Losses for Asian equities have come despite US futures actually improving from US trade. Concerns about liquidity tightening have seen investors on seven-day repo watch yet again, with some fearing we will see a repeat of the June squeeze. China’s seven-day repo rates are at around 4.6% (from 4.04%), but we feel the PBoC is merely taking measures to manage liquidity and we won’t see a repeat of the squeeze we saw in June.
Today’s Asian session has also brought another positive economic reading in the form of a better-than-expected HSBC flash manufacturing PMI (50.9 versus 50.5) reading. However, it seems this figure has been largely ignored given the current liquidity concerns. The PMI reading is a backward number and liquidity issues could potentially impact future growth, particularly in the small business arena. The Hang Seng, Shanghai Composite and the Nikkei are all around half a per cent weaker. Meanwhile the ASX 200 is in positive territory with a surge in the banks underpinning the price action.
AUD finds support off the lows
We have been watching the AUD closely today after a sharp slide yesterday as the China issues surfaced. The AUD tends to be a good indicator of sentiment around China being a prime commodity currency. Just the fact that the AUD has actually managed to recover in Asia today suggests the China concerns were perhaps overdone. RBA Deputy Governor Philip Lowe is also speaking today and traders will be keen to hear more on interest rates and the local currency. While it looks like AUD/USD is in for a bearish turn, I’m more inclined to look at buying the dips, particularly, heading into uptrend support at 0.96. There is also the 200-day moving average, which is likely to support the price action in that region.
Europe pointing higher
European markets are eyeing a modestly firmer open after having struggled yesterday with the banks being the main culprits. Talk of an asset quality review (AQR) for euro area banks also did the rounds and affected sentiment. The AQR will require banks to set aside 8% of risk-adjusted capital as a buffer against losses and is due to be completed in October. While this seems negative in the short term, we feel ultimately it will be a confidence booster.
While the AUD struggled, the euro actually held up fairly well against the greenback. EUR/USD momentarily dipped to 1.374 and swiftly recovered to knock on 1.38 again. Perhaps news that Spain has emerged from a recession with a 0.1% q/q rise in Q3 GDP gave the single currency a kicker.
It’s a big day of trading ahead with a raft of PMIs set to hit the wires, with manufacturing PMIs for Germany and France being the highlights. Both data points are expected to be revised up slightly and this could support the EUR and finally see it convincingly trade through 1.38 for the first time since November last year. Over in the UK, central banker Mark Carney will be on the wires and a much less dovish tone is expected after yesterday’s BoE minutes.
Local banks rally
The local markets has enjoyed a steady recovery today after having experienced a nasty reversal lower yesterday. The main story is around the banks with our largest company by market capitalisation trading at a fresh record high. Commonwealth Bank just continues to defy gravity and lead the big banks higher today. All four banks are firing on all cylinders heading into their reports.
Next week we have ANZ and NAB getting the ball rolling with their FY results and expectations are always high heading into bank earnings. With risk on edge, most flows have been into the defensive names with the healthcare sector in favour. Resmed has climbed 0.9% heading into its results which will be released in the US. RMD’s locally-listed stock is right near its record high of $5.94. Iron ore miners have tapered off a bit today with some mild profit taking on the back of China concerns.