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Chinese trade balance numbers will have only added to concerns about the state of the economy. The 13.8% decline in imports was significantly worse than consensus expectations for an 8.2% decline, and will only add to concerns over declining Chinese demand. This makes it the sixth month this year where imports have declined by more than 10%. Of most concern for Australian miners is the 14% decline in iron import volume month-on-month. It also does not bode well for hopes that stepped-up Chinese fiscal stimulus in the second half of the year will help eat into the growing global oversupply in the iron ore market.
The release of China’s foreign reserves data yesterday have also reignited expectations that further CNY devaluation is in the offing for later in the year. Despite the huge scale of China’s FX reserves, it’s clear FX market intervention is steadily taking its toll. As China sells its FX reserves in order to stabilise the CNY, this only serves to tighten monetary liquidity in the mainland, in turn requiring further easing of monetary policy through lower interest rates and cuts to the reserve requirement ratio (RRR). Monetary easing will only put further downward pressure on the CNY. A steady and managed devaluation will help break this cycle and lessen the risks to the financial system involved in fighting against the foreign exchange market.
The Shanghai Composite has steadily been trending down today. While it appears the ‘National Team’ has stopped its active buying in the market, the range of new restrictions introduced into the market have limited its ability to take drastic moves. Although if we do see a significant break downwards in the index, it is uncertain if these new restrictions will really make that much of a difference in a panic selling situation.
Japanese GDP data was slightly better than expected, but has not managed to ease concerns about the state of the economy. Concerns about China and the rising yen appear to have dominated trading today and pushed the Nikkei down.
The lack of desire for further Quantitative and Qualitative Easing (QQE) in Japan is setting the JPY up for a major rally into the second half of the year. As it seems likely the Fed will push back the date for rate hikes and the European Central Bank (ECB) will step up its own QE program, the JPY is positioned well to rally on its perceived ‘safe haven’ status. In real effective exchange rate terms, the JPY is looking like one of the most undervalued currencies in the world at the moment. And bets on increases in the JPY have risen to their highest levels in 19 months.
Despite oil prices falling again after their recent short-covering rally, the energy sector has driven the ASX up 0.94% today. Buyout fever was in the air as Woodside Petroleum (WPL) offered roughly $12 billion dollars to purchase Oil Search (OSH). The WPL offer was at a 13% premium to OSH’s closing price yesterday of $6.73, but when the stocks restarted trading, OSH’s share price rallied over 15%. This is a strong indication that the market feels the offer is undervaluing OSH’s stake in the PNG LNG Project, which is attractively low cost and has significant capital growth potential. Now that OSH is in play, it will be interesting to see if other suitors come out of the woodwork, potentially pushing Woodside to the side. WPL opened trading initially more than 4% down but has moved up since, indicating the market is fairly sceptical of it being successful in its pursuit of OSH.
But the buyout fever that this offer has prompted has seen a number of other names in the energy sector rally on the prospect of asset sales or full buyouts. Santos (STO) is well known to be readying bids for a number of its assets and its share price rallied 6.3% while smaller names AWE and Beach Energy (BPT) saw their shares rally 6% and 3% respectively, likely on their prospects as buyout targets.
The performance of the utilities sector have also been stoked by asset sales today, rising 2%. AGL announced the sale of its 50% stake in the Macarthur Wind Farm for $532 million, which was met with enthusiasm by investors as its stock rallied 3.1%.