Perhaps a slight fall in the non-manufacturing PMI reading to 56 (from 56.3) contributed to the weakness in China. While most markets in the region are struggling, Japan’s Nikkei is bucking the trend and leading the way with a modest gain. Out of Japan this morning we had monetary base data which showed a 52.5% expansion (up from 45.8%) and was well ahead of consensus of 47.2%. Average cash earnings were in-line with estimates, showing a 0.1% rise.
USD/JPY rallied to 103.17 overnight as the USD got a kick from the better-than-expected ISM manufacturing PMI data (57.3 versus 55.1). This was the fastest pace of US manufacturing growth since April 2011.
BoJ remains on target with inflation
A headline saying the BoJ is working on contingency plans for further economic stimulus set the tone for a weaker yen. Yesterday, BoJ Governor Kuroda also spoke and emphasised that the BoJ will continue to be aggressive until inflation is stable at 2%. Kuroda expects CPI to approach 2% in late FY14 or early FY15 and also said that there is a lag in the economic impact of currency changes.
In addition, we already know the government is looking to unveil a fiscal package in the first half of December to counter the planned sales tax hike. All these factors have the ability to see the yen weaken significantly in the near term. When USD/JPY hit 103.74 in May, the Nikkei traded as high as 15,978 and I would expect it to slowly edge towards 16,000 in the near term.
Europe to open weaker
European markets are pointing to a mildly weaker open, mirroring the pullback we saw late in US trade. Data is relatively light on the European front, with Spanish unemployment change being the only notable release on the calendar. Over in the UK, construction PMI (expected at 59.3) will be in focus and any surprises higher might see the pound look to mount a challenge on yesterday’s highs.
US economic data will also take a break and then ramp up on Wednesday when we receive the ADP non-farm employment change and trade balance readings along with new home sales. This will see tapering remain as the key theme for the week.
AUD steady after the RBA statement
It has been a big day for the AUD, with plenty of data being released. Retail sales showed steady growth, coming in at +0.5% (mildly ahead of +0.4% estimates) heading into the key festive trading period. However, a wider-than-expected current account deficit was a mild concern. The RBA decided to leave rates unchanged at 2.5% as expected. Rhetoric hasn’t changed much, with a very wait-and-see tone to the statement.
As far as the AUD is concerned, the RBA maintained that the currency is still uncomfortably high and a lower level is needed to achieve balanced growth. There hasn’t been much movement in the AUD on the data with AUD/USD trading just shy of 0.91.
Rio Tinto slashes capex guidance
The ASX 200 has had a poor day with losses in the big miners and banks driving the index lower. Gold miners have languished as the precious metal continues to fall with investor confidence rattled by taper talk. Rio Tinto’s massive capex downgrade was perhaps the biggest news of the day. The release of Rio’s capex guidance is a perfect illustration of why mining services companies are experiencing such a major downturn. Up until October this year, RIO withdrew $800 million in exploration and evaluation spending, $50 million more than forecast.
The company is also looking at cutting capex by almost 50% in two years; on current guidance the calendar year will see US$14 billion in capex falling to US$11 billion in CY14 and then US$8 billion in CY15 – that is a 20% reduction year-on-year. The company is also looking at stripping out copper assets that do not meet its criteria, which would mean four low-cost, long-life operations will remain, with two greenfields to be developed; this is expected to see $1.8 billion being delivered back to the company. Surpringly the mining services companies held their ground fairly well, potentially because they’ve already been significantly sold off this year. MND and UGL are both a touch higher.