China equities continue to rally

Asia has been fairly subdued today, although price action on an index level still points to holding a favourable bias towards China, Hong Kong and Japan.

Source: Bloomberg

In Australia, the ASX 200 saw good buying off the early morning low, although defensive names have outperformed. The talk on the floor was around QBE and its latest downgrade, and surprisingly, it has surprised the market.

Over the last few years you’d be hard pushed to find a daily chart in the local market with more gapping issues than QBE; however the sell-side continues to see the insurer as a good stock to hold for the long term, given its natural hedge against rising long end rates. It’s worth remembering that the majority of brokers at the start of the day had a buy rating on this name, so there would certainly be some disappointment today.

Technically, after gapping to a low of $10.24, QBE rallied to the July 1 low of $10.68 and this has been the exact high today. It will be interesting to see if the insurer can trade down to $10, which has been the key buy point since 2012.

China has traded flat today, however it’s worth pointing out that the A50 index, Hang Seng, MSCI China ETF and CSI 300 are all overbought and at risk of profit taking. Good news has seen the bulls put money to work here, with increased confidence that markets were value plays rather than traps.

China equities on fire

Clearly the bulls have needed a helping hand from both the PBOC and government; in recent times we’ve heard of various monetary easing measures, including pledged supplementary lending (PSL). Here the PBOC is providing the China Development Bank with RMB 1 trillion in collateralised loans to help with shanty town renovation. This will act as a liquidity injection into the real economy, while helping to guide medium-term rates.

Adding to this, the various targeted Reserve Ratio Requirement (RRR) easing extended to various institutions has seen around RMB 1.3 trillion of new liquidity or credit into the Chinese economy, which would translate in total to the equivalent of 100 basis points of RRR across all banks.

There are other key positives, such as enterprising initiatives on a corporate level, with Bank of Communications (BOCOM) looking to increase the level of foreign ownerships. Other reports highlight that China's banking regulator is allowing five local governments to set up asset management companies to buy bad loans from financial institutions. Industrial profits rising 17.9% have also helped lift sentiment. Still, the risk is that all the good news comes at once, which seems to be the case, with price action mirroring this, seeing some explosive moves of late.

USD/JPY longs looking technically attractive

USD/JPY has been tracking sideways since February, trading in a range of 104 to 101, however there are signs the pair wants to make a move to the 102.50 area. A slight sell-off in the front of the US yield curve has certainly helped the USD, however technically USD/JPY has closed above the April downtrend and neckline of the double-bottom seen in July. This pattern would target 102.50 and momentum has turned (on the daily chart).

Corporate Japan is certainly in a good space, with earnings and revenue growth leaving other developed markets in its wake. With Japanese inflation struggling and likely to go backwards in the next couple of months, and a number of consumer metrics (including today’s retail numbers) following suit, Nikkei bulls have the added bonus of a market pricing in further action from the BoJ later in the year; potentially October. As we know, stimulus will always push global funds flows to that market.

The Nikkei has broken above the June to July consolidation pattern, but is perhaps not as overbought as many of the Chinese-related markets.

European markets should see a slightly stronger open, with traders eyeing earnings from BP, among others. On the data side, UK mortgage approvals, Spanish retail sales and budget balance will be in focus. US consumer confidence is also due in what is a massive week for tier-one US economic releases. The US Treasury also auctions five-year notes, so after yesterday’s poor two-year auction, today’s could promote further USD strength if we see a poor bid-to-cover ratio.

Ahead of the raft of US data this week, it’s worth highlighting that EUR/USD has traded in a 17-point range over the two sessions - that’s the second lowest intra-day range since the inception of the EUR. Clearly traders are comfortable being short (the Friday Commitment of Traders report highlighted the largest EUR short position since November 2012), but are ready to act if needed.

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