Poor price action in Asia ahead of ECB meeting

It’s been a disappointing tape in Asia, with Australian traders keeping one eye on the cricket, while there has been plenty on the stock side to focus on as well.

The failure of gold miners to stage any sort of bounce despite a decent short covering move in the gold price in US trade is being duly noted. One may have thought, given the textbook downtrend in Newcrest Mining, that there would be a significantly elevated level of short interest in the stock, but there really isn’t. The market just doesn’t see a clear investment case for this space.

On the other hand, miners leveraged to iron ore have moved modestly higher in what is a weak tape for the broader market, and much is being made of the iron ore price pushing up to the highest level since August ($139 per tonne). When you adjust to AUD, at A$154.80 (which of course is what the Aussie miners would translate it back too) the commodity is ready to make a tilt at the year’s high of A$156.27.

Qantas getting smashed

The broader market has pulled back, however, while some people continue to focus on the raft of IPO’s coming out of the Australian market. The major talking point has been on the monster drop in Qantas.

The more cynical fraction of the investment community has often run with the mantra of ‘never investing in airlines’, and with the stock falling on a guidance downgrade, driven by a host of different reasons, you have to feel this statement is correct. The fact is; airlines are in a tough space, and when the AUD falls, the appeal of holidaying domestically increases as well. It’s interesting to see that in late November there was $52 million of short interest in this name, and that figure before today’s open was closer to $40 million. Clearly you’d be fairly upset to have covered shorts prior to today’s announcement.

The AUD tested 90c in US trade, although has staged a very modest revival; however it’s the AUD/NZD that has probably got the lion’s share of traders’ attention today, with the pair trading through the 1.10 level. The pair broke the rising trend recently drawn from the 2008 lows and must be eyeing the 2008 low of 1.0648 in the next six months or so. Today’s October trade balance widened again to $520 million, with China accounting for 40% of all exports.

From a currency perspective, one gets the sense that if we really do see the Chinese liberalising its currency and allowing global reserve managers the prospect to accumulate RMB, then this to me will be a major catalyst that pushes the AUD down. It’s not just yield that has driven reserve managers to buy Australian assets, but because it is seen as the backdoor way of trading China. So offer them the ability to get direct exposure to China and we could see global managers directly reducing exposure to Australia – although in reality this is a way off.

Japan and China are not really expressing any real volatility; with Japan seeing slightly more positive price action after the Japanese investors took profits yesterday after the Japanese Government Pension Fund (GPIF) indicated they were in no rush to change its allocation weightings of asset class. In early trade today we saw the weekly Ministry of Finance (MoF) fund flows and an eighth week of buying of foreign bonds by Japanese funds. While many will be keen to see what the GPIF does with its allocation weights (this fund has over $1 trillion in capital), one of the key principles behind ‘Abenomics’ is through creating inflation expectations and negative real rates, and therefore driving funds into more risk associated assets as well as offshore bonds (thus creating massive JPY outflows), so we will always watch these MoF flows closely.

All eyes on the ECB meeting

Given the relatively lacklustre tape in Asia, S&P and FTSE futures are fairly flat and giving no life into our opening calls this morning in Europe. The BoE and ECB take centre stage from here, although it’s the ECB meeting and Mario Draghi’s press conference 45 minutes later that will be more closely watched by traders.

Firstly, we should see changes to the ECB’s forecasts given where growth and inflation are currently positioned relative to its prior forecasts. A downgrade should certainly not surprise anyone and provides even more fodder to the element of the market which simply expects staff forecasts to be incorrect. The prospect of the ECB detailing the range of tools it has at its disposal to deal with liquidity issues is real, although given the raft of ECB speakers over the last few weeks the EUR shouldn’t move too much on talk of negative deposits or a future LTRO (long-term refinancing operation), as it should be in the price.

It was interesting to see the sharp underperformance of the services print in Italy and France and for me these two economies will get more and more focus in 2014. Predominantly with EUR/USD above 1.35, along with Greece; both these economics need EUR/USD well below 1.20. However, this impacts manufacturing substantially more and it’s therefore worrying to see the slowdown in the service sector.

In the US we get jobless claims, Q3 GDP revisions (expected to tick up to 3.1%) and factory orders (expected to fall 1%). It’s interesting to see a number of economists ratchet up their forecasts for Friday’s non-farms given the strength in the ADP report, although consensus has only moved up 3000 – to 185,000. It seems the risks are weighted now to the upside, despite the employment sub-component of the US services ISM expanding at a slower pace from last month, and the market should position for such. We’re likely to hear ‘whisper numbers’ closer to 200,000 today and tomorrow.

The US yield curve is getting more and more attention from market participants as well, and at 253 basis points – between two and ten-year bond yields – is the steepest since July 2011. The Fed will be fairly pleased with this as it shows a growing view that the Fed will continue to keep short end rates low even when they start to taper. This is the so called ‘separation trade’, where the Fed has tried to hit home that a start to tapering does not signal an imminent rise in the Fed funds rate, and it finally seems to be working.

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