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This was a modest slowdown from the 26.6% seen in Q4, and the final manufacturing read remained unchanged at 49.9, only just managing to stay in contraction.
The Nikkei has rallied 2.2% today and has smashed through the 200-day moving average on its way. USD/JPY has also rallied through 102, although I suspect the move in the Nikkei was driven more by the currency. On one hand we’ve seen USD strength against all G10 currency pairs; while on the other there have been further talk around the Government Pension Investment F und (GPIF) and the potential to move $200 billion out of Japanese bonds and into foreign assets soon. This is a massive amount of money by any standard, but the dynamics seem to explain why the BoJ is quite happy to hold off from expanding its easing program.
Naturally where there is a seller, there needs to be a buyer, and given the BoJ is the only nominal buyer of JGB’s, it seems it is going to have to be fairly active over the coming months to keep yields from pushing materially above 60 basis points. This issue of asset reallocation seems to be the main saving grace for JPY bears right now.
China has been offline today, so Dalian iron ore futures are shut, which is just as well given the commodity is in free-fall, although it’s interesting to see a wave of buying coming into a number of miners today. Perhaps some are adhering to the Warren Buffet rule of buying when others are fearful (although short covering seems more likely), but take Fortescue and Rio Tinto; both have had really strong buying from their lows. Perhaps this is a reflection of the better China PMI data over the weekend, with new orders showing good growth. It’s worth pointing out that iron ore has lost 23.1% since April 9 (slightly less in AUD terms) and in these 31 days we haven’t seen a 1% sell-off of late.
Gold could be dictated by weather patterns
Gold is also at an interesting juncture and while many will be looking for this Fridays US payrolls report for new direction, I would caution against viewing US jobs as the main catalyst. One area of concern is around the upcoming monsoon season in India and the premise that a strong El Nino could lower the strength of the monsoon, which in turn could affect crop yields have ramifications on the demand for gold from rural India. The near-term downside target remains the $1235-$1238 area, but on the daily chart gold is grossly oversold and you have to go back to June 2013 to find more oversold conditions. I can’t see any rallies being sustained and strength should be sold.
The ASX 200 has underperformed Japan, although there has been good buying of banks and as material names found buyers the index has gravitated higher. The weekend China data has helped lift sentiment to a degree, while further easing measures from the PBOC late Friday have been welcomed. It would be good to see how China received the news that Reserve Ratio Requirement (RRR) have been cut for certain banks that have been active in extending credit to rural borrowers and small companies.
Australian domestic data weak
Domestic data on the other hand has been poor to say the least, with building approvals falling 5.6% on the month, while Q1 inventories fell 1.7% and may cause a few economists to tweak their GDP estimates for this week. Tomorrow’s RBA meeting will be interesting and while the market has adjusted to period of no action from the RBA traders will be paying close attention to the RBA’s view on terms of trade and China’s property cooling. AUD/USD has falling to a low of 0.9261 on the data flow.
European markets seem to be following Japan’s lead today, with a stronger open seen. We have certainly seen a bias to be long today from clients, with 64% of all open positions traded on the long side if we take the DAX as an example (as at 3pm AEST). US futures have followed the strength and it seems that despite a huge week of even risk traders are still in optimistic mood. The DAX is honing in on the 10,000 mark, while the FTSE is looking at the all-time high (printed in 1999) and the S&P 500 could be on for a 15th record gain this year.
On the billing today we get manufacturing reports out of Europe and the US (with the index expected to increase to 55.5), while Germany’s CPI could solidify expectations around tomorrows European inflation estimate, which is already facing downside risks after Fridays Spanish and Italian inflation numbers.