Countdown to September

After seemingly rushed moves to introduce a new Chinese currency regime, the People’s Bank of China (PBoC) has quelled the three days of volatility around the CNY level.

Source: Bloomberg

They seem to have been taken aback slightly at the rapid pace of the declines, and there is a growing disconnect between their current statements of letting the market set the closing price and the actual volatility seen in the daily movement of the currency on Thursday and Friday. Although it does clear the way for them to see another 2-3% devaluation in the coming months through the same process.

The roughly 3% devaluation in the CNY last week by itself is not likely to influence the Fed. However, the prospects of a continual steady depreciation of the currency by a few percent every few months and its associated deflationary global effects may weigh heavily on the Fed’s decision.

The Fed minutes and the US inflation data both get released on Wednesday. The minutes will be carefully studied to see if China's slowdown was mentioned by Fed members, and how much the devaluation since then may have influenced any of their decisions.

With oil prices continuing to decline, the key figure will be Core CPI (Ex Food and Energy). Expectations are for a 1.9% year-on-year increase –a number around this level is likely to see the front end of the US bond yield curve rally as bond pricing for the probability of a September rate hike could climb into the mid-50% level.

Concerns over the effects of a continued CNY devaluation impacted all the major Asian bourses last week. The Nikkei finished down 1% on the week, and the ASX declined 2.2%. However, the CSI 300 displayed a noticeable disconnect last week growing 4.6%, despite many companies on the bourse seeing their foreign currency debt steadily increase.

As concerns over the CNY continue to ebb, and the prospect of further rises in the USD in the lead up to the Fed’s meeting, the Nikkei may well recover last week’s losses this week.

ASX at the open

The ASX continues to threaten further downward moves. With the close of 5356 on Friday, the ASX is within touching distance of its January low of 5260. On a number of metrics, the ASX is even beginning to look increasingly oversold.

As my colleague Chris Weston pointed out recently, the consensus forward P/E of the ASX 200 is currently sitting at 15.6x earnings. If this were to decline to 15.4-15.25x, it would be two standard deviations below its four year average P/E. When these levels were touched in mid-2012 and late-2014, they were followed by rallies in the index.

Newcrest Mining (NCM) will announce their earnings today. The $100 decline in the gold price this year is likely to have severely impacted them, and the market is prepared to see the carrying value of the assets decline further. The acquisition of the Lihir mine in Papua New Guinea appears to have been a questionable decision, with high logistical expenses and a declining gold price likely to see further asset impairments. While NCM’s costs are denominated in AUD, seeing them benefit from its recent decline, the majority of its debts are denominated in USD and its net debt position is likely to have increased along with the value of the US dollar.

Flexigroup (FXL) release their full year results today, after previous snapshots from disclosures relating to the resignation of two of its directors. Its continued management instability has hurt its valuation, with its being sold down to around 8x P/E. However, the stock saw 5.86% rally on Friday on news that it may be positioned well for a private equity takeover. FXL’s other main issue is its lack of volume origination, it likely needs to see a turnaround on this front as well to see the market pricing to start increasing. In the short-term, the focus will be on its buy out prospects.

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