After weeks of underperforming, markets in China have finally come back to life, with the Shanghai Composite and the Hang Seng climbing around 2% each. Some have pinned today’s gains on a disappointing US existing home sales reading which resulted in subdued trading for the USD. Home sales were expected to rise 1.5%, but fell 1.2%. However, with Chinese Premier Li Keqiang on the wires saying the bottom line for growth is 7%, then it’s hard to not see risk assets respond to that.
There had been growing concerns that the new government in China wasn’t as concerned about growth as the market would have hoped. He also reiterated the lower limit for China’s growth is 7.5%. The PBOC also announced a raft of changes to lending and deposit rates yesterday, which has been an influence on how the financial sector is trading. Japan’s Nikkei has also pushed higher as investors continue to react to the Upper House election results and after Japan’s cabinet upgraded its economic view. The Nikkei is around 0.8% firmer, while the ASX 200 has put on 0.2%.
The price action in the FX space has been relatively subdued, with a mild USD pullback being the main theme. USD/JPY has been very interesting to watch over the past week, pre and post the Upper House election. With the situation in Japan seemingly improving, the yen has enjoyed some buying as investors grow increasingly optimistic about the Japanese economy.
USD/JPY pulled back into the 99.29 region as the USD lost some ground after a disappointing existing home sales reading. We feel any dips below ¥99 will be used as an opportunity to accumulate, given the Shinzo Abe put supporting the pair. Tomorrow we have Japan’s trade balance numbers, where an improvement from the previous month’s trade deficit is expected. On Friday we have CPI numbers which will deserve some attention, as the government continues to chase the 2% inflation target.
European markets are looking to open modestly firmer today, helped by the strength seen in Asia. EUR/USD actually managed to edge higher despite Portugal continuing to be an issue. Portuguese leaders failed to reach a national salvation pact, but yields still cooled and EUR/USD pushed to a high of 1.322. Later today we have consumer confidence data due out, but it’s not until tomorrow when the data really ramps up; several PMI readings are due, with French, German and European services and manufacturing PMIs being released.
Most of the volatility in the FX space this week is likely to come from US economic data as investors continue to reprice QE tapering. New home sales, durable goods orders and unemployment claims will be the key readings this week. On the US earnings front we have Apple and Peabody being the highlights. For Apple, margins and market share will be the main aspects to look out for given the pressure from Samsung and other Android phones. Discounting on iPhones is likely to pressure gross margins, but in turn will support sales. According to Bloomberg, Apple’s 3Q EPS estimate is $7.30 and revenue is around $35 billion. Some analysts feel guidance might miss estimates due to a late introduction of a refreshed iPhone line. Apple shares have significantly underperformed so far this year, dropping 19.9%, while the S&P is up 18.9%.
The ASX 200 is still struggling to extend its gains above 5000 and we are continuing to eye a close above 5012 as a key technical move in the near term. As we have mentioned recently, 5012 is the 61.8% retracement of the recent sell-off from 5246 to 4632. A closing break here would be very positive. Materials have had a pretty good run today, feeding off some of the strength we are seeing in China. Fortescue Metals had an impressive run up heading into its 4Q results. Unfortunately the figures weren’t as strong as what we saw from its peers RIO and BHP. FMG saw cash costs slightly below guidance, while production was relatively in-line with estimates. The mixed result saw FMG initially push higher only to drop back to around $3.62. We feel any moves lower towards $3.50 could be used as a buying opportunity in the short term, as there is support in that region.
Gold miners have continued to perform well with Newcrest putting on 5.3% to $12.59. Gold has had a monster run over the past few sessions, and continues to be underpinned by a weaker USD. With existing home sales disappointing, gold was just shy of 1340. The range between 1340 and 1350 presents near-term resistance for gold and we are likely to see some nervous trading in that zone. This might prompt some profit taking in the short term.