Japan outperforms Asia once again

Most Asian equities have gotten off to a disappointing start to the second half of the calendar year, with data from China and Japan in focus.

The  Nikkei is the standout performer, rising 0.6% despite struggling earlier. Japan’s Tankan manufacturing index came in better than expected this morning (4 versus 3), showing that manufacturing conditions are improving.  USD/JPY didn’t quite manage to make enough ground on the data, but we still feel the strength in the USD will be enough to see ¥100 tested in the near term.

Meanwhile, China’s manufacturing PMI came in bang in-line with consensus at 50.1, while the HSBC manufacturing PMI was slightly revised lower to 48.2. Given the recent volatility in China, investors would have really wanted to see a solid reading in order to prevent a further sell-off. Additionally, comments by China’s President Xi Jinping hinting at tolerating slower growth continued to emphasize that astronomical growth is no longer China’s main priority. These comments came despite Premier Li Keqiang saying China is still capable of hitting its 7.5% growth target this year. The Shanghai Composite has slumped 0.8% today.

US dollar strength was the main theme on Friday as investors reacted to more Fed talk. Comments by the Fed’s Jeremy Stein highlighting September as a likely time for the Fed to start tapering supported the greenback. However, Fed members have remained adamant that any adjustments to asset purchases will be data dependant. The dollar index is solidifying its position above 83, trading to a high of 83.34. Risk currencies like the AUD, GBP and EUR have also been under pressure due to the rising USD.  AUD/USD dropped to a low of $0.9113 this morning, its lowest level since September 2010, but has bounced back to $0.919 after shrugging off disappointing PMI data. This suggests shorters may be getting nervous about the rapid devaluing of the AUD over the last seven weeks and are concerned the current levels have major support. Considering the swaps market is only pricing in an 18% chance of a cut tomorrow, this would be even greater cause for concern for those holding AUD shorts and may see the pair holding firm. Selling into strength remains the preferred strategy.

EUR/USD continues to threaten to break lower and GBP/USD looks like it is headed back towards $1.50. There is plenty of central bank activity to look out for this week with the RBA, ECB and BoE all set to hit the wires. European markets are currently pointing towards a negative start mainly due to the poor start in Asia. There is a data dump from the UK today with manufacturing PMI, net lending to individuals and mortgage approvals all due out. This week will also be Mark Carney’s first meeting as BoE Governor and therefore this meeting will be watched with interest. On the European and US data front we also have manufacturing PMI data due out.

While the RBA and ECB aren’t expected to do anything, there is a fairly large camp of analysts who feel benign conditions in Australia and Europe warrant some action. While conditions remain tight in Australia, the weaker AUD might be enough to keep the RBA at bay for now, along with uncertainty on the election date. The  ASX 200 has declined 1.6% and is currently trading at 4726, with the banks dragging the index lower. Westpac, ANZ and NAB are all more than 2% weaker, with the financial sector being the worst performer. The iron ore miners are also softer, with BHP and RIO down around 1% each.

Gold miners are among the few bright spots in the market after the precious metal bounced to around 1243. Perhaps this might help gold names today, but the rapid rise of the USD will remain a concern for commodities. Mining services companies are having a tough day after Boart Longyear issued another profit downgrade. BLY has shed 6.7% while MND, UGL and SVW have declined over 4% each.

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