Chris Weston, Research Analyst, IG
Understanding sentiment towards markets can be a huge asset when trading with a short-term focus, so it’s been interesting to see the turnaround in sentiment towards China of late.
The mainland equity markets are looking more bullish, although they are being held back by local players recycling cash out of other equity holdings to take part in the IPO cycle. The A50 index (the top 50 Chinese companies with the futures traded on the Singapore exchange) has printed a higher high and looks set to close above its 200-day moving average for the first time since April 10. Another way traders globally have been expressing a view on China is through the IShares MSCI China ETF, which has rallied 17.5% since March and is 1.6% from the 2012 high.
We’ve seen targeted easing of reserve ratio requirements for certain banks, infrastructure stimulus, initiatives to spur life back into the property market (notably in areas of oversupply) and a RMB 1 trillion supplementary loan to the China Development Bank from the PBOC. The latter is seen by traders as a source of funding to support social housing and speed up the shanty town reconstruction, which of course is of huge importance for Premier Li.
On the economic front we’ve seen a trend of improving data through May and into June. Not just in the government surveys, but as highlighted in today’s HSBC manufacturing PMI print, the private surveys are also improving. It’s a concern that many of these stimulus measures have come as a result of deterioration in the property market and the spike in credit is contrary to the deleveraging cycle that was supposed to be materialising, but still markets are moving positively.
AUD/USD eyeing a break of the July 1 high
What’s been interesting today is there have been reasonable strong moves in gold, copper and rebar futures in the lead up to the strong China data. However, after the news we’ve actually seen a slight reversal, with copper selling off a touch. The opposite is true though of the AUD, which continues to find bids in the market. AUD/USD hit a high of 0.9472 after the China data, but as the pair approached the top Bollinger Band (or two standard deviations from the 20-day moving average) traders have been happy to fade the pair. Key resistance comes in at 0.9505 (July 1 high); given the macro backdrop and trend in risk appetite, a break of the July 1 high could be on the cards in the short term.
I would be shying away from shorts until we see a break of the June 18 low of 0.9322.
The other big mover today has been the NZD which has provided a lesson for traders in market pricing. NZD/USD has sold off aggressively with the bank detailing it is in a period of re-assessing rates and the bears will now be eyeing a move to 0.8568 (the 61.8% retracement of the June to July rally).
AUD/NZD has been my preferred trade of late and the pair has moved two pips shy of the 1.10 level, smashing through the 200-day moving average today. We’ve also seen the pair move into the ichimoku cloud (on the weekly chart) for the first time since August 2013 and thus a weekly close above 1.0962 would suggest an extended move higher over time.
Moves in Japan have been fairly contained today, although earnings season is really ramping up here as well. What’s interesting is of the 11% of companies that have reported in Japan (I’ve looked at the broader TOPIX index), we’ve seen 1% aggregate EPS growth, but a sizeable 9% sales growth. This seems very much the opposite of many Western markets, where the bottom-line has been buoyed by cost-cutting initiatives. Here it seems many companies are actually investing to grow the business through capital expenditure.
USD/JPY looks very interesting too; while the pair is doing very little right now there seems to be a growing view that it could be a good time to look at bullish strategies. Options have been cited as a good way to look at taking advantage of a potential ramp up in volatility into the September FOMC meeting, although I personally would be holding off from buying volatility now given the time value involved here. However, I would personally be looking at easing into long USD/JPY positions, taking a longer-term view.
Europe looks set to open modestly weaker, with European PMI data likely to be a key focus. EUR/USD continues to hold the February low of 1.3477, although the pair is a touch oversold and speculative funds have amassed a fairly large short futures position (-62,000 contracts last week, from +54,000 at the beginning of the year). Technically the double-top through March and May now targets 1.3380. On a slight sidenote, the ECB would have seen the 2% decline today in Japanese exports and concluded that a rapid devaluation of the domestic currency doesn’t always benefit exports.
(Daily chart of EUR/USD)
It also promises to be a big night of earnings with Unilever, Hammerson, BASF, Deutsche Boerse, Pulte Homes, Caterpillar and Visa on the docket. Visa has an 8.4% weight on the Dow, so Dow futures will be in play given it reports in the post market.
Ahead of the European open we are calling the FTSE at 6787 -11, DAX 9745 -8, CAC 4368 -8, IBEX 10655 -4 and MIB 20801 -30