Stan Shamu, Research Analyst, IG
FTSE 6580 +28
DAX 9224 +52
CAC 4150 +21
IBEX 9442 +41
MIB 18185 +61
It has been a fairly busy start to the week for Asia, with some data releases from Japan and China keeping traders busy. Of course Asia hadn’t had the chance to react to the developments from Friday when US jobs numbers smashed expectations. The 203,000 jobs created was much better than the 180,000 the market was looking for and leaves the three-month average on payrolls at 193,000. This certainly should be enough to see tapering start, and judging by the language from Fed members, December tapering is certainly on the cards.
There were some hawkish comments by Fed members with Plosser saying the sooner QE ended the better following the payrolls print, and Evans said he’s open to December tapering. While US dollar strength and risk weakness would have been the expected result, the market showed impeccable resilience as equities, bonds, gold and risk currencies all gained ground. It certainly seems like the market is now comfortable with the fact that tapering is not tightening. As a result, with the Fed funds rate unlikely to move, then the market actually feels there is little to be concerned about. This is probably why the US dollar has remained subdued.
China data helps sentiment
Some better-than-expected trade balance data out of China over the weekend helped set the pace for risk. The much wider-than-anticipated surplus really points towards a pick-up in global demand, which will ultimately shore up growth. The key regions for the improvement were the US, Europe and South Korea where shipments continue to rise. The China data theme continued with bang in-line CPI print at 3%. I actually feel this reading was perfect, as it struck the right balance from a market perspective. Essentially the data continues to show an acceleration from recent lows (in the 2% region), giving less reason to be concerned about downside inflation risks but was also not high enough to warrant concerns about tightening.
There is a raft of data out of China tomorrow, which is likely to have an impact on how risk trades. China’s industrial production, retail sales and fixed asset investment will be released. The Hang Seng and Shanghai Composite are modestly firmer, whilst the Nikkei has jumped nearly 2%. A weaker yen has certainly helped the Nikkei’s cause today. The only currency the USD continues to do well against is the yen, and USD/JPY managed to bounce off lows in the 101.80 region and is back trading near 103. The ASX 200 has been a significant lag to the rest of the region with the financials dragging the index lower.
Europe to track Asia higher
Looking ahead to European trade, the major bourses are pointing to a firmer open as they react to Friday’s developments in the US and China’s trade surplus data. The single currency has held its ground above 1.37 against the greenback today and is relatively sidelined ahead of some key data out of Germany. The country’s exports and industrial production figures will take centre stage with consensus expecting a mild fall in exports from September. However, industrial production is expected to show a modest 0.8% gain. Some strong numbers out of Germany could trigger further euro strength in the near term ahead of ECB President Mario Draghi’s speech in Rome tomorrow. Later today we have Fed members Lacker, Bullard and Fisher speaking. There is plenty of Fedspeak to look out for this week and this will help shape tapering expectations.
QBE sell-off hurts the ASX 200
The ASX 200 has come under significant pressure today. QBE Insurance has been the biggest story of the day with a 20% drop after re-emerging from a trading halt with an alarming trading update. The insurer now expects a US$250 million net low due to claims provisioning and intangibles/goodwill write-downs in North America. However, QBE expects FY13 net profit after tax to be around US$850 million, which is well below the analyst consensus of US$1.3 billion.
The insurer has missed analyst estimates since 2009 and this is its third earnings downgrade in a year. Confidence has certainly been rattled, and while it is tempting to take advantage of today’s share price drop, I am strongly against attempting to catch a falling knife. Any attempts to recover by QBE today continued to be greeted by sellers, and I would expect to see follow-through selling for QBE again tomorrow. It is always a smarter move to wait for significant price stability before accumulating stocks that have experienced a violent sell-off.