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The weekend was relatively light on news, with most of it focusing on either China’s 18th Central Committee of the Communist Party of China, or European woes and the range of actions that can be taken to address disinflation forces.
News was released on Sunday that China’s non-manufacturing has done little to cause equity appreciation in China, despite being solid at 56.3. It has to be said that expectations for a raft of major reforms to be announced at the third plenum are high, with traders noting that these committee meetings have been the platform for major reforms over the past forty years.
The market would ideally like to see moves to liberalise its capital accounts, however this seems a long way off right now and if we do see the Fed taper, having closed accounts will almost certainly limit the drain of funds; as we saw going into September. However, for China to fully become a major financial centre we will one day need to see both the USD/CNY and domestic market dictated to by pure market forces. The risk of disappointment is high here.
On Friday we saw European money market rates (EONIA) settle down again, which of course is a positive for the seventeen-nation economy, however we are not out of the woods yet. This week’s ECB meeting is going to be very interesting and given the trend of falling inflation forces, it seems logical that the ECB do cut rates (given the banks sole mandate is to focus on price stability). If they had a dual mandate like the Fed and focused on full employment, then EUR/USD would probably be closer to 1.10 by now, as the ECB would probably have pushed for treaty change and would be trying to undertake unsterilsed asset purchases and negative deposit rates.
Trading EUR/USD into the ECB meeting will be just as interesting as the meeting itself and much depends on the markets interpretation of how the ECB view inflation expectations. The prospect of either cutting the refinancing rate or signalling one is on the cards is high, although is priced in and thus should not cause to much of a reaction in the single currency. However if the bank suggests they are looking at negative deposit rates that should cause a much more extended reaction. They have mentioned a couple of times that negative rates are a tool at their disposal, so further colour around this is of interest. ECB member Ewald Nowotny mentioned recently they didn’t have the tools to deal with the EUR strength, however they need to think long and hard around that and not simply wait for the Fed to taper (thus causing USD strength). This is because the high EUR is acting as major headwind against inflation which, mixed with extreme levels of unemployment, is a major concern.
In terms of price action it’s been a quiet day in Asia and this shouldn’t really surprise with Japan offline, while Australia is winding down for tomorrow’s Melbourne cup. Volumes have been fairly pathetic, although there has still been some interesting economic data for traders to sink their teeth into. In Australia we have seen ANZ Jobs ads, Q3 house price index and a 0.8% increase in September retail sales, which was double the consensus and will please the RBA. With the recent improvement in business and consumer confidence, better inflation and now a strong retail sales report, the RBA have almost certainly got no interest in cutting for the time being which feeds into the idea that rates will be kept at current levels for some time. The AUD/USD rallied to test the 95 handle on this news, and with the RBA meeting, employment data and the RBA’s statement of monetary policy (SoMP) this week, the AUD is firmly in play.
In the equity world the ASX 200 is flat on the day and finding no support from Westpac, who delivered an in-line result, although the underlying quality was not brilliant. Miners have been modestly bid, although iron ore stocks have fared better due to a 2.5% bounce in the ore price on Friday and the strength of late suggests that the year-end consensus of $120 per ton a number of months ago is not looking good for analysts.
Europe looks set to open on the front and it’s the time of the Europeans to show the sort of strength in manufacturing that has been a source of inspiration in the UK, China, Australia and UK. New export orders are improving, while Korean exports are increasing too, so there is a possibly we see the final European PMI prints being revised higher.
Traders will also be listening to comments from Fed members Jerome Powell (centre of Fed hawkish/dovish divide) and Eric Rosengren (dovish), especially after some very interesting comments from James Bullard and Charles Plosser on Friday, with Mr Plosser throwing his weight behind limiting the Feds bond buying program.
James Bullard is one of the more dovish Fed members and didn’t rule out a December taper. Mix that with a strong ISM manufacturing print and it’s no wonder US treasury yields spiked 11 basis points on Friday. We also get earnings from the biggest weight on the FTSE; with HSBC due to report.