China returns to trade with a negative tone

Equities are mostly firmer heading into a crucial non-farm payrolls print which has been tipped as the key reading this week.

China is dealing with fresh concerns regarding a liquidity crunch after a rise in interbank rates. Perhaps weakness in China is merely a factor of returning to trade on a Friday after a week-long break, or still on a break until Monday.

While there are some interesting moves in equities, the major FX pairs have been fairly subdued suggesting caution is prevailing as we await US data. There has been some activity on the AUD front as investors dissected the RBA’s quarterly statement of monetary policy. The reaction to the statement has been quite confusing as AUD/USD initially gained some ground before retreating shortly after.

The key takeaways were that the RBA revised its forecasts for the economy and inflation higher, with the recent drop in the AUD aiding the changes. While the RBA has raised its inflation expectations in the near term, peaking in the middle of 2014, it expects this to taper off in the latter part of the year. However, the real challenge will be in the jobs market and wage pressure, with unemployment expected to continue to edge up for a few quarters.

The trend in unemployment is only expected to turn lower once growth rises to an above trend pace. With that in mind it seems there is some doubt in traders’ minds at the moment about fanning the long AUD trade further.

Europe pointing to a firmer start

Looking ahead to European trade, we are calling the major bourses modestly firmer as they pick up on the positive momentum in Asian trade. While equities are pointing higher despite the ECB’s decision not to ease further, weakness in bond markets could be a source of concern. It is becoming increasingly evident the ECB is not quite sure of how to deal with uneven economic performance across the region and the structural cracks are likely to continue expanding.

While the ECB continues to acquire more information before taking action, disinflation remains a real threat especially after the recent disappointment in German CPI. There is also no real indication of what unconventional options are on the table for the ECB and this has left analysts speculating this will be unsterilized bond purchases. Focus will now be on revised economic projections in early March and perhaps this is what will force the ECB’s hand. Perhaps the ECB is waiting to see how tapering progresses and what impact it has on the global economy. For now it seems the euro is a ‘hope’ trade centred around a broader global recovery spilling over into the region. 

US non-farm payrolls in focus

The highlight of tonight’s trade will be the non-farm payrolls reading which will help shape sentiment for risk and the fragile emerging markets complex. Emerging markets currencies continued to recover, with the Turkish lira firmly leading the way. The better-than-expected unemployment claims reading from the US also helped sentiment, particularly in the risk space.

For the non-farm payrolls reading tonight, the market is looking for a bounce to 180,000, which is a sharp improvement from the 74,000 recorded last month. Unemployment is expected to remain steady at 6.7%, but some analysts feel participation might drop given the expiry of some extended unemployment benefits. This would lead to people exiting the labour force and artificially drive the unemployment rate lower. Even an in-line reading on the payrolls front today could see the USD extend its gains, given the impact it’ll have on confidence.

Given tapering now seems to be on a set course, it is important to see US jobs stabilising to help underpin confidence. It’ll be important to watch emerging markets closely and how they react to the jobs numbers. On the earnings front, investors will continue to focus on the social media giants after some disappointment from Twitter and LinkedIn recently sparked a selloff.

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