Investors react to poor China data

Asia has begun a key week for global markets on the back foot, as investors react to yet another round of disappointing China economic data. 

Source: Bloomberg

Money supply, financing and bank lending figures all missed estimates. Perhaps what rattled investors even more was the drop off in industrial production, which slowed to 6.9% in August when the market was expecting an 8.8% rise. This reading was the weakest since March 2009, with a big drop off in ferrous metal smelting. This resulted in power and heat production falling 1.7%.

Growth also slowed in retail sales and fixed asset investment. There will now be plenty of talk around China’s growth target and whether it can be achieved with such mediocre activity. Needless to say, the market will be expecting stimulus at some stage. Don’t forget though, this also means China can buy raw materials at lower levels now. So if the country is to ramp up, it would be in a pretty good position.

AUD drops further on China data

Having said that, AUD/USD has been the most interesting pair to watch today after gapping lower at the open and even briefly dipping below $0.9000. While this level has managed to hold so far, the momentum remains firmly to the downside and I wouldn’t be surprised to see selling pressure remain. Once the gap from this morning’s open is filled, perhaps sellers will return with greater conviction. However, the potential for China stimulus could keep some traders on the sidelines given the pair has already dropped significantly over the past week.

On Thursday we have China’s property price data and after we saw property prices fall in 64 out of 70 cities in July, concerns will be rife heading into the data. RBA minutes will be the key local release, but I feel this will be a non-event and greater focus will be placed on the USD side of the equation. For now, I remain of the opinion that AUD/USD will be in a $0.9000 to $0.9200 trading range, perhaps until event risk ramps up on Thursday.

Equities mostly weaker

Markets around the region are struggling, including China and Australia, while Japan is closed for a bank holiday. Equities in China have actually done reasonably well considering the situation and perhaps stimulus hopes are helping to put a floor on the losses.

Additionally we’ve actually seen iron ore futures reverse higher, which could be an indication of expected stimulus. The ASX 200 extended its losses with banks and other yield plays coming under significant selling pressure. This resulted in a fresh four-week low for the ASX 200, despite a fairly steady performance by the materials plays.

The fact that some miners are holding steady can be attributed to these miners having been oversold with most testing 52-week lows. Given China now looks like it might need to deploy stimulus, this has encouraged buying.  The bounce in iron ore futures has helped some of the miners, but Arrium’s capital raising will be a bit of a concern as a lot of iron ore miners fell into the red due to iron ore’s price slump. MQG has bucked the trend today and traded higher after an earnings upgrade due to improved performance fees and deal flow.

Is a USD reversal on the way?

The dominant theme in the FX space lately has been a resurgent US dollar. However, I feel it could be at risk of a near-term reversal as we approach some key events this week. Treasuries continue to be sold off heading into this week’s FOMC meeting, where I feel the key points to look out for will be QE exit strategy and updated projections.

The Fed has stuck to the line it is likely to maintain the current target for the Fed funds rate for a considerable time after the asset purchase program ends and some feel it’s time this is revised. Fed members have recently called for this guidance to be more data dependant rather than time-frame dependant.

While data has significantly improved, July and August payrolls reports showed a slight slowing in jobs added and this could be a concern for the Fed. This could push Fed chair Janet Yellen to remain cautious on the economy and maintain a neutral stance. While the market is positioning for a hawkish shift in tone, I feel the USD rally is at risk here given traders are likely to sell the fact regardless of whether it is hawkish or neutral.

Weaker open for Europe

A lot will depend on what happens with the UK’s Scottish referendum, with analysts feeling it will be a very close call. This makes Thursday a huge day as we get results from the FOMC meeting in the morning and referendum results overnight/early Friday morning.

For the euro, on Thursday we have the ZEW survey and the ECB’s TLTRO allotment. Looking ahead to today’s trade, European markets are set to start the week on a weaker note.

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