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There is no doubt the China Securities Regulatory Commission (CSRC), People’s Bank of China (PBoC) and the government would have been really upbeat about what they had been seeing lately, with the Shanghai Composite gaining 20.2% over a benign 33 trading sessions. These are exactly the sort of low volatile, positive market conditions that the authorities have been trying so hard to achieve. What’s more, breadth had been really positive too, with the number of companies above the 20-day moving average increasing from 1% (on late August) to 100% at yesterday’s high. We even saw traders increasing the level of margin financing for nine straight days – another sign of confidence.
After yesterday’s sharp bearish outside reversal, the number of companies above the 20-day average stands at 74%.
One has to blame Sinosteel for missing an interest payment on $315 million worth of 5-year notes, which caused the selling – despite a strong liquidity injection into the markets by the PBoC through its medium-term liquidity facility. Expect more defaults from Chinese corporates may be the message.
In what was a pretty whippy session, US markets didn’t really react to the China moves, with poor market breadth (74% of companies are lower on the day). Some focus has been placed again on the political situation, with Joe Biden quashing talk that he will make a play at the Democratic leadership – so it’s Hilary’s for the taking now. House speaker John Boehner has given a firm statement that the US will not default. This is fantastic to hear, but it doesn’t mean markets are going to see increased tension as we approach the 3 November debt ceiling deadline and the fact that 4-week T-Bill yields are still elevated (at 10 basis points) suggests Boehner’s comments have fallen on deaf ears.
Will we hear something more from Paul Ryan today about taking up the post as speaker of the House? This could be well received by markets if it comes to fruition.
The ASX 200 should open on a weaker note, with our opening call at 5223 (down 0.5%). We took solace from the strong move in Japan yesterday, with the Nikkei seeing a nice break of its recent technical ceiling at 18,440. But the idea that yesterday’s fairly poor Japanese trade data will push the Bank of Japan into additional easing next week seems misplaced in my mind and I don’t expect further stimulus. However, good volume came into the market, with reasonable volume also driving SPI futures higher.
Other considerations for today:
- Oil prices are 1.7% lower from yesterday’s ASX close, suggesting a descent headwind for the energy space. Iron ore fell 0.3% and BHP looks set to open 0.7% weaker. Copper prices are flat from yesterday’s close
- Gold is nearly 1% lower from yesterdays close. Barrick gold in the US closed down nearly 5%, by way of a proxy
- NAB business confidence is due at 11:30 AEDT and the RBA annual report at 15:30 AEDT
- Watch China’s open at 12:30 AEDT, with futures markets opening 15 minutes earlier. Will we see follow through selling on open?
- AUD/USD traded in a range of $0.7276 to $0.7203 yesterday. US data focuses on September leading indicators and existing home sales tonight, but FX traders will be closely watching China, and whether AUD/USD can hold the session low
- Traders will be positioning ahead of tonight’s (22:45 AEDT) European Central Bank (ECB) meeting. The consensus view is that we won’t see additional stimulus, but the door will be left open. There have been some upbeat signs in Europe of late, notably in the ECB lending survey and money supply numbers. However, with EUR/USD continuously knocking at the $1.14 door, will we see supply give way sooner rather than later and will the pair move higher? It seems Mario Draghi will try and keep a lid on EUR moves so it may be really hard and risky to be long EUR/USD
- Tonight’s US earnings will be interesting with Caterpillar (pre-announced), Pulte Homes, Dow Chemicals, Microsoft and Amazon all reporting