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Clearly the weak US jobs print wasn’t a big enough disaster to cause equity sellers, but has kept the stimulus dream alive for potentially a bit longer.
The eleven basis-point (bp) drop in the US ten-year bond on Friday seems logical given the market was probably positioned for a number above 200,000, while there was also a strong move in the Fed funds future with the market now pricing in 51 basis points of hikes by June 2015. Downtrend resistance in the ten-year intersects at 2.70% and it’s hard to see that being breached this week; we will probably need to see some rather hawkish commentary from Fed members Mr Fisher, Mr Evans and Mr Pianalto for this to materialise. Chicago Fed President Charles Evans will warrant extra interest given he is a voter and effectively devised the outcome-based approach the Fed is currently modelling.
We continue to sit in the camp that the Fed will announce ‘tapering’ to its purchase programme in September and enact this in October, although understand that job creation is by no means inspirational and disinflation is still a concern. There is still a lot to like in the US economy, especially as much of the headwinds caused by fiscal tightening will abate by Q3 2013, and thus we should see a snap back to around 3% GDP in Q3 and maybe even a touch more in Q4. We stick by our call and feel that with EUR/USD approaching 1.33, and USD/JPY below 99.00 the market is pushing back on its previous September consensus call. Given this outcome we still feel the USD looks attractive.
In Asia the initial focus was on the NZD given China has stopped importing Fonterra’s milk products. Dairy obviously makes up a sizeable amount of New Zealand’s GDP, thus the natural reaction was to sell, with NZD/USD hitting a low of 0.7693. AUD/NZD saw a pronounced move to 1.1588, helped also by a strong services PMI release over the weekend from China, which benefited the AUD. It seems however that the market doesn’t seem too concerned about the longer-term implications of a halt in orders, and traders have used the spike to re-enter short positions. A weak Australian retail sales report (unchanged versus a reading of 0.4%) has once again put the onus on the AUD, which has also traded to a new low against the greenback (0.8848).
Tomorrow’s RBA announcement will focus once again on the statement and whether the 50bp of cuts that are priced in over twelve months are justified. The argument of cutting by 50bp has also raised its head, although the probability is low and would almost scare a few traders off given this sort of move is usually reserved for times of severe strain. From a currency perceptive Glenn Stevens doesn’t seem in the slightest bit concerned about the sharp drop from 1.03 in May, and seems to be almost willing the unit down to 0.8500 over the coming months. Comments around China will be interesting, as will statements from Rio Tinto when it reports 1H 2013 earnings on Thursday, although there will be closer focus on its cost reduction programme in the Pilbara and whether it can beat the $25 billion the street has for revenue and $4.6 billion for NPAT.
The fact that Australia has a firm election date hasn’t really been the catalyst some had hoped for, and to be fair we always knew it would happen; it was just a timing issue. The ASX 200 has been hit with a number of corporate issues (VAH and PDN), and again the general theme has been one of negativity. The fact that the Nikkei is down 1% is probably having an impact on sentiment as well, although the Japanese earning season is going well with 70% of companies having reported quarterly earnings; while 66% have beaten on the EPS line, on aggregate we’ve seen 107% growth in earnings. News from Toyota gives us some hope that Abenomics is working at a corporate level, with the company putting some of its $37 billion in cash to work by raising capital spending and research expenditure 10% this year, while paying its staff higher bonuses. All we need now is for some of these workers to actually spend it on discretionary items.
China is relatively flat with the Shanghai Composite up 0.4% and the CSI 300 up 0.1%. This is a critical week for China, and not just from an economic stand point, given the huge data dump; we get reporting season out of Hong Kong as well. The last couple of weeks have been positive, with authorities stamping down their commitment to meet the 7.5% growth target, while the Politburo has removed its tightening bias on property and are now promoting ‘stable and healthy’ development. Given our view that many of China’s key trading partners should see better days in 2014, the risks that China slows below 7% are diminishing and we feel confident it can trade around 7.5% in 2014, despite continued deleveraging.
So with relatively offered equity and commodity markets in Asia, amid a backdrop of tepid USD buying, European markets still look to find modest upside on the open, although there doesn’t seem to be much conviction. US futures have re-opened for the new week and are down 0.1%, so are not really giving anything away at this stage. In upcoming trade data is light, although on the corporate side HSBC takes centre stage; with a healthy 8.3% weight on the FTSE a good earnings report should help the broader market, which is in touching distance of the 1999 high. Italian bonds will also be in focus given they have broken below the bottom of their recent range and look to be heading to the 4% level; news that Mr Berlusconi was withdrawing his party’s support from the current coalition could weigh. and a subsequent spike in the ten-year from 4.25% could put pressure on the EUR.