Markets taking bad news as good news

There is a feeling from the data over the last 24 hours that bad news is being taken as good news once again. 

We saw slightly weaker Japanese business confidence numbers, a mixed read on Chinese manufacturing, a mixed read on eurozone manufacturing followed by solid German employment. Then on the other side of the Atlantic, the US saw slightly lower construction spending and a moderately weaker ISM manufacturing read versus the consensus - also a mixed read.

However, this didn’t stop the European markets from rallying solidly overnight, and saw the S&P hit another record all-time high as the March data leans itself on the prospect of stimulus/accommodative operations.

With Janet Yellen quelling talk of rate rises in early 2015, and talking up the idea that accommodative policy will be in place for as long as it takes to see 10 million Americans moving into work, plus the inflation rate moving towards the 2% level, the weakness in the USD is understandable.

The issue here is the EUR as it continues to push higher. The ECB is currently in a bind with the EUR and its consistent rise. The threat of deflation in the periphery is mounting, and the lack of competitiveness is making the ECB’s role all the more difficult. With German unemployment still falling, Spain, Italy and even France are seeing unemployment rising on the prospect of further ECB operations through possible rate cuts at Thursday’s meeting. 

If there isn’t a move from the central bank it’s hard to see EUR/USD not moving through $1.38 and even back to $1.39; the upside risk in the EUR on no action is mounting.

Currencies aside, there has been an interesting development in iron ore. As the Dalian iron ore futures showed yesterday, the March rout has now being completely retraced. The data out of China certainly backed the prospect of increasing and bringing forward pre-determined asset projects to stimulate domestic demand, particularly infrastructure projects; this does expand the increasing price demand for iron ore.

The PBoC so far has not refrained from its current fiscal program of draining liquidity from the market, which some suggest could be back pocket ammunition if China really does slow down. What is interesting is the PBoC seems to be countering the draining of credit by a weaker CNY, as the fixing rate has continued to fall to 6.1503; the spot rate however strengthened.  

Ahead of the Australian Open

With such a positive lead from Europe and the US coupled with the stronger iron ore price, we are currently calling the ASX 200 up 24 points on the 10am bell (AEDT) to 5413 which will reverse yesterday’s losses and some. Overnight, BHP suggested it could be looking to divest non-core assets in a $20 billion spin-out. This would be a very interesting development and would make sense. Shareholder value should increase and it would leave BHP with the four key assets: (with a fifth to come) iron ore, copper, oil and gas, met coal and potash to come. This will be an interesting development if this is indeed the case.

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