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The market is now more than ever likely to scrutinise every comment from central bankers, government officials and every release of economic data - even tier-two releases. We can even now look at US mortgage rates and to a lesser degree further fall out from emerging markets, although the latter will be much less of a trigger for the slowing of bond purchases.
News flow over the weekend has been relatively light, with some interesting comments from Jackson Hole, and the price action in Asia is testament to that. Equities are mixed across the region, while the USD has stabilised after Friday’s fall out, with narrow ranges seen in the G10 space. Of course all eyes are on emerging markets right now; however we’ll have to wait a number of hours before USD/BRL (Brazilian real) opens up, after the central bank’s announcement to offer $2 billion per week in swap auctions and $1 billion per week in forex credit lines. Certainly the flows we have seen in MXN (Mexican peso) aren’t overwhelming today, but the fact that the BRL closed at its highs suggests a market that was appeased by the measures; another blow-out in US yields may change that however, and we’ve already seen the USD ten-year bond tick a couple of basis points higher.
AUD/USD initially fell to 0.9012, but has since recovered as Chinese equities moved higher. It could be big week for the AUD, although AUD/NZD is looking more interesting from a technical view, as it looks set to break the March downtrend and has broken and closed above the 23.6% retracement of the year’s high to low at 1.1548 (see chart). Australia Q2 capex takes centre stage this week and the market is currently looking for an unchanged reading on the quarter, although capital expenditure should fall throughout the year. Our trading bias on AUD/USD would be to trade the 0.8800 to 0.9200 range in the coming months; however it’s the upside that interests us, given the confluence of resistance between 0.9195 and 0.9225, where a closing break above could target 0.9600. In this case we’d need to see a much weaker US picture to justify such a move and US bond yields closer to 2.40 to 2.50%.
China has been pushing higher from the outset, with comments in late morning catching the bulls’ attention. Talk in a local publication was that there is no possibility of a local government debt crisis; however Sheng Laiyun (spokesman for China Statistics Bureau) said there were increasing signs of stabilisation and further growth. He also mentioned there were ‘positive signs’ given the recent July economic indicators. It seems the market has become more comfortable with China of late, although it’s hard to really say it’s out of the woods. However, after a period of re-pricing of a hard landing scenario, the current views on the economy have probably reverted back to where we would see as more fair value and thus target 7.5% to 7.6% for year-end.
The ASX 200 traded to a high of 5157, but has retreated into the afternoon, with the ASX now at 5132 (up 0.2%). A flat read in the Nikkei has held some traders back, although there doesn’t seem a lot of interest today from domestic funds to increase exposure. There are still a number of stocks to report earnings this week, although the actual aggregated weighting on the market is small and shouldn’t have a huge influence on the broader index. China seems in a better space as detailed, as does global growth (notably the UK and Europe); however on the other side of the risk coin we feel iron ore has downside risks into Q3 and Q4, the US situation continues to be all over the place with regards to the bond buying programme, new Fed chairman and US debt ceiling, and of course a lot of long only equity funds are really only just coming to terms with the emerging market fall-out. Justifying being too positive in this environment is tough given the levels of complacency, although the larger funds just can’t increase short positions because there continues to be a long held belief that bad news will continue to be good news for stocks, and if asset prices fall too hard then central banks will simply ramp up supportive rhetoric.
Gold has been a talking point today, seeing early buying and hitting a high of $1407.18 before surrendering gains and falling back below $1400. Price action is looking more attractive, having broken the year’s downtrend on Friday, and is nearly in bull market territory again. Key resistance now stands at $1415 (the 38.2% retracement of the sell-off from October to June), where a break of this level should see $1423 come into play. Australian gold stocks have flown today and thus we’d expect a similar theme to play out in Europe and the US.
Apart from some potential for gains in gold names, European bourses look set for a positive open. Data is light, with US durable goods expected to fall 4% on the month, while Spanish PPI is probably the highlight in Europe. Bundesbank President Oliver Weidman will be speaking in Berlin, although he has been relatively vocal of late in protest of a third bailout for Greece, as well as trying to highlight to the market that it’s wrong to think the crises is over. There are also a number of bill auctions in Germany and France, although we don’t see this causing too much in the way of volatility.