China data points to signs of improvement

Asia is mixed today with the ASX 200 leading the way after having missed out on trade yesterday due to a bank holiday. 

China
Source:Bloomberg

Emerging markets remain the main focus of the week after China pumped out another round of positive economic data from May. CPI was much firmer at +2.5% for May (up from +1.8%) and even ahead of estimates of +2.4% and the fastest pace in four months. This rebound in prices is consistent with the notion that China has been taking easing measures in order to revive growth. China’s PPI for the same month was relatively in-line with expectations at -1.4%.

There has been plenty of talk recently around the measure China is taking including increasing spending on railways and broader infrastructure along with lowering reserve required ratios. Confidence might just be growing that China will hit its growth target after all, not that many ever doubted this will be the case. It’s also clear that China is focusing on the small businesses and rural areas as the next growth drivers. Equities in China have also extended their gains in response to the recent measures and this morning’s CPI data, with the Hang Seng and Shanghai Composite gaining ground.

Local data not as bad as it seems

On top of the China data, we’ve also has some local data with some important economic sentiment indicators being released. NAB business confidence showed a slight improvement, while ANZ job ads and home loans data disappointed. Although NAB business confidence showed an improvement, business conditions deteriorated further and dipped into negative territory. The home loans data was slightly below estimates but still improved from the previous month when we logged a -0.9% reading. Additionally, investment lending and owner-occupied loan value showed a strong rebound from the previous month.

Apart from the ANZ job ads, everything else was fairly OK and remains consistent with the RBA’s neutral bias. Tomorrow we’ll have Westpac consumer sentiment and then the all-important jobs numbers on Thursday. As far as local equities are concerned, there are two key themes to look out for in the near term. Buying banks and other yield plays on pullbacks along with selling miners on strength. It is clear investors have gone back into yield-hungry mode as the risk picture remains choppy.

Euro losing ground to the AUD

The overall effect of today’s releases was modest AUD strength with AUD/USD printing a high of 0.9363. The pair encountered a barrier at that level and has since been sidelined. While AUD/USD is the main pair to watch, there is an interesting trend developing in EUR/AUD. The EUR and AUD fundamentals seem to be diverging at the moment and this has resulted in a nice near-term downtrend developing in the pair. EUR/AUD is testing previous resistance (from November 2013) lows in the 1.4520 region and this could be broken if EUR weakness continues in the near term. Should this level be broken then traders could eye a move down to 1.4300 ahead of key support at 1.40. However this would be a long shot in the near term.

The European calendar is relatively light today with French and Italian industrial production being the only readings to look out for.  As far as opening calls are concerned, the major European bourses are facing a mixed start, with some mild downside likely at the open. In the UK we have manufacturing production and industrial production due out. 

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