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Chinese markets have fallen modestly, although 0.9% move in the CSI 300 these days is small change and largely helped by a number of stocks coming back from suspension. China’s economics are playing a greater part, at least for those outside of the mainland, although the equity market falls today have the distinct feel of profit taking, given the CSI 300’s near 20% upside move over the last few sessions.
China’s M2 money supply data came in some 80 basis points above expectations at 11.8%, with total social financing nicely above expectations at RMB1.86 trillion. It seems the credit taps have been modestly turned on, which of course one would expect in times of turbulence in the stock market. Credit growth (year-on-year), however, has fallen modestly in June. Still, the impact on markets has been limited and traders continue to focus on tomorrow’s Q2 GDP. As detailed yesterday, 6.8% is the consensus print and while many have focused on the feedback loop between the stock market and growth (through the wealth channel), this view is the wrong way of looking at things and the real metric traders should be focused on is the positive impact on the financial services sector from the massive increase in stock market turnover.
Recall in Q1, financial services contributed to around 10% to Q1 growth, so given we are seeing sustained record levels of stock market turnover seems unequivocally positive for financial service, which in turn should support Chinese economic growth. Q2 GDP should come in at 6.8% or 6.9%, but the chances of below consensus seems fairly low, especially after yesterday’s export growth.
The ASX 200 continues to work within its well defined multi-month downtrend and desperately needs to close above the 2 July high of 5609 for this rally to find a better technical backbone. Looking at the short-term moving averages (to really gauge the trend) we can see that the market is moving perfectly sideways and as a result playing a range two standard deviations of the 20-day moving average seems the best strategy for now. This range then stands at 5694 to 5399, so the market is still positioned mid-way in that range for now.
Volatility measures have subsided today, with the ASX volatility index falling 13% to 18.3%, while the S&P VIX fell 17%, with implied volatility in the FX market also dropping somewhat. Traders have reduced their hedges, but this has also given confidence to the Aussie market that thrives on low volatility, as this is when traders look to position themselves in income generating positions and the hunt for yield. When around 50% (weighting) of the top 100 stocks fall into a yield play macro thematic, I would expect good outperformance and a move to the top of the trading band (5,694) if we can see a move closer to 15% on the ASX volatility index.
I would also expect to see this reflected in the money manager flow data towards Australian equity funds when figures for the week ending today are published on Friday.
Another talking point has been around the moves back into the USD, specifically to the detriment of the euro and AUD. With Greece finally coming to an initial agreement with the Eurogroup, the market feels this will be taken well by the Federal Reserve and with the market only pricing in eight basis points of tightening for the September meeting, many are too underweight the USD ahead of ‘lift-off’. Let’s hear what Janet Yellen says about the global macro environment and how this impacts Fed psyche when she steps up to testify in front of the Congress and Senate banking panel on Wednesday and Thursday.
Watch US retail sales today (22:30 AEST), notably the ‘control group’ (the area of retail sales that specifically impacts GDP) which is expected to increase 0.3% points. A good number here could really set the market alight given timings around Fed policy have played a distant third behind Greek debt negotiations and Chinese stock market moves. Rallies in AUD/USD to $0.7450 to $0.7500 look like good entry points for shorts in my opinion.
Moves in Asia should support the European open and our calls look modestly positive at this stage. Much ink has been spilt on the Greek ‘deal’, but judging by what we are seeing in markets, traders seem to be happy with what they have seen. One must acknowledge, however, that there will be political change within Greece over the near-term and the implementation and execution is still a huge risk. There is no doubt what has been accepted is going to be brutal for the Greek economy, and at least at this stage doesn’t provide an answer to those (including myself) who feel the restructuring of debt simply has to be on the cards now.