The fact the EUR has also fallen relative to the JPY and GBP (despite growing concerns from Angela Merkel about the UK leaving the EU) highlights the fact traders are now expecting some sort of retaliation from the ECB at this Thursday’s central bank meeting. This seems misguided to me, with the central bank firmly in wait-and-see mode, keen to see if the current slew of measures can boost inflation expectations.
If anything, the ECB could make the current loans on offer (under its Targeted Longer-term Refinancing Operations or TLTRO) even cheaper and thus more compelling, while they could also signal a desire to buy corporate bonds in a bid to increase its balance sheet. Regardless, they should give us a more definitive hint around government bond purchases. I think EUR/USD shorts look good on a daily close below US$1.2501 and the market is screaming out that we are seeing a game of ‘who can be the easiest central bank around’.
The BoJ takes easing to a whole new level
The moves from the BoJ were huge and the fact the central bank worked in such cohesion with the government shows why being long Japanese equities is the right trade for now. Names like Mazda (who reported upbeat earnings last week), Honda, Sony and Orix should work from the long side, although I would be hedging the currency exposure. It’s not often you get such a clear sign that authorities want a higher equity market to generate monetary velocity, but that’s exactly what we are seeing. As we have seen on so many occasions, when a central bank and government target an asset class, investors will respond in kind.
The RBA have shown time and time again that they refuse to join in the race to debase and continue to hope US inflation expectations pick up, resulting in a lift in the funds rate during Q2. It seems likely they will amend the statement this week, although the tweaks will be modest. The bigger event for markets could actually be Friday’s Statement on Monetary Policy (SoMP). In August, the Australian central bank cut its forecast for headline inflation for June 2015 by 50 basis points to 2.25% (to a range of 1.75% to 2.75%). There is a good chance this mid-point is revised down by 25 basis points, although its GDP forecasts could be pushed up a touch.
Recall that on 3 July (in a speech in Tasmania) Glenn Stevens previously stated, ‘It should go without saying that those seeking to understand our thinking should, in any event, look not just at the wording in the post-Board statement, nor just in the minutes, but also at the whole analysis of the economy and the outlook in the regular Statement on Monetary Policy.' So, if the RBA sees a possibility of headline inflation going as low as 1.5%, we know that the door could be opened just that little bit further.
Indian equities look like a standout
Japan has been offline today for Culture Day, although the futures markets have still been trading on the Singapore exchange. Nikkei futures are up 3.3% from the cash close so, all things being equal, we’d expect an open above 17,000. Still, the opportunities in Asia are all around and one just has to look at price action in the India Nifty 50 to see the huge inflows from the international investment community of late. Comments today that the Indian government aims to implement its new budget from 1 April (three months early) should only add to the sentiment. The Nifty is one of the best-performing markets this year and is a thing of beauty for trend followers. This is one that still has great upside potential, in my opinion.
The CSI 300 and the A50 cash (the top 50 mainland stocks where the futures settle in Singapore) are flat today, with the latter continuing to eye the 7500 level, although both markets look bullish on the daily chart. The softer official manufacturing PMI data (out Saturday) hasn’t caused too much of a risk-off move – neither has the HSBC print, which was modestly better at 50.4. The numbers themselves should help to keep the targeted liquidity measures going, while it was also interesting to see the PBOC lift the USD/CNY mid-point through its ‘fix’ operation by 64 basis points. Could we see the PBOC enter the currency war?
European markets should open on a slightly firmer footing, although if we use the ASX 200 as a guide, gold stocks should see heavy selling, while other sectors in the market may pause for reflection. Locally, we’ve seen a disappointing Q1 sales report for Woolworths, while Westpac came out with good cash earnings, despite the overall quality not being as hot as some had hoped. Still, this is no lead for Europe, who will be eyeing manufacturing data from France, Italy and Germany (as well as the Eurozone as a whole). US manufacturing PMI is expected to grow at a slightly slower pace in October, with the index falling to 56.2, so USD/JPY could push through ¥113.00 if the US beats expectations.
Markets start off the new month and it’s hard to think we will get another like October, where we saw the DAX, FTSE, S&P 500, Dow Jones and ASX 200 trade in a 1166, 550, 198, 1540 AND 404 point range, respectively. Still, if you look at the final set-up on the monthly charts, things look bullish and I therefore expect further upside.