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News flow over the weekend has been positive for risk assets and clearly this is reflected in Aussie equities, commodity currencies and CME copper (up 2%).
Asian data has been constructive, with China PMI (released over the weekend) highlighting the improvement seen in the region, and while the headline was stronger than forecasted, at 51.0, the forward looking new orders component rose to 52.4, showing good expansion. The HSBC print (that survey’s around 420 smaller businesses) was revised to 50.1, and again the new orders component are just in expansionary territory. Traders and economists have been asking what this means for Q3 GDP (released on October 18) and when put alongside the recent July data series the result suggests upside risk to Q3 GDP, with consensus currently calling for 7.5% growth.
It’s also worth highlighting the Korean August export print, increasing 7.7% year-on-year, the fastest in seven months. Simply overlapping Korean exports (who always report these figures slightly earlier) against that of China’s highlights the strong correlation, and thus we look forward to the China August export print (released Sept 8), with upside risk likely to be in store if history is to be our guide. With 30% of Korean exports going directly to China, this spike will no doubt inspire AUD longs, given around 35% of all Aussie exports make their way to China. We have said before that China is outperforming right now and if you want to be concerned with anywhere it is still India, with INR (Indian Rupee) finding modest sellers today.
A monster 10.8% increase in Australia’s July building approvals also contributed to AUD/USD hitting a high of 0.8973, and with net shorts (as held by futures traders) increasing another 12.5% last week, we feel the pair could squeeze a little higher through Europe. Short EUR/AUD seems to be getting quite a bit of interest from traders as well.
Of course part of the relief we are seeing in S&P futures (currently up 0.7%), and selling in oil and gold is down to the ever-changing perception of US military action. These two commodities are watched by investors and traders of all other asset classes right now and gold especially looks vulnerable given the break of the August 7 uptrend at $1400. The US may have ‘proof’ the Assard regime used chemical weapons; however from all accounts the President’s 45 minute walk led to a massive turn-about in his thought process that left his advisers scratching their heads as to the change in tact. A congressional vote will now happen in the coming weeks and after comments from Republican Peter King suggesting that in its current form the Republicans would vote ‘no’, we wonder what will need to change for action to be taken. Clearly the President will have to be at his most influential to push this through. The fact the Syrians are hailing this a ‘historic American retreat’ will aid his cause.
Interestingly, despite US futures pushing up 0.7% on good Asian data and a slight re-pricing around Syrian contagion fears the Chinese market is only up 0.4%, while Japan is pushing up 1.6% and the ASX 200 up 1.1%. The ASX 200 especially looks interesting, having printed a high of 5191 and is currently near the highs of the day. The index rallied 11.6% from June 25 to August 14 and despite pulling back to 5028 has now recouped those losses and printed a higher high, although needs to close above 5168 to confirm the bullish move. A close below 5168 could be significant and would push back on the divergence seen on the daily MACD and the fall in the short-term ten-day moving average.
On a monthly chart the Dow Jones printed a bearish reversal at the trend highs, having rallied above July’s high and closing below its low. We will need to see follow-through selling to confirm this reversal, however with the mass of event risk on the calendar in the next two months volatility could spike, and a pullback of 5-10% could be on the cards. We would certainly be looking at reducing risk exposure right now, although it thoroughly depends on the region in question and for now we feel Australia and certain Asian markets should outperform given the US and European issues including tapering, the US running out of money in mid-October, the German elections and Greek debt issues. Of course the US was the big beneficiary of QE over the years, with its stock market outperforming, however right now the price action here looks quite dicey and we continue to like long ASX 200/short S&P 500 trades. We also feel of these events that the debt ceiling could be the biggest threat and if you are concerned about political posturing over Syria, wait until we get into October and the prospect of the US hitting the debt ceiling.
Given the positive flows in Asia and gains seen in FTSE and S&P futures, a strong open is expected in Europe. It promises to be a huge week of data and hopefully by the end of it we will get a stronger consensus around a number of key macro issues. Of course, the US equity market is closed for Labor Day today, however liquidity comes back this week in a big way and the prospect for senior money managers to book some profits is real.
In upcoming trade the manufacturing reports continue; with European and UK numbers due, although in the case of Europe these are revisions and not expected to change. On the currency side there has been some good selling in EUR/GBP (low of 0.8485), with the market going into this week’s ECB decision expecting slightly dovish rhetoric. A rate cut of course won’t be on the cards, despite the head of the Bank of Cyprus suggesting it is not off the cards; however with EUR/USD above 1.3200, amid the rise in long end yields, should keep the ECB president from materially changing the banks stance or economic projections. We would stay short EUR/GBP and feel the pair can ease to 0.8400 in near-term, especially with GBP/USD finding buyers given the agreement between Vodafone and Verizon