China continues to provide a risk-off tone

Asia has started the week with a risk-off tone and US futures would probably be down more than 0.1% if Japan hadn’t been closed for Children’s Day.

USD/JPY has broken through recent support at the 102 level and has chewed through a good level of bids, despite it being a national holiday in Japan. As argued last week, the BoJ are treading on thin ice at present and need to be sure about the economy if they are going to exposure the JPY to short-term upside risk. Comments from the bank today that the private sector economists are underestimating the strength of the economy perhaps have added to the buying of the JPY.

Fridays US payrolls were mixed, although had you told me the US 10-year bond would be lower despite the strong headline payrolls print, with revisions to the prior month, I’d find it hard to believe. Still, it seems the pessimists had the upper hand and the flat earnings growth and 806,000 decline in the labour force (leaving the jobs market with the lowest participation rate since 1978) saw a big turnabout in the treasury market and subsequently money flowed out of the USD and the S&P 500. The year’s low, and bottom of the multi-month range (on the US 10-year bonds) of 2.56% needs to hold or we could see a bigger move lower in the S&P 500. However it seems the idea of low inflation and good headline job creation should keep things relatively stable for now.

Chinese equities finding good selling activity

China has been sold off fairly aggressively today, with the CSI 300 falling 1.1%. The HSBC PMI print fell to 48.1 in April, which has widely been talked about as the key reasoning behind the selling. There has been a number of interesting comments that have been pushed through the local media, especially one article suggesting the property market in tier-one cities is not doing much better than smaller cities.

There were also headlines that authorities see reserve ratio requirements as high relative to developed markets but this should not shock anyone, although the timing of the comments seems interesting, especially ahead of this week’s CPI, trade balance and financing data. Certainly comments from finance minister Lou Jiwei that China won’t undertake a large stimulus in the short-term, seems to push back on building expectations and as said before unless employment really looks under threat will the Chinese authorities really turn on the stimulus. Recall their bias right now is still to deleverage, slowly but surely.

In Australia the ASX 200 found sellers after the unwind, although good gains in the materials space has supported. Record Port Hedland iron ore shipments and a higher ore price on Friday seems to have helped. Westpac (WBC) has taken some wind out of the markets sails and traders have learnt once again that you can beat cash earnings, but there are many other factors at play and when the market has priced in a good number they really need to bring their A-game and beat on a number of metrics and give a sense that you can even on 14.5x forward earnings there is room to run. In fairness there has been a ramp up in corporate news with Aquila and Bendigo Bank also getting headlines. There still seems like opportunity both from the long and short side, regardless of the lack of volatility on an index level.

IG clients positioned for downside

Europe looks set to open marginally lower today, with the UK off for May Day holiday. Traders will focus on services ISM report out of the US, which is expected to continue the trend of improving US data. We also get economic forecasts from the EU, while ECB member Mersch speaks and his comments will be interesting ahead of the key event risk this week, in the ECB meeting. Certainly the market has been loath to really move currencies around too aggressively today; however there is still a bias from traders to be short, with 87% of all open positions (IG clients) currently short.

I am not so sure we get anything too spectacular from the ECB and would be using weakness in EUR/USD as a buying opportunity. Certainly it seems much more logical that if we do see easing it will take place in June after the June 3 inflation data, while the ECB publish economic forecasts on June 5.  

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