Asia switches focus to China as event risk ramps up

The main event of the week has come and gone now and it seems to have left market participants with a bit more confusion.

While there were no major surprises from the Fed, analysts feel the statement was slightly more dovish, particularly on the inflation front and slight change in growth language. The Fed is concerned about disinflation (with inflation persistently below its 2% objective) and changed its growth language from moderate to modest.

The USD got off to a strong start in US trade as the ADP non-farm employment change (200,000) smashed consensus along with a strong advance GDP print. The USD lost some ground later in the session as Fed comments hit the wires. USD/JPY enjoyed an initial spike higher to 98.60 before dropping back into 97.80; where it is currently trading. With the yen strengthening, we are currently calling the Nikkei down another 0.3% at the open.

Price action in the market is looking much more negative of late and it’s clear that the market is starting to lose faith that ‘Abenomics’ is working. One of the most important ingredients to weaken the JPY longer term is to encourage Japanese investors to export long-term capital i.e. buying foreign assets. This is largely dictated by domestic inflation, bond yields and off-shore opportunities. Given that, todays (09:50 AEST) weekly fund flow data is important, as it shows what Japanese corporates are doing with regards to foreign bond and equity buying. As things stand, it’s clear the market believes the task at hand for the BoJ is a very tough one and could be losing traction, especially as the rest of Asia is slowing down.

Ahead of the open we are calling the ASX 200 relatively flat at 5052. The market has been up for the last eight consecutive days, which rarely happens. The last time the market rallied eight straight days was in January and then subsequently went onto rally another 4.5% over the next month. In March 2010 the index was up eight straight days (by 3.9%) and then put on another 2.6% over coming months. On this occasion however, it looks as though the market may be running out of steam.

There will be quite a bit of data to look out for heading into the end of the trading week, starting today with China’s manufacturing PMI due out. A number south of 50 is expected, with consensus sitting at 49.8. Should we see a disappointing reading, the AUD and the ASX 200 will likely come under pressure. AUD/USD is now trading below 0.90 and will likely be sold on a recovery to 0.90 – which is now resistance. We also get HSBC’s final manufacturing PMI expected at 47.7.

The resource names look like they are in for a strong start despite weaker gold and iron ore prices. BHP’s ADR is pointing to a 0.8% rise to 34.90. No doubt China data will cause some volatility for the resource names today. Banks will be in focus after strong gains which saw Commonwealth Bank trade at a record high yesterday. Suncorp will be in focus following a trading update which was released after trading hours yesterday. SUN expects FY profit in the range $480 million to $500 million, which is below a Bloomberg analyst average of $586 million. However SUN also announced it plans a special dividend of 20 cents per share. SUN was just touching $13 and this level will be crucial in today’s trade.

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