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The Federal Reserve will also enter into the week-long media blackout ahead of the 16-17 September FOMC.
For Monday, investors will keep a close eye on the return of Chinese equity markets after a four-day long weekend. The question on their mind is whether the ‘National Team’ of state-sanctioned stock buying will be around to support the markets.
It was said that the government does not want the market instability to mar the commemoration of the 70th anniversary of the end of World War II, and had re-activated the market support to keep volatility to the minimum last week. If there is no state support, we could see the Chinese stock markets quickly retest recent lows. This means 2850 for the Shanghai Composite (SHCOMP), 8500 for the China A50, and 2950-3000 for the CSI 300.
Let’s not forget about the US markets’ lower close on Friday, which also saw major indices posting a weekly loss. While the miss in US payroll data was cited as the trigger for Friday’s underperformance, we actually saw mixed employment data.
Although the headline reading of 173,000 considerably underwhelmed consensus of 217,000 additions, the unemployment rate fell more than expected to 5.1%, with wage growth growing faster than estimated. This supports the case for rate normalisation.
Therefore I feel that it was the realisation that the Fed will still raise interest rates this year, despite the slowing global growth and falling inflation expectations, that dampened market sentiment.
Furthermore, Friday’s session came ahead of a long weekend, where US will be off on Monday for Labour Day. Market participants typically do not want to hold too much risk in such situations. This added to the selling pressure.
The dollar ended last week as the second strongest currency, behind the yen. The view that the Fed is still on schedule to raise rate this year would keep the greenback on a firm footing. Asian currencies would be mostly tracking the USD.
The Aussie and Kiwi remained one of the weakest currencies. The AUD could face some volatility from its jobs data and China macro numbers this week while the RBNZ meeting on 10 September could give NZD more selling pressure. Expectations are for a 25 basis point cut in the RBNZ cash rate. The European majors were a tad on the weak side, with notable weakness seen in GBP.
Over the weekend at the G20 meeting, PBOC governor Zhou Xiaochuan said the Chinese stock market is nearly done with its correction after a bubble was formed in the earlier part of this year. He said ‘at present, the exchange rate of the renminbi against the dollar is stabilising, the correction in the stock market is already mostly over and the financial markets show hope for stabilising.’
Mr Zhou added that Chinese government action had helped avoid further declines and systemic risks. In addition, the finance ministers and central bankers at the meeting accepted China’s argument that the tweaks to its exchange rate in August were a step towards a more market-determined mechanism. The explicit support from the G20 would address concerns of competitive devaluation against the backdrop of slowing global economy and deflationary risks.
Looking ahead to Asia, I expect catch-up action to weigh on the regional markets at the get-go. The intraday performance of the Chinese markets should dictate how the Asian markets will end today.