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The key event will be today’s conclusion of the FOMC meeting, with most expecting a September tapering. However, US data have been inconsistent; consumer confidence was slightly softer than expected at 80.3 vs. 81.3 estimated. The Fed is trapped in a position whereby traders expect them to address a timeline. Further reiteration of loose stimulus would risk a re-run of the volatility we’ve seen in bonds and equities.
A new pessimism
The sell-off looks to continue in the Nikkei. The market has turned from exuberance to pessimism after Prime Minister Abe’s election. The main focus has been the reluctance of Japanese companies to spend from the windfall of a weaker yen which shows the uncertainty they feel towards the future.
The Hang Seng and Shenzhen Composite lead with the best returns in Asian equities for the month of July, with over 5% return each. There have been powerful promises from China’s Politburo to keep growth at 7.5% this year. This could keep the momentum going for companies listed in Hong Kong and China, although we hold the view that the government aid will be sector-specific and aimed at construction of infrastructure such as rail. Technically, we see the HSI has broken out of the resistance level of 21,600 with the next resistance level at 22,465.
Turning to commodities, the backdrop of slowing growth globally weighs on prices – what’s more important is whether China allows the country’s growth to slow, and at what rate. It’s clear today’s headline suggests officials will keep growth at the level they have indicated. Industrial metals could see some activity in the second half of the year, considering the additional infrastructure spending.
Copper prices failed to stay above the $320 level, finding sellers at these levels. Recent price action looks tired and our view will turn bearish if it fails to hold the support of $300. Arguments for the recent strength were low inventories and trades expecting continuous stimulus from the Fed. Traders have changed their sentiment after Chinese cities missed growth estimates. Today’s trading will be key to whether the recent floor it found is no longer valid; our bias is towards further softness.
WTI dropped below our short-term support level of $104 on fears of slowing growth in the US. This slide could continue with WTI to trade below $100 a barrel. The underlying support for energy prices has been from geopolitical tensions in the Middle East, renewed optimism on global demand and low inventories. These factors look short lived and waning.