Chinese trade balance boosts material names

Asia has been in consolidation mode today, as opposed to displaying continuation of the recent range expansion.

Economic data has been fairly light on the ground today, although the Westpac consumer confidence report in Australia was on the weak side and took some very modest wind out of the AUD’s intra-day sails.

Naturally, efficient market hypothesis suggests markets should be forward-looking, and when you see the spread blow out in the survey between current conditions and expectations to the widest since June 2000, it doesn’t paint a particularly optimistic picture.

Flows around the AUD were fairly lifeless around the Westpac confidence print, but it came alive after China’s January trade balance print blew expectations away. AUD/USD rallied to 0.9062 and looks set to test 0.9079 in the short-term (as I highlighted yesterday).

I suggested looking at EUR/AUD shorts yesterday and that continues to work. The Chinese trade data was super strong, with exports growing 10.6% against expectations of 0.1% and imports growing 10%. This will clearly please the China bulls and certainly isn’t thematic of an economy which is rapidly trying to rebalance and is 23% above the average gain in exports since 2012.

China is rallying modestly today despite the strong trade figures and the fact that JP Morgan put out a note saying they expect a 15-20% bounce in the Chinese market (MSCI China) over the coming weeks.

The rationale the bank gave was premised largely on seasonal factors such as the traditional strength seen in official manufacturing PMI around March and April, and the fact that China’s market is trading on a forward price earnings ratio of 8x (which many are saying is now cheaper than the Turkish market). We’ll have to see how this transcends as this is an index that has been ‘cheap’ for some time. Our Asia-based clients have been fairly sanguine on markets such as the Hang Seng and H-shares of late, however that may change if we see a stronger underlying trend in the mainland markets.

ASX being buoyed by material names

The ASX 200 has been buoyed by gains in the materials space, although the moves in the majority of banks have helped. CSL reported soft revenues and, like I’m sure we’ll see throughout earnings season, if a company is priced for perfection you need to deliver something impressive or the weak longs will take profits.

CBA delivered a strong result, and after spiking to A$76.92, reversed hard. To be fair, this was expected given the hourly chart was so overbought; with the 10-period RSI hitting 88. The failure to close above the 61.8% retracement of the January to February sell-off at A$76.07 has been noted, but shorting bank stocks has been a painful trade for many over the last couple of years. With fair levels of earnings growth, improving bad debts, a strong yield and good short-term trend, this is a name that will be bought on dips, especially with traders likely to buy before it goes ex-dividend on February 17.

BLD and OZL have been the big gainers today and for OZL the result was strong (relative to expectations), however you have to think the upside is capped by the fact they have a limited mine life.

European markets should see a fairly flat open, with US futures doing very little from the cash close. Consolidation looks to be the order the day, although there are a number of companies due to report including Tullow Oil, ING, Total and Societe Generale.

There is very little data due and the highlight will fall on European industrial production, and more importantly, the Bank of England Quarterly Inflation report. Fixed income and currencies traders will be keen to learn whether there are any tweaks to the bank’s forward guidance with regards to the trigger for putting up interest rates.

Traders keen to look out for tweaks to forward guidance from Mark Carney

There is a varied playbook around the various outcomes likely to be detailed from the BoE and the different moves which could transcend in the gilt market, while moves in short sterling futures and sterling itself will be interesting, and the chance of an outright move to a new threshold guidance of 6.5% seems unlikely. A view I feel seems realistic would be to change guidance in-line with the Fed; whereby rates will stay low even if the unemployment rate drops through the threshold or rates are staying low for a long period. Clearly there is still slack in the UK economy and similar to Japan, earnings are still far too low, relative to the level of inflation, and certainly too low to deal with a central bank hiking interest rates.

Traders should also keep an eye on narrative from Fed members Richard Fisher, Jeffery Lacker and James Bullard. However, until we see a new round of US data the market seems fairly au fait with the Fed’s stance, as Janet Yellen and the raft of recent speakers all seem to have fairly shared views with regards to taper and there hasn’t been one Fed speaker who has deviated too far from the mainstream.

This is positive for markets, however, trade today in the US will be interesting given the S&P 500 found strong selling at the 76.4% retracement of 6.1% sell-off in January. If the index clears this level new highs should be seen.

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