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The Asian session has been dominated by US politics, as traders waited to react to any headlines as the ‘shutdown’ deadline approached. However, as it became clearer that a conclusion would not be reached by the deadline, markets started tapering off. As it stands now, the shutdown is official and we have to just wait until US leaders can find middle ground without a defined timeframe. Of course it would be in their best interests to sort this out sooner rather than later.
Despite the negative tape out of Washington, Asian equities actually held up reasonably well. While China is closed for a holiday, Japan optimism is riding high heading into Prime Minister Shinzo Abe’s speech on measures to counter the sales tax hike. The Nikkei is streaming ahead with a 1.2% rise and leading Asia.
There was a raft of data out of Japan this morning, which was mostly mixed. Household spending (-1.6% versus +0.2% exp) and unemployment rate (4.1% versus an anticipated 3.8%) missed estimates, while the Tankan manufacturing and non-manufacturing index readings impressed. The 12 manufacturing reading (versus 7 expected) for the quarter was the best results since the first quarter of 2008, and marks a strong improvement in manufacturing conditions and sentiment. Mr Abe will be on the wires at 6:00pm AEST where he’s expected to announce a stimulus package. We feel optimistic that Mr Abe will come up with a substantial package to counter the sales tax hike, which is what’s driving Japanese equities higher today along with the solid Tankan manufacturing index figure. Essentially positive data out of Japan increases risk appetite, weakens the yen and in turn gives a positive kicker to the Nikkei.
The main thing for traders now is how this tax increase will be offset, with local media recently speculating the Japanese government will announce a ¥5 trillion stimulus (1% of GDP) of alternative tax breaks. There has been talk that the ruling parties in Japan will scrap the surcharge on corporate tax, which was set up three years ago to fund efforts for the reconstruction process after the earthquake. The surcharge added to corporate tax was set at 2.55% (to provide a full corporate tax rate of 25.5%), so removing this should aid the economy, although not offset the full amount felt by the rise in the sales tax. We feel that the BoJ will continue to ramp up the level of easing in the coming months to help offset any concerns around the sales tax and this should continue to provide downside risks to the JPY.
Elsewhere in the region, China’s manufacturing PMI reading disappointed, with a 51.1 result missing estimates of around 51.6. However, with Chinese markets closed and with US political risk, this data didn’t get too much attention. The ASX 200, which is generally leveraged to China, has been relatively flat today as caution prevails.
Ahead of European trade, most of the major bourses are facing a rebound at the open. However, since the US government shutdown kicked in at 2:00pm AEST, we have seen some of these calls retreat with gains partly or fully erased. After a poor start to the week, the euro has regained ground against the yen and greenback ahead of a raft of PMI releases. There were some developments on the Italy political front, with PM Enrico Letta set to hold a confidence vote for this Wednesday that may toss the country back into election mode again. President Giorgio Napolitano approved the move to hold a confidence vote. We are eyeing Italian yields on the 10-year very closely as they remain relatively calm on hopes Mr Letta’s government can survive the confidence vote. This should keep the euro steady until Wednesday, but should the vote not go as anticipated, the euro sell-off will likely resume.
Apart from the political crisis in the US, manufacturing data will continue to hit the wires today, with Spanish and Italian manufacturing PMI due out. We also have the European final manufacturing PMI and UK manufacturing PMI reading due. The European unemployment rate is expected to remain flat at 12.1%. The most impressive trend in the major FX pairs at the moment is in GBP/USD, which has charged to a high of 1.625 today and this puts it within striking distance of its highest level of the year at 1.6383. A beat in the UK PMI later could be a catalyst for further gains in cable in the near term.
The local market has been oscillating around break-even all day, with investors unsure of what direction to take with a pending US government shutdown and looming RBA decision. As expected, the RBA kept rates unchanged at 2.5% and highlighted that prior rate cuts are supporting spending and asset values. The brief 350-word statement was fairly neutral as the RBA deemed it too early to judge consumer and business sentiment. This is a clear wait and see approach by the RBA and goes a long way towards removing expectations for another cut anytime soon. House price data released earlier today also showed a strong improvement in capital city house prices across Australia. In fact AUD/USD actually rallied on the statement and looks set to test recent highs in the 0.94 region in the short term.