China data caught traders off guard

Asia got off to a very strong start, but has since pulled back following China’s trade balance numbers.

The headline trade balance figure came in at $27.12 billion, falling short of expectations of around $27.8 billion. It was the sharp drop in exports and imports that really caught investors off guard and triggered further China concerns. Exports were down 3.1% (versus +3.7% expected) while imports were 0.7% lower (versus +6% expected). China’s data put a dampener on what had been a fairly positive start after a good lead from US trade.

So far, most markets in the region are still enjoying some gains, with the Hang Seng up 0.5% and the Shanghai Composite rising 0.3%. Meanwhile, the Nikkei is relatively flat and the ASX 200 is up by 0.5%. Risk assets were mostly firmer as investors remained optimistic about US earnings and European leaders discussed ways to bolster the eurozone economy. ECB member Joerg Asmussen was on the wires saying nothing should be ruled out when asked about the possibility of a second LTRO. He also suggested that the ECB has a wide range of non-standard instruments which can be deployed if and when the need arises. Asmussen also said forward guidance communicated by the ECB goes beyond 12 months. The IMF’s move to downgrade growth forecasts due to a slower US recovery didn’t get much attention.

Looking ahead to the European open, our calls are quite mixed at the moment, with the MIB likely to underperform on the back of the S&P downgrade. Italy was slapped with a downgrade by S&P to BBB (from BBB+). All this negative tape weighed on the single currency which dropped to its lowest level since April against the greenback. EUR/USD slipped from around $1.285 all the way down to $1.275. The single currency has underperformed the risk space as it lost the $1.28 handle. The pair had been threatening to move lower for a while now and we feel support at around 1.275 has to hold to prevent a steeper slide in the near term. A close below that level could be a trigger for a further sell-off. In Europe we have French and Italian industrial production along with German CPI. The fall in the euro was also quite positive for the US dollar index, which pushed to its highest level since May 2010. The greenback will be in focus later today with the Fed set to hit the wires. The FOMC meeting minutes will be released at 4:00am AEST and it is important to note that it won’t take into account Friday’s very strong non-farm payrolls reading. We doubt there will be too many surprises from the meeting as Fed chief Ben Bernanke was very clear in his message following the meeting. We’ve also had a raft of Fed members hitting the wires since the meeting who have been re-emphasising Ben Bernanke’s comments. What might make a difference is if Mr Bernanke pours water on market expectations of September tapering.

He is set to speak at a conference titled ‘A Century of US Central Banking’ a couple of hours after the minutes are released. Regardless of tapering looking inevitable, it certainly seems like investors are growing increasingly comfortable with the fact that it will occur due to the sharp improvement in the US economy. Apart from the Fed, we also have a US 10-year bond auction where it’ll be looking to raise around $21 billion.

The ASX 200 has experienced a sharp reversal from a high of 4951 printed earlier to be trading back at the 4900 level. Should the current price action continue, this could result in a bearish technical signal termed a pin-bar reversal. This generally indicates a shift in the short-term trend.

However, the market is still up 0.4% and these signals only count at the close of trade. The materials have been mainly responsible for the pullback as the reality of a China slowdown bites some of these miners. BHP is 0.7% firmer along with RIO, while the likes of OZ Minerals and PanAust are weaker. Most of the big banks are holding around half a per cent firmer, with Macquarie the standout climbing 2.4%. A disappointing Westpac consumer sentiment reading is hurting the retailers with Myer and David Jones down over 2% each.

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