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The ASX financial sector is seeing better buying, although volumes are poor and there seems to be some modest rotation from certain mining stocks into this space. The data in Australia has traders scratching their heads as to whether it is supportive for banks or a headwind. NAB business conditions improved modestly, although the index is still in negative territory, while the confidence index fell modestly from 6 to 5. What’s important though is we really aren’t seeing the sort of post-election bounce many had expected and been calling for in business confidence – and this is at a time when the government is now polling worse than Labor for this first time. What’s more, if you drill down into the employment sub-component of the survey and the index fell from -3 to -8. Add that to yesterday’s poor ANZ job and the employment picture has just started looking less appealing.
Employment has to be front and centre now for the RBA, so today clearly goes to the economists’ calling for rate cuts in 2014. Of course from an equity perspective this actually reinforces the yield trade, thus this could be a reason why banks are finding buyers, especially when you are picking up the banks on a net yield of around 6% at present.
QBE getting smashed again
The shake-out of QBE longs has continued in earnest today and traders continue to ask ‘do I short (at these levels), do I go long now or wait until $10?’ This $10 level is huge support on the daily chart, but it’s important to realise confidence in the stock from a bottom-up perspective has been shot to pieces and until the stock shows signs that the bulls are happy to support and stabilisation is seen – stay away. There could feasibly be one more (albeit more modest) shake-out, and from here it could be worth looking at long trades, if for nothing more than the upgrades that are likely from the investment banks, given the distance the stock would be from their recently revised twelve month price targets.
China is putting on modest gains, although the real action comes just after-market with industrial production, retail sales and fixed asset investment data due. There has been more attention from traders on the weekend news that the PBOC have allowed certain banks to trade negotiable certificate of deposits (CDs) with each other. This is a big step for the Chinese capital markets and should really be seen as major step in adjusting to a more liberal interest rate setting.
By allowing markets to dictate the prices of these products, it is really one of the first times we are seeing a market-determined system in China and could, in theory, provide Chinese banks the necessary deposits to overcome stringent caps on lending (lending as a ratio to deposits). Some had expected this move, others thought it may come later; thus it seems the authorities are trying to get ahead of the curve. It will be a couple of years before we see these products being extended to corporates or even households, and even longer before the ceiling on deposit rates is removed.
Japan is also at a really interesting juncture right now, with the Nikkei hitting a high of 15,633 before finding sellers. The index gapped lower on December 3 and after pulling back to a low of 15,112 has retraced some of the losses. It still needs to fill the gap and close above the December 3 low of 15,633, and more importantly, the December 3 close of 15,749. A failure to do so could have negative ramifications on the index. However, USD/JPY continues to look strong although could do with the US ten-year bond moving back towards 3%, and a failure in the short-term to close above the December high of 103.38 could see a few taking profits. Interestingly, there are signs of divergence emerging on the daily chart, with the pair hitting a high of 103.39 today, while stochastics and the RSI created a lower high. This could indicate a pullback, although I feel traders will be keen to buy dips here around 102.50
No moves in bonds despite heightened taper expectations
Price action in the US bond market is in focus, as well as the failure of the long end of the curve to sell-off at the centre of this, despite a number of pro-taper comments from various Fed officials. St Louis Fed governor James Bullard’s comments look especially interesting because he talked about reducing the pace of bond holdings by a small amount, given the strength seen in the labour market. Most importantly there has been absolutely no move in the bond market and this firmly suggests that the market is set for tapering to be announced; whether that is December, January or March really doesn’t matter too much.
The three major issues I see markets more interested in from here are what the initial size of the taper will be, if there will be a cap on future purchases and if there will there be a roadmap for future bond purchases, and lastly whether we will see any changes to the Fed’s forward guidance around thresholds for putting up the Fed funds rate.
European markets look set for a flat open, although there is plenty to keep traders occupied. We get industrial and manufacturing production from the UK, Holland, France and Italy, while in Italy we also get the Q3 GDP print. Mario Draghi speaks at the Banca d’Italia Rome (23:00 AEST) and it will be interesting to see if the ECB president talks more openly about EUR/USD and the fact that at 1.38 it is killing manufacturing in Italy, France and Greece. It is also pulling inflation lower, just look at Greece’s CPI print yesterday – down 2.9% on the year. We also have the ECOFIN group of EU finance ministers meeting, amid signs that Germany and France are closer to agreeing to details, in principle, on a banking deal. Traders have been net sellers of EUR/USD during Asia and the failure to break 1.3800 is being noted.