This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Comments by PBOC Governor Zhou from the weekend have set the tone for Chinese equities with stimulus expectations ramping up. Mr Zhou aired some concerns about the drop in China’s growth rate and went on to add the country has scope to respond without really clarifying what this means. This has been enough to see Chinese equities bid in a week where we have some key data due out of the country.
Following last week’s alarming drop off in the HSBC flash manufacturing PMI print, we have the official print due out on Wednesday. This reading is expected to come in at 49.7, remaining in contractionary territory. Last week already delivered another drop in industrial profits and this will soon have implications on growth and fan some risk aversion. There is also a growing feeling that stimulus is no longer as effective as it used to be in China and therefore investors could be getting ahead of themselves about it. China has the ability to have a significant impact on risk this week and perhaps the decline we are already seeing in the AUD is testament to this.
AUD yielding to the greenback
AUD/USD is now testing 0.7700 and last traded this low on March 20. Politicians have stepped up budget rhetoric and this also seems to be having a negative impact on the AUD. This makes this week’s trade balance data very important as we’ve been hearing quite a lot of negative chatter around declining terms of trade. A wider trade deficit is envisaged and this will give a clearer picture of what falling iron ore prices mean for us. This will also result in interest rate cut timing repricing and with key commodities falling heavily along with declining activity from China, many are betting on the AUD going lower.
US jobs back in focus
The greenback returns to the fore this week and it just seems to be showing signs of bottoming at the moment. Friday’s sessions was centred on Janet Yellen’s speech of which she reinforced a rate cut this year is likely. While some are waiting for inflation to pick up, Ms Yellen said the Fed only has to be reasonably confident that inflation will climb back to 2% within a year or two for it to commence lift-off. The timing is more hinged on further labour market improvement of which US jobs are tracking faster than the Fed’s projections at the moment.
This week is also non-farm payrolls week which tends to keep the greenback on its toes. Any sizeable gains in jobs could really reignite the greenback. This week the market is looking for around 250,000 jobs to be added which is below the 12-month average of 275,000. While most of the Fedspeak took place last week, there are still a couple of members on the wires this week including Mr Lockhart and Mr Lacker. Once again the stronger USD will keep equities in the US in focus and the recent retreat in the S&P has seen the index break the uptrend support, which has been in place since October 15. The inverse relationship between the greenback and equities has been growing recently. Trade balance numbers at the end of the week will also help give more insight into how the stronger dollar impacted imports/exports.
Firmer open for Europe
I feel EUR/USD is the pair to watch this week; it has now lost its grip on 1.1000 and looks like it could be in for some near-term downside. In Europe everyone is on Greece watch yet again. Remember an economic overhaul plan is needed to fulfil the bailout extension agreement. The country is looking to finalise some reforms to help it meet its bailout. Prime Minister Alexis Tsipras is said it to have requested a session in Greek parliament today and some reports are suggesting Syriza may split over these debt talks; this will not be ideal. This would help Greece come to an agreement with its creditors and prevent sending markets into a tailspin again. However, many analysts feel there is still a long way to go.
Apart from Greece, Europe will also focus on CPI releases this week and judging by the way data has been going recently, there could be some positive signs.
Ahead of the open we are calling the FTSE +35 6890, DAX +44 11912, CAC +26 5060, IBEX +13 11440, MIB +68 23052.