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The Chinese market intervention ahead of the WWII commemoration tomorrow has also boosted stocks in the region. Only the ASX is down on the day, but it has pared back much of its earlier losses.
China: readying for a holiday
The ‘National Team’ are out in force today in the Chinese markets. There were reports that in preparation for the WWII commemoration, the Chinese Air Force has trained a troop of macaques to remove any bird’s nests in the vicinity of the air bases, the hope being that this will stop any birds being sucked into the jet engines.
Much like the macaques, the ‘National Team’ has been busying itself in the stock markets, scaring off any bearish sentiment. The Shanghai Composite (SHCOMP) initially opened down 4.4%, but optimism over the coming two-day holiday and general patriotic sentiment seemed to spur the markets upward, and the SHCOMP was up 0.3% on the day by the mid-day recess.
These moves, however, only serve to solidify a greater sense of foreboding for what the Monday session will bring after the Chinese markets close for Thursday and Friday. The government has made it clear that it will not support the stock market anymore – the recent market intervention was focussed on removing the stock markets as an issue during the grand political spectacle planned for the WWII commemoration on Thursday. Once this event passes, there will be no short-term incentive to support the stock markets and we could see the SHCOMP testing its low of 2850 seen last week.
There was also potentially major news for Indian equities today. The Indian government sided with the recommendations of the Shah panel, withdrawing all retrospective of Minimum Alternate Tax (MAT) being applied to foreign institutional investors (FIIs). The removal of retrospective taxes on foreign investors will help make investing in Indian equities easier and more transparent for foreign investors. Reforms freeing up foreign investment in India are much needed, and easier access to the Indian equity markets is a necessary measure for it to steadily increase its capitalisation. The amendments are expected to be tabled in the next parliamentary session, although the Modi government’s track record of getting much legislation passed has been fairly poor due to its lack of numbers in the Rajya Sabha, India’s upper house. The regrettable retreat from reforms to the land acquisition laws are indicative of the government’s unwillingness to pass any legislation that could impact their chances in State elections.
India’s Nifty opened up nearly 1% on the news, but has given some of that back in early session trading. The Indian Rupee also strengthened 0.1% against the USD around market open, but has steadily given that back as well.
Japanese capital investment figures out yesterday saw Q2 investment decline 2.7% quarter-on-quarter. This does not bode well for the revised GDP figure, which will be released 8 September. The preliminary Q2 GDP saw a 1.6% decline in annualised terms, and the risk is that this number could see further downside.
Japan’s manufacturing PMI was also slightly weaker than the previous month – 51.7 compared to the prior reading of 51.9.
US futures have shown strong gains in Asian trading hours. This is primarily responsible for spurring further weakness in the yen against the US dollar. The JPYhas weakened 0.7% against the USD today.
Renewed weakness in the yen has been one of the major boosts to the Nikkei today. The index has risen 1.6%, with gains being led by the healthcare and consumer discretionary sectors – both sectors that benefit from a weaker JPY. Eisei in the healthcare sector and Uniqlo’s parent company Fast Retailing in consumer discretionary were two of the best performers today. However, the Nikkei would need to rise 4% today to fully recover from Monday’s loss, which is looking like a bit of a stretch at this point.
The Australian Q2 GDP figures came in below forecasts with a 0.2% quarter-on-quarter (QoQ) and 2.0% year-on-year (YoY) expansion, compared to expectations for 0.4% QoQ and 2.2% YoY. Net exports subtracted 0.5% from GDP, as indicated by yesterday’s current account balance numbers. Real domestic incomes also declined 0.4%.
The Reserve Bank of Australia (RBA) has forecast GDP growth at 2.25% for 2015, but the current turn in the global economy and poor performance in the Australian economy could see growth at 2% or lower. With GDP and employment now moving outside the RBA’s projections, we could see the possibility of rate cuts re-emerging. This is going to add considerable further downward pressure on the AUD, and projections for the exchange rate to reach 0.65-0.68 by the end of this year are looking quite astute. The AUD/USD exchange rate broke below 0.70 twice today, but it still looks to be processing its 1.6% fall over the past 24 hours.
ASX reporting season has been broadly in line with expectations, but the biggest surprises were the cuts to outlook. 45% of companies cut their guidance for FY16 with companies expected to struggle in their pursuit of margin growth. Star performers on the ASX saw some of the biggest downgrades to their growth forecasts with Ansell (ANN), Seek (SEK), Cochlear (COH) and CSL all cutting their forecasts for FY16 growth by more than 5%.
Banking stocks have been hit particularly hard over the past month, declining 11.7%. There are concerns over refinancing needs in order to meet the Australian Prudential Regulatory Authority’s (APRA) 10% requirement for the capital equity tier 1 (CET1). Lending exposure to the resources and agriculture sectors has also affected the bad and doubtful debts at many banks. Increased competition in the sector has weighed on margins and the sector is also highly exposed to any potential slowdown in the property market.
Utilities have been the worst performers on the ASX today, down 2.15%, with Spark Infrastructure (SKI) and APA group seeing the worst falls in the sector. The energy sector has also suffered on the back of renewed oil price weakness, down 2.08%.