A Sea of Red: China's Inflation Drop Sparks Global Market Concerns

After Friday’s US employment data, the US stock market saw a surge in buyers but soon significantly collapsed. As the bullish price movement lost momentum, the NASDAQ collapsed by 1.24% and continued declining this morning. Last week’s market analysis blogs evaluated that investors are set against the market bulls, and we saw this materialise on Friday. This morning, investors turned to developments in China, the world’s largest “exporter of inflation”. 

The price of the global stock market continues to see bearish price movement and low investor sentiment, but NFP is not the main price driver. This morning China released its latest consumer and producer inflation data. Chinese inflation falls at its fastest pace in seven years, compounding fears of economic contraction. In addition, the inflation data fell at such a fast pace that China is now on the brink of deflation. The Consumer Price Index read 0.0%, lower than the 0.2% investors were expecting. The Producer Price Index fell by -5.4%, the lowest since 2016. 

In addition, the Chinese Core Inflation data also significantly fell, which the rest of the world still needs to experience. Investors are now contemplating whether the global economic slowdown is closer than previously thought. As a result, the global stock market continues to decline while the US Dollar edges higher after Friday’s selloff. The best-performing currency of this morning is the Japanese Yen, similar to Friday, as well as the Dollar. The US Dollar Index this morning is up 0.19%.

NASDAQ - Inflation Drop Sparks Global Concerns

The NASDAQ is experiencing the most significant decline from the three US indices declining 0.60% this morning. The main price drivers are China's data and the latest employment data, which continues to point towards at least two rate hikes. Lastly, this morning's index drops to a new monthly low, but the top most influential stocks are higher during the pre-market sessions. 

The main concern for investors regarding the employment data was the Average Hourly Earnings. The Average Hourly Earnings read 0.4% higher than traditional levels and analysts’ expectations. Higher salaries are specifically a concern for the Federal Reserve as the regulator tries to decrease inflation and demand. In addition, the Unemployment Rate declined to 3.6%, again setting a clear path for the Fed to hike. The Non-Farm Payroll fell from 306,000 to 209,000, slightly lower than expectations. As a result, investors are pricing in two more rate hikes and a hike later this month. 

The next price driver will be the US’s official inflation rate on Wednesday afternoon. Markets expect the Consumer Price Index to read 0.3%, lowering the inflation rate from 4% to 3.1%. This would be the second consecutive significant decline, bringing the inflation rate close to the Fed’s 2% target. Investors are contemplating whether such as decline would put a second interest rate hike in doubt. If inflation declines to 3.1% or lower, the NASDAQ may experience further buyers. At the same time, a smaller decline will result in additional pressure from the monetary policy. After the inflation data, investors will focus mainly on comments from the Federal Open Market Committee. 

NASDAQ 30-Minutes Chart on July 10th

Regarding technical analysis, indicators continue to point towards a potential downward trend. The regression channel and Bollinger Bands point downwards while the instrument forms lower lows. The asset trades below the 75-bar Moving Average, and moving averages are developing bearish crossovers. 

Gold - Investors Eye Inflation Data

Another asset that saw a rise in volatility levels was Gold as investors reacted to the Dollar’s collapse on Friday. After the NFP release, the asset rose by 0.91% over the next three hours and only saw a decline towards the end of the week’s session.  The positive price movement was mainly in response to the Dollar’s decline making Gold and other safe-haven assets more attractive as wealth holders and a hedge against inflation. 

The price of Gold has declined during this morning’s sessions as the Dollar has risen. However, investors should note that the Chinese data, deflation, and lower stocks are positive factors for the instrument. The main concern for investors is interest rate hikes which are almost inevitable for July. Analysts still believe an interest rate hike of 0.25% at the July meeting has a 90% probability. Another risk for Gold is the increasing bond yields, making the asset less attractive than a significant competitor. 

However, as stated above, investors may turn towards Gold if the economy and stocks continue to experience a slowdown. Investors have not obtained a significant signal from indicators or price action indicating a longer-term upward trend. The price action remains within the sideways trend between $1,902.13 and $1,934.91. Like the NASDAQ, the price condition will particularly depend on the inflation data this Wednesday. 

Gold 15-Minute Chart on July 10th

Summary:

• Chinese inflation falls at its fastest pace in seven years, compounding fears of economic contraction. The Producer Price Index fell by -5.4%, the lowest since 2016. Analysts advise China is on the verge of deflation. 
• Employment Data continue to point towards a more restrictive monetary policy. The main concern for investors was the Average Hourly Earnings. The Average Hourly Earnings read 0.4% higher than traditional levels and analysts’ expectations. 
• Global stocks significantly decline due to poor Chinese data and the possibility of further interest rate hikes. 
• The next price driver will be the USA's official inflation rate on Wednesday. Markets expect the Consumer Price Index to read 0.3%, lowering the inflation rate from 4% to 3.1%.