Ahead of the European open

After getting off to a strong start, most equities in Asia have swiftly turned gloomy, with the Nikkei and Shanghai Composite now both in negative territory for the day.

This would come as a surprise to a market that seemed set for a near term bounce. Japan's Nikkei is down 0.2% while the Shanghai Composite has shed 1%. Many would have been expecting to see China repo rates calm down significantly, but this has not been the case at all today. The interbank rate actually traded in a very wide range with a high of 12, a low of 5.55 and is currently at 7.2. This doesn’t really help sentiment and is possibly why equities are lower in China. At the same time, analysts feel this PBOC intervention will only be supportive in the short term as the bigger picture is about banks de-leveraging and creating a more sound banking system.

It’s not only equities that are feeling the pinch as gold has tumbled to 1244 - its lowest level since September 2010. The US dollar came back to life following a string of positive economic readings in US trade. US durable goods impressed (3.6% versus 3% consensus), capital goods (1.1% versus 0.5%), new home sales (476,000 versus 460,000) and consumer confidence all came in convincingly ahead of estimates.  The Case Shiller home price index showed home prices increased by 12.1% (versus a consensus of 10.6%) and added to positive sentiment around the US economy and the USD. The dollar index has started to march higher again and is slowly making its way back up towards 83. Later today we get the US GDP reading and the market will be looking for a continuation of positive data prints from the US.

Risk sentiment got a lift from positive news out of China but gains in FX pairs have been limited due to USD strength. Chinese officials finally decided to step in and made comments regarding easing the current liquidity problems. The PBOC has already given cash to some institutions and said it will continue to do so if needed. With the PBOC moving to calm markets, we felt this could be a trigger for near-term strength. It’s been all about consolidation in the FX space, with AUD/USD sidelined around 0.925, while EUR/USD just fails to reclaim 1.31. EUR/USD is also just testing the 200-day moving average support at 1.306, which looks like it might be broken in the short term. ECB President Mario Draghi yesterday said the overall economic outlook still warrants an accommodative stance. This was one of the factors weighing on the single currency. Data is limited in Europe today, but the German consumer climate might deserve some attention.

The pound has been subdued for a while now and GBP/USD remains relatively sidelined just above $1.54. Perhaps the imminent change at the helm is seeing investors exercise caution on the pound. Later today we have outgoing BoE Gov King on the wires, the BoE financial stability report along with a government spending review. These releases might have some bearing on the pair. Near-term resistance is at $1.548 and support is at $1.534. European markets are pointing to a mildly firmer open, but should Asia continue to struggle then this might easily swing to the downside.

The local market got off to a strong start and has managed to remain resilient in the face of yet another political storm. It seems the Labor Party will have a ballot at 9:00 AEST tomorrow and this just adds a bit of uncertainty that investors don’t need in this environment. On current standing, the Rudd camp needs 35 members of the caucus to sign the petition. This equates to one third of the caucus plus one and will force both Kevin Rudd and Julia Gillard to face off for the Prime Ministership. What is clear is that whatever the outcome is from tomorrow morning’s spill the Labor party is more divided than ever.  None-the-less, the ASX 200 has jumped 1.4% to 4723 and printed a high of 4750 for the day. Materials are leading the way following improved optimism on China. 

BHP has advanced 2.4%, RIO is up 3% and Fortescue has climbed 2.7%. The underperformance in gold names has continued with Newcrest only higher by 1%. The banks have also firmed up with ANZ and NAB rising over 1.5% each. Defensive names are underperforming, with consumer staples and healthcare names at the bottom-end of the ladder. ResMed has finally lost some ground, down 1%, and CSL is relatively flat.

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