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Asia in for a bit of indigestion today

Given the current global market conditions, the strong gains seen in Asian trade in the past two days should ring warning signs for today’s session.

Janet Yellen
Source: Bloomberg

The overflow of ebullience from Asia proved short-lived in the European session as the Euro area PMI declined in September. US trade whipsawed as investors and the USD reacted badly to the ISM PMI reaching its lowest level since 2013, but were buoyed by news that jobless claims continue at decade lows. This leaves Asian markets in for a bit of a negative open, as some of the gains will be pared back and the markets position themselves ahead of the all-important US non-farm payrolls number due out tonight.

There are a few trends that the past 24 hours of trade re-emphasise, and some of these trades are starting to look overcrowded and potentially susceptible to a major upset.

Markets are still very bearish on China, with many foreign fund managers publicly stating they expect a China collapse as their base case scenario. There were definite positives in China’s PMI releases yesterday, which, while well-received during Asian trade, were largely discounted in European and American sessions. Make no mistake, a major undershoot of the 7% GDP growth target in China would be disastrous, and not just for global markets. The local economy would be in disarray with so many contracts and investment return profiles based on the always-reliable government growth target. The target for next year will quite likely be lowered to around the 6.5% range, but the government will be throwing everything in its power to hit the 7% target for this year. While there is understandable scepticism of official Chinese data, it’s not feasible for them to entirely make the data up. It should not come as a major surprise that Chinese activity data continues to pick up in Q4 as fiscal spending and monetary easing (which usually has a 6-9 months delayed effect) starts to be seen in the data.

The market probability for a December rate hike by the Fed currently sit at 42.9%, well below 50%. Meaning a majority of market players believe the Fed’s first rate hike in 9 years will be pushed back into 2016. And yet the statements by Fed Chair Janet Yellen in particular make clear her belief that the economic consequences of not hiking in 2015 would outweigh the benefits of a few months extra of easier monetary policy. Yellen’s statements appear to be making a very firm commitment to a rate hike in December bar a significant deterioration in the US economy. One only needs to imagine the consequences of another rate decision delay in December. The Fed’s credibility would take a massive blow with a heavy selloff in the dollar, it could indeed precipitate a major de-dollarisation of the world economy. Given the blow to the Fed and the US economy’s position in the world economy, another rate hike delay in December would make it seem the Fed is highly likely to raise come what may.

Things to watch today:

It is clear investors are concerned about Australia’s slowing housing market and the possibility of the first recession in 24 years occurring in 2016. This seems to be evident in the growing number of short positions in JB Hi-Fi, a domestic economy consumer discretionary focussed stock. The percentage of outstanding short positions on JB Hi-Fi has increased to 11.2%, making it the sixth most shorted stock in the ASX 200.

Australian retail sales for August are due at 11.30am AEST, with expectations for them to pick up to 0.4% month-on-month from a -0.1% decline last month.

The Japanese unemployment rate is due at 9.30am, with expectations for it to remain unchanged 3.3%.

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