US and China drive Asia

Asia is off to a solid start to the week, with the stars starting to align for equities yet again. After a sharp pullback recently, investors appear to be regaining confidence that we may have seen a bottom for now.

Source: Bloomberg

Sentiment is vastly improved from the carnage we saw last week and some positives are beginning to emerge. Bond markets showed signs of stability in the US, with the 10-year yield rising in treasuries and German bunds. This helped prop up the US dollar, which had struggled through most of last week although the tightening debate is likely to continue.

As we head into the next FOMC meeting, which is not far off, investors will be left to rely on data as Fed members disappear from the scene after having been very vocal over the past few weeks.  On the reporting front, 77% of companies have beaten estimates out of the 16% that have reported so far. Around 58% of companies have beaten on the revenue front. This is a good sign that the stronger economic data is feeding through to corporate earnings.

Apple and IBM both report after market today, which will help shape tomorrow’s trading. Over 130 S&P companies report this week, including the likes of Microsoft, GM, Boeing, Caterpillar, Yahoo and Amazon. Investors are fairly optimistic about Apple following demand for the recent product launch.

Japan rallies on pension fund reports

Strength in the greenback has aided a USD/JPY recovery, with the pair squeezing above ¥107.00 yet again. There have been a number of Japan-related headlines over the past few days. Perhaps the one getting most attention is a report suggesting the Government Pension Investment Fund will lift its domestic shareholding to 25% (from 12%).

This has seen the Nikkei bounce back from correction territory and outperform the region today. The report in the ‘Nikkei’ newspaper also added that the fund will lift holdings of foreign bonds and stocks while reducing its domestic debt. This has seen the Nikkei swiftly trade back above 15,000 and is likely to encourage traders to buy the dips.

Asia has also been on headline watch around China after reports the PBOC plans to inject $32.7 billion into national and regional banks to help provide for year-end liquidity needs.  Once again, this is very targeted and perhaps reduces the prospect of an all-out RRR cut – something some were hoping to see. This week will be a real test for China on the economic front, with Q3 GDP, industrial production, retail sales, fixed asset investment and the HSBC manufacturing PMI due out.

China’s GDP is expected to have slowed to 7.2% (from 7.5%), a concern for investors, while industrial production growth is expected to have picked up to 7.5% (from 6.9%). I feel China’s GDP could be a win-win – if the number misses, there’ll be calls for stimulus. If the number impresses, markets will feel things are not as bad as initially thought.

As a result, I feel buying dips is a reasonable play should the price action stall. The ASX 200 has had a big run over the past week, and this has continued today with a broad recovery heading into some key data releases for the region. The recent recovery has seen us retrace 38.2% of the drop from August highs to October lows.

This level comes in at around 5,332 and I feel we’ll need a fresh catalyst to push us through this region. While there has been plenty going on locally today, headlines have been dominated by the Medibank IPO. IG will be offering a ‘grey market’ in the run up to the November 25 listing.

Europe to open firmer

Ahead of the European open, we’re calling the major bourses mostly firmer, with the exception of the CAC, which looks like it might lag. After big gains on Friday, it doesn’t seem like we’ll have any major catalysts in today’s trade.

Data is relatively light, with German PPI, the European current account and German Buba monthly reports. There is also mild strength in the sterling on the back of comments by the BoE’s chief economist, who suggested markets may have overreacted to some recent weak data.

However, I’m not sure just how much further the pair can run before sellers flock back in. While traders would want to buy into the notion the BoE could still hike earlier than expected, recent deterioration in data is likely to take precedence. On the UK calendar this week, we have public sector net borrowing, MPC minutes, retail sales and GDP data. This puts the sterling in the spotlight and some volatility is highly likely.

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