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Australian equities have been the regional outperformer, however, with all sub-sectors of the market in the black. The key from here will be whether the ASX 200 can convincingly move above the 5700 level and as we saw on 21 July the market seems hesitant to find a new higher range. As I wrote earlier in the week, commodities were due a bounce this week and this seems to be coming somewhat to fruition. I still feel that rallies are to be sold here.
Keeping an Aussie focus, we’ve seen no discernible trend from clients to buy or sell AUD/USD today but it feels as if the pair can squeeze a touch higher from here. Comments from the IMF (staff assessment) that the AUD’s real effective exchange rate looks high when put into context of falls in the terms of trade (given it is 15% above its 30-year average), haven’t really taken any wind of the AUD sails. I don’t think these comments will surprise too many, but it’s interesting for the IMF to be making these comments and I struggle to recall a period where the IMF have been so vocal.
Perhaps the best way to express an AUD bearish view is against the Kiwi. I highlighted AUD/NZD short positions on Monday and this is now working out quite nicely, and with the double top pattern complete, I would be holding for a move into NZD1.07. RBNZ Governor Wheeler caused somewhat of a stir by suggesting some of the interest calls from local commentators were consistent with recessionary conditions. It seems rates will come down this year in New Zealand but Mr Wheeler was a little more nuanced than some had expected.
The Nikkei has come under a bit of pressure today which would be taking some wind out of S&P futures. June retail trade data came in 20 basis points below the +1.1% consensus, with large retailers seeing a 30 basis point contraction in the month of June. The Nikkei seems to have moved into the shadows of late and traders are looking at increasing short-term activity in US and Chinese markets and commodities given the higher volatility of late.
Continued China focus
Chinese stocks are down for a third day, although volatility has clearly subsided. Some focus seems to have fallen on the fact the number of new stocks investors fell to the lowest on record at 391,500 (for the week 24 July). This was down 26% on the prior week and it seems there is a belief that the moves of late have scared new entrants off.
One of the other key questions investors have asked is whether the sharp falls and increased volatility in the Chinese markets will lead to a strong negative effect on future economic growth through the wealth effect.
Personally, the first port of call when looking at the impact on wealth, the first variable that stands out is the savings rate and there is no disputing that China runs one, if not the highest net savings rate globally, at close to 40%. The savings rate should insulate the economy to a much greater extent than if significant equity volatility was to hit the US which runs a savings rate of 8%. It must be said, however, that it’s hard to picture the S&P 500 falling 5.5% in an hour.
If anyone is to make an argument that the July equity sell-off will not greatly impact consumption, then the huge level of savings is always the first talking point.
The next point to make is that equities, as a percentage of Chinese household financial asset allocation, is still fairly low despite increasing consistently from 2005. I have seen statistics ranging from 12% to 24%, but this is still dwarfed by the allocation to deposits and property. What’s more, the top 30% of retail accounts make up 90% of the total value of Chinese equity holdings. This shows a heavy concentration (or low distribution) and while we have seen an explosion in new A-share accounts this year, we know the bulk of the value of the net holdings is held by a small percentage of households. What’s more, the share of the total population trading equities is less than 10%, which pales in comparison to 25% in the US and 30% in Australia.
So, despite the falls in the market, the impact will be limited to a small fraction of the population.
Turning to the European open
The modest off in US futures isn’t subtracting from our European calls as it stands and a modestly positive open is expected. All eye’s fall on the Fed, but given the current implied probability of the Fed action being priced by interest rate markets for September (59%), October (90%) and December 130%) I wouldn’t expect a huge move in interest rate pricing and therefore the USD. Most expect the Fed to be more upbeat about the economy, but I would expect a red flag to signal a September move.
Given Twitter’s crazy 22% price reversal in the aftermarket, earnings from Facebook will come into focus on what is going to a huge day of earnings from both US and European companies.