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Markets to push higher as China cracks down

The futures markets are forecasting positive prints for the Asian region as Europe and US reversed Friday’s negative prints.

Markets saw green on screens after putting the Ukraine fears and a slide in commodities to one side.

The positive moves were brought about by US heavy-weights Pfizer and Apple - both jumping during US trade as AAPL’s results continue to filter through the market and Pfizer confirmed it had made a pass as British rival AstraZeneca. However all-in-all a very light news session and the calm is probably appreciated ahead of the rush which is likely to come at the end of the week.

The FOMC meeting, Janet Yellen’s press conference and the much anticipated non-farm payrolls (NFP) will see trade excitement. Expectations are for the NFP print to cross over the Fed’s 200,000 mark to 205,000. The lofty expectations will see USD positioning come the Friday print as this maybe the first time in 2014 we will see the physiological 200,000 mark cracked and the first time since the winter freeze. EUR/USD and USD/JPY are the pairs to watch.

The positive overseas leads may be tempered in the Australian index as commodities take a further pounding. Yesterday saw the largest intraday move on the Dalian iron ore futures since March 10 falling a maximum 4.2% at the intraday low. At CHY757 per metric tonne, this is the lowest print since the price collapse in March and does not look like it will abate today. It is also the first time since the March collapse that the price of the red ochre material for physical delivery has fallen below US$110 a tonne as rebar and hot-rolled coils followed suit.

This fall comes as China Banking Regulatory Commission (CBRC) starts to crack down on collateral and minimum funding by raising the cost of financing. In a report released yesterday CBRC will increase the size of minimum deposits required to purchase iron ore by ‘a substantial measure’.  

These measures are in response to the March collapse as it emerged that copper and iron ore are being used as collateral in letters of credit and other form of trade finance. This caused a run on in the futures physical markets as investors feared there would be mass stock dumping as credit providers called on collateral margins – this saw both copper and iron ore prices plummeting.

These proposed new measures are to curb lending practices, particularly at the heavily-indebted steel mills which are currently averaging a US$3.50 loss per tonne of steel and that is likely to head lower still as rebar and coils prices suffer similar fates.

This will affect material plays and temper today’s expected rise – BHP and RIO started to slip during the Australian session and continued to slip in London and New York. FMG and Atlas Iron both saw losses accelerating in the afternoon session and that is likely to continue this morning.

Ahead of the Australian Open

We are currently calling the ASX 200 higher to 5563 on the 10am bell (AEST) up 26 points as the three major banks which are due to report inside the next week are being bid up on dividend expectations and the expected record profits. I am wary of this trade; it looks crowed and even with a beat of the street consensus will see short-term investors exiting the trade post dividend dates as investors look elsewhere.  

It will also likely be incredibly quiet on the trade volume front as Australia’s largest foreign market participate Japan is shut for Showa Day. There is no major macro news till later tonight when the US releases the much watch Case-Schiller home price index.

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