The Chinese yuan is smack bang at the heart of concerns and much has been made of the comments in the China Securities Journal that the weakness in the CNY is not actually causing instability. This is key, and traders feel this portrays more CNY weakness to come and therefore additional strain on the global economy, not to mention corporate China. For risk assets to stabilise and sentiment to turn around, we are going to need a stable or even positive move in the Chinese currency, so once again it’s all about 12:15 AEDT today and the People’s Bank of China’s CNY ‘fixing’ mechanism. Judging by the weakness seen in the offshore yuan (CNH), it’s hard to believe we are going to see a significantly stronger CNY ‘fixing’ today, but always be prepared to be surprised!
It’s interesting that we see an open in the ASX 200 at 5110 (-0.3%). Traders will be eyeing whether we see the same sort of support into the figure (5100) as we did yesterday. Cast your eyes away from the cash market and onto the SPI futures and we can see that strong support lies into 5008 (5060 at the time of writing). Near-term and on a positive note, SPI futures market seem to holding yesterday’s low of 5048. I think this is an important level for the ASX 200 cash market, and a break of 5048 in SPI futures should see the cash market fall into the 5060 area.
Leads for the Aussie market are weak, with a strong focus on oil (once again). Brent prices had been consolidating since 14 December, as had US light crude, but a massive jump in gasoline inventories and record storage at Cushing is always going to cause oil prices to be offered and break below the recent range. To give an indication of the S&P, energy sector closed down 3.6%. WPL’s American depository receipt is -1.6%.
US economics have not really been a factor, despite a plethora of data releases. The ADP jobs report (+258,000) should elevate expectations for Friday’s US payrolls, although it really is all about wage growth. The trade deficit narrowed to an eight-month low; imports fell strongly, as opposed to strength in exports and this is presumably why no one is ramping up their Q4 GDP forecasts (released 30 January). The services ISM report was largely unchanged.
More focus has been on the December Federal Open Market Committee (FOMC) minutes and the headlines will state that ‘some’ members think the move to hike the target range was a ‘close call’. The best thing (as always) is to look at price action in the fixed income markets. What can be seen from the modest bid (-2bp) in both the two and ten-year US treasury is traders saw the minutes as modestly dovish. On the day though it’s interesting to see the US yield curve (two-year treasury versus ten-year treasury) has flattened by five basis points to 119bp. I can’t go past the headline that ‘some FOMC members saw considerable risk to the inflation outlook’ and it’s clear that it really is inflation in the US (and globally) that will now drive future rate hikes. Job creation is important, but inflation gets a stronger consideration from here.
The second derivative of the rates market is naturally the USD and this has been sold in the wake of the minutes, with the JPY still the place to be for 2016. For those long JPY keep an eye on the 12:15 AEDT CNY ‘fixing’ as there could be more juice left in this trade. My focus remains on short KRW/JPY.
We’ve seen the World Bank cutting 2016 global growth this morning to 2.9% stating they see ‘substantial downside risks’ and this growth call is modestly below consensus. It’s clear that the market is becoming increasingly concerned by the global inflation outlook and the Fed strongly highlighted their concern here in the minutes. The weakening of the Chinese currency means China’s biggest export will presumably be its deflation and there is little the world can do about it. Disinflation is the new buzzword and woe behold us if we get a major market shock that genuinely rattles confidence. Central banks have very little this time around to defend markets and I believe it’s this issue that is causing such angst at the start of the year. Inflation and inflation expectations are key.
All this being said, S&P futures are holding the 14 October low of 1974.75. A bounce here can’t be ruled out and could set the scene for a rally in Asian markets. If we take a big picture view on global equities, if you want to know the answer to any impending bear market, one needs to look at the 24 August capitulation low of 1867.01 in the S&P 500 cash. A break here (that level is 5.6% away) and we would be staring at the next bear market in global equity markets in my opinion and I would suggest increasing shorting allocations. Until then, expect increasingly choppy trade.