China data on the confusing side

In China the big news was the collapse in the July financing data. 

Source: Bloomberg

We knew the PBOC was keen to see M2 money supply closer to target (13%) than 14.7%. The fact that this metric fell 1.2% percentage points or 120 basis points was certainly not expected, but neither was the collapse in aggregate financing to RMB 273 billion, some 86% below the June print. What’s more, the level of total social financing fell below that of new yuan loans (this has only happened three times since 2009), which is testament to the shadow banks that have cut back on activity and failed to roll over maturing loans.

Talk in the market is that the level lending also fell is down to accounting changes at mid-year, although ultimately most will view this decline in credit that the financial system is undergoing rapid deleveraging and if the tightening continues would be very bearish for future growth. This makes little sense to me though, as we have only just seen the PBOC undergo various easing measures over the last couple of months and to smash lending to this magnitude seems counterintuitive.

The Chinese market barely moved on the numbers.

On a more stock-specific level it’s been a busy day for Aussie earnings, with traders and analysts having one of the busier days of the year. CSL has pushed up 3.5%, with the market seeing good IG revenue growth and volumes that compare favourably to its peers. Commonwealth Bank has fallen on the day and as the attached note says from my more equity focused colleague Evan Lucas the result was broadly in-line and despite being an all-round solid result should be taken fairly neutrally from the market. The fact the stock is down 0.8% and Westpac up 0.2% suggests some modest switching going on.

In Europe, traders focused more heavily on shorting German equities yesterday, with the ZEW confidence print highlighting a worrying trend in confidence.

With geo-politics in mind, then the situation in the Ukraine seems delicately poised, with NATO recently detailing that there is a ‘high probability’ that Russia will invade Ukraine. With Ukraine officials suspiciously refusing access to 280 Russian aid-carrying vehicles, it opens up the prospect that Russia enters more forcefully on ‘humanitarian’ grounds. So it seems the situation is still extremely fluid and thus European bonds should stay well bid (even if we are seeing record low yields), with the EUR sold on any rallies.

The interesting dynamic is that the earnings multiple on the DAX has fallen 10% since June 27, and on 11.3x forward earnings stands at an 11% discount to the Eurostoxx index. Value seems to be growing, especially with so much revenue derived offshore.

Our opening calls for European markets today suggest stability on the open, and although traders will be keeping an eye on developments in the Ukraine, the key event risk in the Bank of England’s quarterly inflation report promises to be a rates and sterling affair. Naturally the main focus here will be around views on slack in the labour market and whether the BoE cuts its view that slack is 1% to 1.5% of UK GDP. It seems consensus believes the bank will do so, which should throw weight behind the view that the BoE could hike in November, despite the swaps market pricing in the first hike by February.

Cable a potential short at 1.70?

There is the possibility that GBP/USD pushes up to the 1.70 level over the next week or so, which was the high seen after Mark Carney’s Mansion House speech, and from here I would be fading such a move.

Asia has not really contributed to the sentiment, with S&P futures unchanged on the day. There’s been plenty of news in the region however, with Japanese Q2 GDP printing slightly better with a contraction of 6.8%.

With Q1 being revised to growth of 6.1%, Japan has recorded negative growth in the first half. The impact of the April sales tax is there for all to see, with the print being a mere ten basis points better than the 6.9% contraction seen after the 2011 earthquake. Still, GDP is backwards-looking and given we are in Q3 we should look forward to a Q3 print closer to +2.5%. This is interesting because most in the market feel that the BoJ will need to see 3%+ growth to convince them to raise the sales tax again in December.

I still feel that there are huge risks to the Japanese economy, with the paradox being that I feel Japanese markets are the best places to be investing over the coming six to twelve months, with global liquidity likely to chase a central bank that may have to do much more.

Keeping on the central bank theme, in Australia we saw Q2 wage inflation running at 2.6%, which when adjusted for inflation highlights negative real wages. With the economists expecting headline inflation to tick down to 2.4% in Q4, perhaps we can see a modest pick-up in consumer confidence as we see real wages again. AUD/USD saw no real reaction to the wage data given it was in-line with forecasts.

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