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The risk-off tone in global markets has continued as investors focused on unrest in Ukraine, Hong Kong and data from the US for direction. As a result, not only are markets risk-off at the moment, but constant repricing of rate hike expectations are also at play. Emerging markets are the worst hit at the moment and the trend is likely to continue in the near term. Fed members have been growing increasingly hawkish and even some of the traditional doves have said they see the possibility of a lift off in rates occurring in mid-2015.
Hong Kong unrest continues
Quite a number of trading themes have emerged due to all these events, and USD/CNH buying has been fanned by the Hong Kong protests. China’s HSBC manufacturing PMI was revised lower to 50.2 (down from 50.5) and this has also not helped the situation.
While the revised figure was weaker than the preliminary reading, investors seem encouraged by the fact it was steady from August to September. Perhaps this indicates we are finally starting to see some stability. As a result, we’ve actually watched equities in China edge a touch higher – also getting a kicker from USD/CNH buying.
Unfortunately for the Hang Seng, it has been another day of selling as unrest around the protests continues. China is reported to have told the international community not to interfere on the matter. Tomorrow’s official manufacturing PMI reading for the country will be key for Asia. However, China will be on a break in observance of their National Day, and activity might therefore still be limited.
Japan wage growth remains benign
Japan has seen a sizeable pullback today after having outperformed the region over the past week. There have been a number of releases from the nation today, including August retail sales, industrial production, unemployment rate figures, labour cash earnings and household spending.
The readings were mixed, with a drop in unemployment, better retail activity and labour cash earnings. However, household spending remained quite poor and industrial production was very disappointing. The figure that drew most attention was the beat in labour cash earnings as it is directly linked to inflation. Cash earnings were expected to have tapered off from the previous month, which had seen a spike due to bonus earnings.
Despite the pullback, the reading actually came in ahead of expectations, showing a 1.4% rise (versus +0.9% expected). Japan would want to see earnings growth catch up to inflation and contribute to the recovery. Given the fact inflation has been artificially pushed up by the sales tax hike, then the growth in cash earnings barely touches the sides in real terms.
While the beat was enough to ease yen weakness for now, it seems temporary as far as spending behaviour is concerned. As a result, I’d still be looking to buy dips in USD/JPY and the Nikkei heading into Friday’s non-farm payrolls reading. Tomorrow we have the Tankan manufacturing survey and this will give a better indication of how the economy is tracking.
Europe focuses on CPI data
Looking ahead to European trade, we’re calling the major European bourses mixed, with some facing a minor recovery after yesterday’s sharp sell-off. More CPI data is due out today and the headline flash CPI estimate is expected to show 0.3% growth. Core year-on-year CPI is expected to come in at 0.9% and ECB President Mario Draghi has always said anything under 1% would be uncomfortable.
This CPI release will also help shape expectations heading into this week’s ECB meeting. A disappointing reading will only weigh on the euro further, while a surprise beat could see a temporary euro recovery. EUR/USD managed to find some support at $1.2660 – the point where November 2012 lows kicked in. I would consider selling any moves back into July 2013 lows in the $1.2760 region.