Australia has been at the heart of the action

This will be primarily known for being a top-down week; however there are still some interesting micro stories out there which should still warrant attention.

In Australia we have seen the first early names report earnings, with supermarket giant Woolworths (WOW) coming out with a Q4 sales report, which seems to be highlighting some discerning trends; if you also look at annualised sales per square metre, rival Coles is continuing to make ground, with the ratio of its earnings to WOW now 92%. In the coming hours we will look out for earnings from Deutsche bank, Banco Santander, BP, Barclays and in the US Merck, Pfizer and Coach.

Coach will certainly be interesting from a macro standpoint given its footprint in emerging markets and notably China; having beaten expectations in every quarter (except Q2 2013) since early 2006, it is generally a stellar performer. Merck and Pfizer have a great pedigree against consensus, although there is much more to look out for in these results than merely comparing revenue and EPS against the street.

You can also throw in Japan which is just about to see a massive ramp up in earnings announcements, with 13% of the Nikkei reporting today and 24% tomorrow. One of the reasons for the poor price action of late was the lack of any pre-earnings confessions from the export-focused names, with expectations in recent weeks that we could see blow-out numbers here.

The failure to come out with early guidance had a few who were positioned very aggressively, taking some long positions off the table. Still, from what we’ve seen thus far from the likes of Kobe Steel and Sumitomo Mitsui, they should keep the bulls relatively happy given they both absolutely smashed expectations. It was also interesting to see a spike in USD/JPY and subsequently Nikkei futures when Japan released its June industrial production numbers which fell 4.8% on the year. The jobless rate also dropped to 3.9%, however the industrial production report is not good news for Abenomics, however it does suggest the BoJ will need to put its foot down slightly firmer on the easing peddle. Still it was better days today, with the Nikkei gaining 1.4% thus far and USD/JPY showing good support at the bottom of the ichimoku cloud of 97.50.

Australia has been at the heart of the action today, with June building approvals showing that you can bring down the cash rate 200 basis points, but it doesn’t always translate into good housing data, and in this case a clear translation effect on the domestic economy. June approvals fell 6.9% in June (13% on the year), against expectations of +2%; what’s more, the May print was revised from -1.1% to -4.3%. RBA governor Stevens spoke just after lunch and in a pre-prepared speech and subsequent Q&A session suggested the bank still had room to ease after the recent CPI data. His words were dovish and backed up what he said three weeks ago when he argued ‘if the economy needs a lower exchange rate, it will probably get it’.

This time he detailed that a lower AUD makes sense, and that expectations for a drop are fair. This is a man at the helm and not in any way concerned with the magnitude of the drop over recent months, happy to massage the local unit lower. AUD/USD hit a low of 0.9065 on these comments, and although the swaps market is pricing in an 86% chance of an August cut, you have to think that if the RBA doesn’t move, then it would looking at something that no one else can see. There is even a joke on the floor that the banks should come out today and pre-announce cuts. We’ve been calling the pair to trade the range of late, but you have to feel the recent lows could be under threat.

Let’s see how London comes in and deals with the statement; one feels the AUD should see further downside. Keep an eye on EUR/AUD, which is a momentum trader’s dream right now and is continuing to print higher highs. Stay short AUD/NZD.

China is doing rather nicely, courtesy of a RMB 17 billion reverse repo, the first since February and clearly aimed at calming the interbank market. The seven-day repo rate had been threatening to pull away from the 5% level, but seems to have settled down a touch today after this extra liquidity, while there seems less concern about the forthcoming audit.

Perhaps it could even be a positive event (the audit), similar to the US bank stress test, with the potential for clarity to be restored because while there are concerns of the level of debt  on local government balance sheets, there is also a strong concern about the level of corporate debt. The issues with high debt are quite manageable when growth is high and revenues therefore are good, however it’s more of an issue as the rate of growth falls; for today however, the liquidity injections seem to be winning over.

European markets have a positive feel to them today, and while our opening calls have moved in-line with Asian markets, client business has actually been two-way. This suggests sentiment is still quite fickle and highlights a lack of trust in the spike in Japanese and Chinese markets. Data in upcoming trade centres around Spanish GDP print (expected to be down 1.8% year-on-year), while we also get a read on German CPI. Expect earnings to be the bigger driver.

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