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China PMI dampens Asia

Most of Asia, with the exception of the ASX 200, has struggled as investors followed leads from Friday’s US and European trade.

China
Source: Bloomberg

The disappointing US GDP reading set the tone for global equities but there were some encouraging signs and comments about the US economy. Overall, it seems the Fed is quite satisfied with the pace of the recovery, particularly in the jobs market. In fact, Bullard went as far as saying inflation is not low enough to rationalise the zero-interest rate policy.

With fedspeak broadly in line with the FOMC statement, rates lift-off around the middle of the year remains a realistic prospect. Regardless, this week brings enough economic events for the US to cause some volatility. US jobs growth will remain firmly in focus, with non-farm payrolls data due out at the end of the week. President Obama’s budget proposals will also deserve some attention, along with five regional Fed presidents speaking, including Bullard, Lockhart and Rosengren.  

On the earnings front, around 102 S&P 500 companies report as earnings season winds down. All these factors, along with whether the oil price surge on Friday is sustainable, will remain key factors for US equities this week.

RBA the key event

The main event in the region will be the Reserve Bank of Australia’s (RBA) February policy meeting. The RBA decision will be of particular interest given there is a huge divergence between the market’s and economists’ expectations.

The market is pricing in a 69% chance of a cut while the median among economists is for the RBA to remain on hold. Decline in commodity prices and ongoing weakness in China are some of the key factors that might force the RBA’s hand.

If we don’t see a cut, the market will want to see a dovish shift at a minimum, otherwise we could be in for a sharp reversal this week. Apart from the RBA, we also have building approvals, trade balance and retail sales due out. The RBA’s monetary policy statement is released on Friday and that will give more clarity on the RBA’s decision.

While some risk currencies have recovered a touch, AUD/USD remains under $0.7800 with traders reluctant to push the local currency higher heading into the RBA. Positioning is key at the moment and 45% of IG’s clients trading AUD/USD are short the pair, the majority favouring longs at these levels.

It seems a lot of traders are banking on a ‘sell the rumour, buy the fact’ approach here. The ASX 200 has taken off today and headed towards September 2014 highs in the 5650 region. We could see some consolidation in that region and I suspect we’ll need a significant catalyst to budge through there. This level could actually trigger some profit taking if tested.

Weaker start for Europe

Ahead of the European open we are calling the major bourses mildly weaker. Greek negotiations are likely to remain a dominant theme and, while new Prime Minister Tsipras has said negotiations have been constructive, traders are likely to take this with a grain of salt. On the economic calendar we have manufacturing PMIs for the UK, Spain, Italy and the region. This will set the tone for sentiment, along with any fresh headlines out of Greece.

We have already received a disappointing manufacturing PMI out of China, which came in at 49.8 when the market was expecting a slight tick higher to 50.3. This is the first time we’ve seen a contractionary reading in two years and this has been enough to keep most of the regional equities on the back foot.

It seems bad data is no longer necessarily a positive for Chinese stimulus and I feel investors will be eager to see China’s growth target in early March for an indication of what officials will be aiming for.

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