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China key for Q2

It has been a choppy start to the quarter for global markets and I get a sense that this will be a dominant theme through the Q2. 

China
Source: Bloomberg

While equities mostly enjoyed a strong Q1, it’s clear that without the support of policymakers, investors would not be feeling quite as optimistic. In fact if we consider some of the recent price action, policy expectations have been the pillar holding everything together. As Q1 data starts to trickle in, it’ll give a clearer assessment of the impact that action by various central banks and weaker oil prices have had on some key economies. Having said that, I feel China could be the missing piece or game changer in Q2.

While other economies have seen officials step up to resuscitate growth, the action out of China has been somewhat lacklustre. Given China has been pivotal for global growth over the past decade, the country’s slower growth rate is a worry. However, following comments by the PBoC’s Governor Zhou over the weekend, it is clear China still has an unacceptable level of growth that will prompt it to step up its actions. This has kept China equities bid and if it comes to fruition could really do a lot for the region.

Greenback dips a buying opportunity

The US economy for example will also be keen to see to what extent the stronger greenback has impacted the recovery. It has been well documented that US rates liftoff will be data dependent and the US dollar has been reacting to data releases much like an election poll.

Yesterday’s disappointing ADP non-farm payrolls and ISM manufacturing PMI readings may have gotten a little too much attention as it was greeted by a strong bid tone in treasuries, while the greenback was a touch weaker. However in the past six months or so we’ve seen the private payrolls reading understate the official payrolls reading, which will be released on Friday. As a result, any sizeable gains in Friday’s release could really reignite the greenback.

The market is looking for around 250,000 jobs to be added which is below the 12-month average of 275,000. I still expect to see a firmer greenback in the medium term and short-term greenback weakness is likely to be a good opportunity for traders to buy.

AUD selloff accelerates

Some of the interesting currency pairs at the moment are AUD/USD, USD/CAD and of course EUR/USD. In all three pairs, the greenback just seems to be gaining momentum. The AUD is in focus due to iron ore, CAD due to oil and the euro because of the unpredictability of the Greece situation. In all three pairs it just seems buying USD dips is the way to go.

AUD/USD is perhaps the pair to watch at the moment heading into next week’s RBA decision. Traders do not want to be caught out on the wrong side of the AUD. The pair is testing March lows and the sell-off in iron ore has seen the probability of a rate cut on Tuesday ramp up to nearly 71%. While there is still a disparity between market expectations and economist expectations, this has proven to be irrelevant in the past particularly at the February meeting. Some analysts have been changing their calls following the iron ore price rout and UBS is the latest to change its call to an April cut.

At the same time iron ore price forecasts are being slashed by analysts quite heavily. Some now feel until BHP and RIO hit their breakeven levels then it’s hard to call a bottom. However, in the past when analysts grow overwhelmingly bearish about an asset, then it could be that we are near the bottom. For now though, even against other risk currencies like the NZD, the AUD is finding sellers.   

Ahead of the European open we are calling the FTSE -1 6809, DAX +25 12026, CAC +14 5076, IBEX +18 11588, MIB +25 23384.

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