A crazy 12 hours for markets

Asia has kicked off about as crazy a 12-hour period as you will see in any market, at least from an event-risk perspective.

Source: Bloomberg

I am keen to mention the Australian consumer confidence figure, given it fell a further 3%. At 92.25, the index is approaching multi-year lows and, despite 10 interest rates cuts since November 2011, we are all still worried!

Obviously, traders haven’t been overly concerned as AUD/USD fell a whole five pips on the news, backed by no change in the front end of the Aussie bond market. It’s also interesting to see the widening divergence between business and consumer confidence – this divergence stands at an all-time high.

As previously detailed, the risks to China’s Q2 GDP were to the upside, so the 7% year-on-year growth (20 basis points above forecast) won’t surprise too many. Growth in the territory industry grew well over 8% and this feeds into the argument that the contribution from financial services is really helping the overall growth rate. Industrial production was a massive 80 basis points above forecast at 6.8%, while retail sales (at 10.6%) and fixed asset investment (11.4%) were also stronger.

The growth numbers look even more impressive if you look at the data on a nominal basis; here we saw a massive 130 basis-point improvement to 7.1%, which means the deflator is back in positive territory and we are seeing inflationary forces in theory. There will be some conjecture here, although the China Stats Bureau have been eager to bring home the fact the data is accurate.

Outside of the mainland Chinese markets, which have fallen on the idea the good numbers will limit future stimulus, other Asian markets haven’t reacted too greatly to the numbers and the bulls continue to get the upper hand.

As suggested yesterday, I feel the ASX 200 can squeeze into the 5700 area (top Bollinger band and 24 June high), although I would personally be looking to fade the market into here as the sideways nature of recent price action suggests range trading is the best strategy for now. Still, a close above the 2 July high of 5609 is bullish, as is the break of the April downtrend, although it would have been nice to see volumes pick up.

Also on the calendar we have heard from the Bank of Japan who lowered their estimates for core inflation and growth, while the Bank of Canada (BoC) meets later today. The BoC will be enthused by the rally in oil despite Iran getting its much-anticipated deal. However, there is no denying that the market’s 50% probability of a rate cut today from the BoC seems fair.

Expect the CAD then to be the volatile currency in the G10 region over the coming 12 hours; in my opinion the highest probability set-up is to buy dips in GBP/CAD or USD/CAD. If the central bank leaves rates on hold, it will provide a dovish bias and will almost certainly cut its growth forecasts for 2015, so we should see a reversal in CAD strength if rates are kept on hold.

Perhaps the two key events, given the impact on multiple asset classes, will be the Greek parliamentary vote and Janet Yellen’s testimony to congress.

The Greek parliament should vote through the measures with some ease (22:00 Athens time), but the focus of the market has shifted somewhat to the future of the Greek political landscape. There is a belief that Tsipras will form a minority government at some stage after the measures pass, utilising support from the less extreme members of the opposition parties.

The other key issue is around whether Greece will achieve bridge financing, with some believing we may see IOUs issued. It seems, though, that traders are not too concerned by these issues as it stands and we are eyeing a positive open, with better buying in the German DAX.

Janet Yellen will be speaking on behalf of the collective, so her rhetoric should represent the views of the wider group and theoretically be in line with the June meeting minutes. We have heard views from Dudley, Fischer, and Williams and from Janet Yellen of late, so it won’t surprise anyone to hear the Fed’s plan to raise this year – although whether we get the feel of two moves as San Francisco president John Williams recently detailed is doubtful.

Naturally, views around the Greek negotiations, volatility in China’s equity markets and moves in the USD and energy will also be important. With around eight basis points of tightening being priced into the September meeting and the 21 December meeting, it seems hawkish language will be readily absorbed by the USD bulls.

Keep an eye on US corporate earnings too with Blackrock, Bank of America and Intel (after market) reporting numbers.

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