Chinese stocks get hit.

* New Home Sales Disappoint
* Data picks up later in the week
* Brazil falls to a 12 year low
* Chinese industrial profits fall

And now. Today’s A Pfennig For Your Thoughts.

Good day. Welcome to Monday morning and hopefully you were able to enjoy the last weekend of July. Let’s first see what Frank has in store for us today:

July 27th, 2015 – Saint Louis, MO. We woke Sunday morning to a day with that mid-summer feel. Hot. Humid. Still. Some rain had blown through unnoticed overnight scattering leaves and sticks in the pool and around the back yard. A tour of the main yard showed that none of those trees and branches we walk quickly under had succumbed. Glad to let the chain saw stay in the garage.

We have all commented a number of times over many years now about how China seems to be buying up all the resources in the world. We felt it, read about it, speculated about it. But stealing quite a few pages in the New York Times Sunday morning was a very large story with facts to back it up ( After all with several trillion in US dollar reserves what’s a country to do? Go shopping.

As expected China has focused on acquiring resource assets of various kinds. Both directly and through those small print clauses in loan agreements to countries who have otherwise worn out their global borrowing welcome. Quirky Ecuador is the star of the article, quirky because they are a dollarized economy now heavily indebted to China. As a reminder the PRC has a very long view, much longer than we are used to dealing with. ‘Fifty dollar oil’ they might say, ‘so what, let’s see where that stands in 50 years.’ The article notes that the Renminbi / Yuan will likely receive reserve currency designation soon – not “the” reserve currency but a giant step along the way.

Thanks Frank. The US dollar held its ground throughout the day on Friday amid mixed data. First, we saw June new home sales fall 6.8% to an annualized pace of 482k units and marked the lowest level since November. There was also a revision made to the figures from May as the original reading was revised downward to 517k from 546k, which gives us two consecutive months of losses for new homes, and is a divergent path as compared to existing home sales. Some of the discrepancy can be attributed to how the figures are calculated as new homes sales are counted when a contract gets signed but existing home sales are counted when the purchase is finalized. Ultimately, the popular view of continued optimism for the housing market remains intact, but a couple more reports like this would start raising eyebrows.

The other report released on Friday, the Markit US Manufacturing PMI Index, gave us muddied results. The good news was that manufacturing activity on aggregate increased for the first time in several months after the report came in at 53.8, which was slightly better than last month’s 53.6 reading. Keep in mind that 50 is the dividing line between expansion and contraction. The orders component was higher but the employment gauge fell to the lowest level since April. The chief economist at Markit, Chris Williamson, said that a modest upturn in the headline manufacturing PMI belies some worrying undercurrents which point to potential weakness in coming months.

He went on to say that companies saw output and order book growth regain a little momentum at the start of the third quarter, but the overall pace of expansion was nevertheless the second weakest seen since the government shutdown of 2013. If the dollar remains on the strong side or moves higher, I would expect to see these manufacturing reports continue to encounter turbulence going forward. This week is shaping up to be a big one in the data department. We start off on the slow side as we’ll see the June durable/capital goods orders and the Dallas Fed manufacturing report today then we kick things up a notch with the Fed meeting and second quarter GDP later in the week.

Before I left the office on Friday afternoon, I took a look at the currency screens and saw where most of them were able to claw their way back and come very close to climbing out of the red. In fact, the euro exchange rate was flirting between gains/losses as the morning turned into the evening and most currencies had marginal losses of 0.25% or less. Ultimately, losses were primarily concentrated in two currencies. The Brazilian real took it on the chin again with a 2% loss and was trading at 12 year lows on Friday afternoon as concern of a potential credit rating cut got some legs. The central bank is still fumbling to keep inflation in check so the odds of a 0.50% rate hike this week are getting stronger.

The South African rand was down about 1.5% even though the central bank increased interest rates for the first time in a year as policy makers are doing what they can to put a floor under the currency in an attempt to cool inflation. The slower manufacturing data out of China last week really put the hammer down on this currency and the price of gold hasn’t been any help. Speaking of gold, it was nice to see the bleeding stop. I didn’t see any concrete news other than being oversold that would support the change of course, but gold had a $20 swing late in Friday trading and touched $1,100 while ending up with a $5 gain. Hopefully $1,100 acts as a lifejacket for gold and is a buoyancy point where it doesn’t dip too much lower for a sustained period of time.

As I came in this morning, the euro is leading the currencies higher after the July German IFO, also known as the business climate barometer, beat both expectations and last month’s reading. The bigger story overnight, however, came out of China as their equity markets had another setback. Chinese stocks fell more than 8% today and has cast a general risk off sentiment among the markets, although, you wouldn’t necessarily think that was the case by seeing the dollar down and currencies moving upward. Chinese industrial profits missed their mark in June and initially sent stocks lower but the snowball effect picked up steam and ended with the biggest one day drop since 2007. Logic suggests that gold should be trading higher on that news, but the general commodities sell off was too much and is down about $6 so far this morning.

Currencies today 7/27/15. American Style: A$ .7280, kiwi .6603, C$ .7674, euro 1.1061, sterling 1.5518, Swiss $1.0440, . European Style: rand 12.6737, krone 8.1776, SEK 8.5428, forint 280.35, zloty 3.7345, koruna 24.422, RUB 59.50, yen 123.17, sing 1.3700, HKD 7.7503, INR 64.2140, China 6.1176, pesos 16.3250, BRL 3.3785, Dollar Index 96.67, Oil $47.62, 10-year 2.23%, Silver $14.58, Platinum $972.74, Palladium $619.47, and Gold. $1,091.45

Mike Meyer
Vice President
EverBank World Markets