Business as usual as Chinese data holds

There’s been a slight risk-off bias in today’s Asian session, with traders continuing to sell equities and bid up the USD, while gold has also pushed higher.

There are a number of macro themes worth watching this week; however, for stocks to really get a wriggle on, then it is fundamental that we see US earnings beating expectations. It’s worth highlighting that so far we’ve seen 10% of companies report, and while sales and earnings growth have been strong, this pace of appreciation could dissipate as the season rolls on. With 61.5% of companies having beaten on the bottom line, this is still short of the traditional outperformance against consensus.

S&P estimates too high?

There is also view that the $1.31 the street has as consensus aggregate earnings is a touch too high, given this implies 10.2% EPS growth over the coming year. Then you can push into 2015 and the street expects a further double-digit move; therefore earnings guidance is key here and companies simply have to give the impression that they are going to see the sort of operating environment that suggests earnings expansion to the degree that is being priced in. When you see the S&P trading on a P/E that is 10% premium to the five-year average, then you know a fair amount of good news is being priced in.

We can also look at inflation forces this week out of New Zealand and Australia, while the Bank of Canada will no doubt talk about inflation when its own central bank meet. Given inflation, or should I say the dis-inflation that is running the FX markets right now, we should have a slightly clearer picture by the end of this week and traders should adjust holding accordingly. European PMIs out of the Eurozone (as a whole), Germany and France will also be in focus as weak numbers will lead into the idea that the cyclical recovery is failing to really materialise. With EUR/USD closing below its 100-day moving average for the first time since September (as highlighted last week), price action is becoming more shaky. Still, with such a compelling current account surplus, it’s hard to get overly bearish on the EUR.

Keep an eye on European money-market rates

Keep an eye on EONIA (European money market rates) this week, which have spiked to thirty-four basis points. While thirty-four basis points doesn’t sound high, bear in mind this figure was at fourteen basis points a week ago and in theory should be lower than the central bank’s refinancing rate, which currently stands at twenty five basis points or 0.25%. Any moves higher in this metric will feed into the idea that the ECB will need to increase liquidity and help loosen financial conditions, thus keeping the EUR fairly anchored.

The key focus today was the monthly Chinese data drop, which was also accompanied by the Q4 GDP print. In terms of the numbers, industrial production came out just below forecasts at 9.7%, fixed asset investment grew 19.6% (consensus 19.8%) and retail sales were bang in-line at +13.6%. The December data prints were offset by a Q4 GDP print, which grew a touch better than what was priced in at 7.7%. The annual pace of growth for FY2013 was also 7.7%, thus twenty basis points above the government’s target. All-in-all nothing in this data series should alarm anyone, especially when you see alternative metrics like 2013 power output rising 8.3%. 

Like EONIA rates, there has been some focus on Chinese repo and Shibor rates again, as these have been on the move of late. The seven-day repo has increased a further nine basis points today to 5.25%, but it is clearly well away from the levels we saw either in June or December 2013. These rates generally move higher into Chinese year-end, and there is concern that the Chinese bank ICBC will not bail out customers of an investment trust product that the bank had been marketing to customers. There had been concern that a default here could be taken badly by markets, and I feel the risk of a negative move is real, although the pain should be short lived. The issue of default here has been widely discussed on the desks today; however it must said that any default would affect only a small amount of people and shouldn’t cause a significant tightening of conditions.

There was a modest move higher in the ASX 200 on the Chinese data, notably in the materials plays (as you’d expect), which is starting to get more attention anyhow from traders. The AUD found buyers, although this was a function of positioning and the fact the pair couldn’t rally above 88 cents could be telling, especially after last week’s bearish weekly engulfing pattern. One has to feel for the AUD to get any kind of traction we are going need to see a blow-out Q4 CPI this Wednesday. European markets won’t get much a lead from Asia, especially with Chinese equities flat on the day and the US market shut for Martin Luther King Day. Our clients have been better sellers on the day, which is partially being driven by Deutsche bank, who reported a pre-tax loss of €1.15 billion.

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