All eyes have been on the Chinese money markets and whether rates across the interbank curve would settle down. The issue of tighter interbank liquidity has been a key focus a few times this year and given the seasonality this should not surprise anyone, but with the lack of major weekend newsflow perhaps this issue has been given greater attention from markets than it would have done otherwise.
We’ll have to see how the repo market plays out for the rest of the day, but the injection of $49 billion to qualified institutions on Friday through its SLO (short-term liquidity operations) initially seemed to have settled the markets nerves. The fact the seven-day repo fell 264 basis points on open was a net positive, and perversely coincided with a 1% decline in the CSI 300 at the time. However, like we saw on Friday, the repo market did an about turn and is now up 78 basis points higher on the day, with the Chinese market rallying.
The Hang Seng is up 0.6% and has been provided the extra positive kicker with China Mobile offering Apple products to customers in 2014. Valuations on the various Chinese markets are still highly compelling (if you believe earnings assumptions are accurate), thus given the sizeable discount to the long running P/E and price to book, mixed with reasonable earnings growth has probably been a strong reason why the Chinese market is not down for a an eleventh consecutive day.
AUD/USD struggling to extend Friday’s gains
The AUD/USD actually fell modestly despite the big move lower in the repo market and history suggests that while the Shanghai Composite, Hang Seng, copper and gold are more heavily correlated with big moves in China’s money markets, from a currency perspective the AUD arguably has the closest correlation. Can AUD/USD make it an eleventh consecutive week lower? Well from a positioning perceptive it probably deserves a slight uptick, while you have to think there is a lot of bad news in the price. Still, selling rallies in the pair on a bit more of a rally to the 90 handle (top of the channel) is preferred.
With the Nikkei closed and limited moves seen in USD/JPY, the focus outside of China has been the ASX 200 and once again positive flows into the equity market have been seen. The fact that US futures and China’s numerous equity markets found modest buying interest is positive and providing backbone to the gains, however the bears will be pointing to the technical selling that took place at 5293 (the 61.8% retracement of the 5454 to 5028). On a sector basis, healthcare, discretionary and financial names have been the star performers, while utilities and materials have been better offered. There’s been fairly good buying of a number of beaten up stocks, with names like BLY getting attention on the floor and clearly the 15% rally in that name is predominately driven by some of the $35 million of short interest buying back shorts to close.
European traders to focus on US data
European markets should find buyers on open, although there is little to focus on from a domestic event perceptive and a greater focus on the US should be seen, with November personal income and spending (both expected to grow 0.5%), University of Michigan confidence and core PCE in play. Core PCE is the Feds preferred measure of inflation and has, to a large degree, overtaken employment as the key trigger for raising the funds rate. The fact that the Fed believes inflation will rebound modestly over time and has cut its bond purchase program by $10 billion to adjust to the more positive employment picture and assess inflationary forces, puts this number firmly in play. If you look at the trend in inflation it is still falling and while the market expects a slight uptick to 1.2%, it’s not out-of-question that core PCE falls.
It’s hard to imagine how the bond market will react to inflation with a zero handle (say a 0.9% print) and you’d imagine the US ten-year treasury would be heavily bid, with the yield likely to head back to 2.5%. Still, a miss is not expected, but given the trend from the 2012 levels of 2% you simply can’t rule it out. Clearly the USD will get smashed on that outcome, while gold will fly.