Japan’s Q2 GDP rose by 0.3% q/q and 1.0% annualised, surpassing expectations. This marks the fifth straight quarterly expansion, bolstered by rising consumption and capital spending. The stronger figures led to yen appreciation and an advance in the Nikkei.
In China, July data showed continued falls in new home prices both monthly and yearly, although annual declines narrowed slightly. Industrial output increased by 5.7% y/y, below the estimated 5.9%. Retail sales grew by 3.7% y/y, less than the expected 4.6%. Fixed asset investment rose by 1.6% from January to July, missing the 2.7% forecast.
Currency Movements
Apart from yen strength due to Japan’s data, major currency moves were limited. GBP, CHF, EUR, and CAD saw slight increases against the USD.
Asia-Pacific stocks displayed varied performances: Australia’s S&P/ASX 200 rose by 0.45%, Hong Kong’s Hang Seng declined by 1.25%, Shanghai Composite increased by 0.26%, and Japan’s Nikkei 225 climbed by 1.01%. Reports indicated that China suspended car trade subsidies in several regions, and foreign firms were advised against stockpiling rare earths. Economic activity showed challenges amid external uncertainties.
The significant economic weakness coming out of China, with both retail sales and industrial output missing forecasts, is the main signal for us. This continues a long-term trend we’ve watched, with China’s official manufacturing PMI staying below the 50-point mark that separates growth from contraction for much of the past year. This persistent weakness suggests looking at put options on the Hang Seng index or shorting the Australian dollar, which often acts as a proxy for Chinese industrial demand.
In contrast, Japan’s economy is showing surprising resilience, with Q2 GDP growth beating expectations and marking a fifth straight quarterly expansion. We remember the Bank of Japan finally ended its negative interest rate policy back in the spring of 2024, a major policy shift that is now seemingly supporting the economy. Given this momentum and the strengthening yen, we could consider buying call options on the Nikkei 225 index.
US Market Event
The upcoming speech by Fed Chair Powell on August 22 is now the key event for the US market, especially with the recent surge in producer prices stoking inflation fears. This brings back memories of the aggressive rate hikes we saw through 2023, which were designed to tame inflation that had peaked at over 9% in 2022. We anticipate higher volatility, making it a good time to look at straddles on the S&P 500 to play a potential sharp move.
We’re also watching the moves of major investors, as Soros Fund Management massively increased its Nvidia holdings, betting on the continuation of the AI-driven rally. This trend has dominated markets for over a year, and such a large institutional buy-in suggests more potential upside. Following this signal, we might look at buying call options on key semiconductor and tech stocks.
The slowdown in China’s industrial output directly impacts commodities, and we should expect continued downward pressure on industrial metals like copper. Meanwhile, the oil market is focused on the meeting between Trump and Putin. Any geopolitical developments from that discussion could introduce sudden volatility into crude prices, making options that profit from sharp price swings particularly relevant.
