anticipated IPO. The late Friday restrictions meant traders could not act on the July 5th holiday.

China has provided a strong backdrop for risk appetite over the years but lately it seems things are heading in the wrong way. This latest round of crackdowns are putting some US IPOs in jeopardy.

Another big risk for the world’s second largest economy is the struggle in reaching the agreed upon purchases with the phase-one trade deal with the US. A conciliary tone was expected from President Biden and that is not what has happened so far. It seems the US is mounting a case against China that will likely lead to tense moments over the coming months. US-China relations have a plethora of risk themes that include Taiwan, global security challenges, human rights issues, back-and-forth sanctions, and trade.

Oil

OPEC+ drama is the icing on the cake for the rally in crude prices that is widely supported on an improving global economic recovery. Everyone knows that the OPEC+ experiment wouldn’t last forever, but this somewhat surprise move by the UAE is just a smart posturing on their behalf. It doesn’t make sense just yet for the UAE to leave the cartel, but they sure are getting ready for the eventual battle for market share.

Now that everyone expects crude prices to rise, the question is will Brent crude find resistance at $85 or even the $90 level. An agreement could still happen in a week or two, but that uncertainty might be enough to support another surge in oil prices. While the decision to keep output unchanged is what the current agreement says, no one should believe that OPEC+ members won’t start increasing output.

The oil market is heading toward a deeper supply deficit and that is supporting the kingdom’s decision to raise prices strongly. Saudi Aramco lifted the official selling price for Arab Light crude by 80 cents a barrel to $2.70 above the Oman/Dubai average for Asia, the largest monthly increase since January.

Crude prices turned negative as bullish bets became overcrowded and as optimism remains that OPEC+ will work this out and not allow the market get too tight.

Gold

Gold prices are valiantly fighting off a potential death cross as stubbornly low Treasury yields shows steady flows boost sentiment for the precious metal. For gold prices to continue rebounding, it needs to survive the upcoming Fed Minutes that will most likely confirm their hawkish tilt. Taper discussions are intensifying and that should drive a stronger dollar that could be a drag on gold prices.

After a disastrous June, gold is stabilizing but the downside short-term risks remain as the oil price spike is driving inflation concerns. The long-term outlook for gold is still bullish as the low interest rate environment will likely remain in place over the next couple of years. The 10-year Treasury yield has probably peaked for the remainder of the year and that should provide a friendly environment for gold to eventually recapture the $1,900 level.

Bitcoin

Bitcoin’s overly optimistic calls have quickly faded away as investors anticipate a boring period. The mining activity is exiting China and that period of adjustment supports an extended trading range. The longer-term bullish case for Bitcoin embraces the departure from China as it supports the decentralization of mining activity.

Bitcoin is in a difficult period after Wall Street has turned slightly bearish for the remainder of the year. The world’s largest cryptocurrency is once again trading near the lower boundaries of its $30,000 to $41,000 trading range that has been in place since mid-May.

Bitcoin quickly gave up earlier gains after reports that the PBOC and Beijing’s local financial regulator ordered a software maker to shutdown over suspected crypto trading. China’s crackdown is intensifying and that is why Bitcoin’s hash rate, how hard it is to mine, has recently plunged the most on record.

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