Further buying of Chinese equities

Despite certain developed markets getting smashed last week, global stock funds still attracted $11.3 billion in new cash. 

Source: Bloomberg

Emerging markets attracted a fair portion of these funds, recording the biggest inflows in 18 months.

Europe had a shocker, taking the falls in the Eurostoxx 600 index to 7.6% from its June 19 peak. This would make sense given we’ve already heard names like Adidas, Siemens and Volkswagen speaking out about how their businesses are being affected by tensions in Ukraine and Russia. Reports that Russia is amassing troops on the Ukrainian border will not appease falling sentiment towards the region, and judging by the 21% spike last week in EUR net shorts (as measured by the weekly Commitment of Traders report), it seems that traders have ramped up currency hedging.

Euro struggling to rally

We expect to see a slightly stronger open here today, with Asian markets finding buyers easier to come by after the open and US and FTSE futures coming along for the ride. News that the Portuguese central bank was splitting Banco Espirito into two banks seems to have helped, although this action was speculated on Friday. Interestingly there has been little buying of EURs; even EUR/GBP has failed to bounce, despite wildly diverging futures holdings (as measured by the weekly Commitment of Traders report). EUR/USD is unchanged and on the week and I would (optimistically) be looking at potentially working offers into any rallies to 1.3495 – the 38.2% retracement of the recent sell-off from 1.3700.

The ‘lower for longer’ trade was unwound somewhat last week, with the S&P 500 closing below the February uptrend and 55-day moving average. The MACD has broken below the signal line, suggesting momentum is working against the bears, however it seems that if the US equity bulls are going to put money to work today (which is what the futures are suggesting),  much will hinge on the price action in Europe. As we saw on Friday, the S&P 500 rallied shortly after European markets closed, thus if we get more positive European trade then US traders could take some inspiration from this.

It’s also interesting to see the massive spike in the CBOE put/call ratio, which is now at the highest level since August 2011. Whether this is pure speculation work or actually portfolio hedging, the increase in put option buying has been significant.

Asia naturally priced in the US negative lead on open, although most will be saying Friday’s US data drop was a fairly market-friendly outcome. The two key issues here were that the U6 unemployment rate (the broadest measure of employment) increased ten basis points to 12.2%, while we also saw sluggish wage growth. It was positive to see the participation rate tick up, suggesting we have seen a structural trough in this rate, while we have also seen six months of job creation above 200,000. Still, it seems consistent that short-term rates in the US will be targeted in June or July, although narrative from Dallas Fed president Richard Fisher on Friday would suggest the risks are skewed to the March 2015 meeting.

Further buying of Chinese equities

The big move in Asia has been the China CSI 300 which has put on 1.1%. The Nikkei found buyers and is oscillating around the flat line, while the ASX 200 has gained 0.3% from early session low. The Chinese market is performing with real strength and further optimism around reduced state involvement in the equity market seems to be buoying financials. We’ve also seen the Sichuan provincial debt department pushing through initiatives to attract more first home buying, although this is being tempered by the fact that last week’s second-quarter monetary policy reports detailed that few new initiatives are likely to be announced.

It seems therefore that the PBOC is fairly content with the way the economy has responded to recent moves, although it is still worrying that the PBOC really struggles to move away from promoting credit to spur stability which has caused many to express scepticism about what is really going behind the scenes.

Australia will also take centre stage this week, with a barrage of key event risk. Earnings season ramps up as well at a time when the index is trading on a price to earnings ratio 12% above its long-run average, thus any companies that miss expectations could be savaged. Currently 31% of ASX 200 listed companies are trading above brokers (consensus) 12 month price targets, with the level at 19% last month. We can go back to the all-time high in November 2007 and this was marginally higher at 39%.

On another metric, 38% of companies are trading within 5% of their 52-week high, which is the highest level since 2012, although well below the all-time high level of 72%in the early 90s. The issue then is we will have to see solid earnings numbers, accompanied by an inspiring outlook that supports EPS estimates, or the market will cut positions and run.

Today’s June Australian nominal retail sales were certainly better than forecast, showing a 0.6% month-on-month gain, however we’ve only seen a very modest bounce in the AUD.  A slight decline has been seen in volumes in the June quarter, which is the first time this has happened in two years and throws up some downside risks around the upcoming GDP report. AUD/USD continues to hold the June range lows of 0.9321 (and 61.8% retracement of the May to July rally), so price seems delicately poised. 

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