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Surely the easy money has been made on a number of assets, with German bund yields at 42 basis points and EUR/USD seemingly stabilising around the $1.16 level. Oil prices seem to have stabilised and the fundamentals appear to favour reducing short positioning, while gold looks to have found good supply around $1280.
Asian stocks are seeing greater range expansion of late, although Japan and China take the prize here. China stole the show yesterday with the various indices undergoing dramatic moves rarely seen outside of small cap oil explorers.
We have seen a bounce back today as local traders felt the moves yesterday were overdone. To me, greater regulation around margin trading seems a good thing over the medium-term. Markets should have some reflection of fundamental economics, although you could argue that hasn’t been the case in most developed markets for the last few years.
Greater regulation in China a net positive for Australian assets
The greater regulation around entrusted loans is also a positive for other assets like the AUD, ASX 200 and China’s growth-sensitive commodities. Given most of the money lent out is feeding into various financial markets, the idea behind moves from the Chinese banking regulator (CBRC) here should in theory re-channel those funds back into the real economy.
The ability for the various regulatory bodies to control excessive speculation should give rise to further controlled liquidity operations too, with a higher chance now of the Peoples Bank of China cutting reserve ratio requirements (RRR) for banks. Still, while we are seeing such extreme moves, I question if it has caused the global investment community to think twice about investing here.
On another note, we are used to governments releasing economic data at the time stipulated. This gives participants an equal playing field by which to react, although technology has altered that somewhat over the years.
Chinese GDP was effectively leaked eight minutes before the time stipulated (13:00 AEDT), although the ten basis point (or 0.1 percentage point) beat at 7.3% year-on-year growth was not really enough to set the world alight.
The December industrial production print was the most important of the data points and at 7.9% was strong – some 50 basis points above consensus. This should put upside risks to the markets’ view that the Chinese economy should start to see downside momentum from here.
IMF downgrade to global growth expected
At an asset level there was some buying of resource names and AUD on the GDP print. However, we have seen traders looking to sell into moves, especially in the AUD. The IMF have cut its global growth forecasts to 3.5% (from 3.8%) but the cuts were largely expected as the IMF were scheduled to release updates. Far from being bearish, these numbers are above consensus and some 50 basis points above the recent downgrade from the World Bank.
The ASX 200 has seen limited life and volumes on an index level, which this seems in-line with the recent low correlations with Asian, European and US markets. There has been some buying of gold stocks again today and these remain the flavour of the month as traders see benefit in hedging out risks around central-bank-induced volatility (notably after the Swiss central bank decision).
These include this weekend’s Greek election and the European Central Bank’s likely announcement of a total bond buying program (including sovereign bonds) of €40 billion or more.
The playbook for this week’s ECB meet seems almost impossible to call. If we look purely at the technical set-up it looks as though being long CAC and DAX may be to the way to go. The CAC 40 has broken above the June 2014 downtrend and could be eyeing a move to the 4,500 level, while the DAX has broken out above topside supply nicely and looks strong.
Long EUR/USD could be a way to mitigate disappointment, but you are fighting a strong downtrend. Being short German bunds also seems compelling to me, although this has been a terrible trade over the last year or so. The risk of disappointment is high, but it seems the tide has changed somewhat over the last few days and the macro community appear to be expecting disappointment.
One thing we have learnt over the last few years is that for risk-associated assets like global equities to push higher, traders simply need something to worry about.