There are certainly some interesting thematics shaping up as well, which suggests volatility could resurface.
Firstly on a positive note, the RBNZ has signalled a tightening bias and thus the ‘Kiwi’ has once again emerged as the currency of choice, alongside the USD for macro and leveraged accounts. The bank kept its forward guidance unchanged, saying ‘we expect to keep the OCR (overnight cash rate) unchanged through the end of the year’, however this has been offset with ‘although the removal of monetary stimulus will likely be needed in the future’.
Also, with regards to the currency, which has been a thorn in its side for some time, it now sees it as ‘high’ as opposed to ‘overvalued’ – a clear downgrade of the level of its concern. There was also no threat of using ‘macro-prudential’ tools either. It has to be said there were some elements of concern, but the market now sees this as the most hawkish central bank in the G10, and we see the bank lifting the OCR in Q1 2014. Looking out, the markets now expect a further 1.25% of hikes by mid-2015.
Fundamentally, New Zealand has the highest ‘real’ yields in the bond market in G10, when adjusted for inflation, while it is clearly the most likely to raise rates the earliest. Short AUD/NZD and GBP/NZD look good, with the latter premised on playing the lowest ‘real’ rates against the highest, while the AUD/NZD looks good from both a fundamental and technical basis for a move to 1.10 over time, although our immediate target is 1.1275. We also believe the RBA will cut in August, although this is largely priced in.
In Europe, equities are in a firm uptrend, printing higher highs and are likely to see a firmer open today. Not only did we see good improvement in the PMI suite, but there is improvement seen across the board. Today’s German IFO series is expected to show increased confidence from German businesses, while Spain is also looking a lot more promising, although today’s unemployment rate is expected to tick up modestly to a sizeable 27.2%.
In recent times we have seen an expansionary 50 reading in its PMI print (well above the 48.5 estimate); we are seeing job creation, bank funding is coming down, the excess in the housing market is falling and the sizeable deficit has reversed into a surplus. All good news for one of Europe’s troubled economies, although the focus surely has to be on lowering its budget deficit to really push yields on its sovereign debt down below 4%, not to mention pulling the sovereign away from being a clear downgrade candidate. All together though, the ECB’s outlook for a rosier second half looks sound at this stage. On this ground we like EUR/GBP and EUR/AUD on dips.
As suggested, Asian markets have been modestly offered today, although there has been limited volatility. The ASX threatened to break the 5000 level, but found buyers at 5007, moving higher in mid-morning. More negative production numbers have plagued the market, while Macquarie (down 3%) has detailed a pretty upbeat Q1 2014 operating performance, however the outlook guidance has probably disappointed given the huge benefit the AUD depreciation should have provided, which was down around 5% in Q1 and guidance ultimately has remained unchanged. Gold stocks have found themselves on top of the worst performers list, as gold prices gravitate back to the $1300 level.
In China the market appears pretty lifeless, although it seems supported after yesterday’s announcement to allow VAT breaks for small business (those with monthly sales of less than RMB20,000) and reduced fees for exporters and initiatives to make life a little easier in this space.
There were also initiatives around railway infrastructure and encouraging investment in bonds back by railways. It seems to us the authorities are trying to channel funds from one part of the economy to others to selectively support parts of the economy; however whether this leads to the levels of support to keep growth above the floor of 7% and onto target of 7.5% this year is yet to be seen.
It’s also worth keeping an eye on the interbank market in China again, with one-month Shibor creeping back above 5% again for the first time since July 4. We are not overly concerned about this move at this stage, as the repo and interest-rate swap markets are still at low levels, and there is around RMB85 billion in central bank bill redemptions going back to the banks next week; this will alleviate some concern around near-term liquidity issues.
As mentioned, Spanish unemployment and German IFO are due, however UK Q2 GDP (advanced) is also on the docket and could extend yesterday’s falls in cable if the print comes out lower than 1.4%. The technicals (we have used the four hour chart) are looking a touch dicey, with the pair having firmly rejected the 61.8% retracement of the 1.5752 to 1.4813 move and now breaking below the rising wedge. We sit in the camp that the August inflation report will be the forum for further clarity on the MPC’s forward guidance, and this in theory should reverse the markets’ more hawkish view after the BOE firmly rejected near-term QE.
In the US we get initial claims (expected to rise to 340,000) and durable goods (anticipated to gain 1.4% in June), so it will be interesting to see if the rise in US bond yields can continue injecting new life to the USD. On the earnings docket we get numbers from Dow Chemicals, DR Horton, 3M and Newmont, while in Europe we get numbers from Unilever, Orange, BT Group, Telefonica and Repsol.