US strength and Chinese weakness

The FOMC meeting has come and gone and as expected, the status quo was maintained on US monetary policy.

The FOMC left all current stimulus measures in place and the $85 billion will remain. However, as with every statement from every central bank around the world, any inferences which are drawn can spook markets.

There is one line which is receiving the most attention from the statement:

“Taking into account the extent of the federal fiscal retrenchment over the past year, the committee sees the improvement in economic activity and labour market conditions since it began its asset purchase programs as consistent with growing the underlying strength in the broader economy.”

The ‘underlying strength’ comment saw the S&P falling half a per cent as expectations for when tapering will begin jumped forward three to four months. Expectations had been for tapering to start in March or April next year; today’s call saw the street moving its predictions to January which saw hot money exiting.

The statement also had a profound effect on the USD; rising against the EUR, JPY, NZD and AUD.

A falling AUD is a must for the local market. If the ASX is going to see fundamentals supporting the bloating of some listings; export competitiveness needs to return. The high AUD is clearly a concern for the RBA, the federal government, mining and agricultural companies and despite their best effort, the AUD is realistically out of their control. The end of QE in the US will be the single biggest mover of the AUD. The sooner the AUD returns to some form of normality the sooner investment in companies denoted in USD will leg higher.

Chinese weakness

I have stated that longer term strength in the Chinese economy is coming as the central government continues to stem the credit growth to the country and wring out bad and doubtful debts from its five major state-run banks. However, in the short term this policy shift may lead to instability as bad and doubtful debt continue to balloon and write-offs mount.

The nonperforming loans at ICBC, CCB, ABC and BoC rose 3% to a combined total of CNY329.4 billion (US$56 billion). I expect this to rise further in the interim as small and medium enterprises see credit pulled out from underneath them having heaved themselves up on credit over the last five years, creating this credit splurge.

This will see bank profitability falling as defaults rise. Currently the state-run banks are trading near record lows as investors shy away from the expected bump coming in the credit markets. The drop in the credit market will impact regional exporters (both in Australia and South-east Asia). The loss of credit is hitting the full spectrum of operations, from cement producers to steel refineries to paper mills. A slowing credit market will see a slowing of trade, particularly imports.

Ahead of the Australian open

Ahead of the open we are calling the ASX 200 down 15 points to 5415 (-0.27%) as the market continues to hover around the 5426 technical level. BHP’s ADR is suggesting the stock could slide some 18 cents to $37.49 (-0.48%) as it recoups some of yesterday’s losses.

The news out of the US coupled with general tepidness will make trading a little subdued today. However it is the end of the month and that means window dressing. October should be the third best month of the year and hedge fund and asset managers will want to close the month on a high before realigning for November. Don’t be surprised to see fair random trading on the market on relatively low news.

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