Both of these factors are likely to spur further selling in Asian markets today, with the outcome of the Chinese market reopening being the greater cause for concern.
The G20 meeting in Turkey over the weekend provided a positive outlook on the world economy, with members stating that they supported the Chinese government’s recent currency moves and that the slowdown in the Chinese economy is not a major cause for concern. While this is salutary for the global outlook, it is unlikely to distract from the influence of US NFP and the Chinese stock markets driving market volatility today.
The US NFP came in at 173,000 against expectations for 217,000, which drove the poor performance in US markets on Friday. The unemployment rate in the US now sits at 5.1%, and given this alone, the Fed would still have a good case for raising rates on 17 September. This is a major reason why the probability for a September rate rise still sits at 30%. However, inflation is still well below where the Fed would like to see it and global markets are still in a state of disorder, making it unlikely that the Fed will hike rates next week. The fact that the US economy is not strong enough to warrant a previously expected rate rise in September is negative for global sentiment, in that the US economy is not doing as well as it had been previously hoped. There is still a strong desire within the Fed to hike rates this year, and while the Fed meeting in October is still very much ‘live,’ December looks to be the most likely occasion for a rate rise.
The ‘National Team’ of state-related institutions tasked with supporting the Chinese stock markets restarted market support on Thursday 27 August. Despite clear indications that the government had decided to no longer conduct daily operations to support the market, a decision had been made that stock market volatility should not distract from the grand political spectacle planned for the WWII commemorations on Thursday 3 September. This creates a conundrum for markets: Now that the short-term reason for restarting stock market support has disappeared, will the removal of state support lead to a renewed free fall in the Chinese stock markets when they reopen today?
It seems quite likely that the removal of state support should at least see a retest of the 2850 level on the Shanghai Composite (SHCOMP), which is where the market found a floor during the week of the ‘Black Monday’ sell off. Renewed Chinese state intervention has only lengthened the period of time that it will take for the stock market to find a natural floor for itself.
The other pressing question is whether global markets have reached a point of China-fatigue, and that the frequent volatility seen in Chinese stock markets has proved itself more as noise with little real effects. A better indication of how the Chinese economy is actually tracking will be provided by the release of trade data on Tuesday and new loans, CPI and PPI on Thursday.
Chinese markets remain somewhat of an unknown today, but Japanese and Australian markets are likely to be negatively impacted by the NFP undershoot in any case. However, the opening of the Chinese futures markets at 11.15am AEST today are likely to provide further downward impetus to Asian markets. And there certainly exists the outside possibility of a replay of the ‘Black Monday’ sell-off if state support for the Chinese stock markets is definitively ended today.
The USD/JPY will be a key currency pair to watch today. The JPY did not take the US NFP and the likelihood of a delayed US rate rise well, and this has been steadily strengthening against the US dollar. The European Central Bank (ECB) meeting on Thursday provided further EUR weakness, the US NFP undershoot has tempered the USD’s rise. The fact that the Bank of Japan (BoJ) and the Japanese government are indicating that an expansion of the Quantitative and Qualitative Easing (QQE) plan is unlikely has made strength in the yen the path of least resistance in G10 currencies. The JPY is in a clear downtrend, which looks to extend in trading today. The question is now becoming – at what point will Japanese yen strength force the hand of the BoJ to act again and change their mind about extending the QQE program?