The most notable thing is not what has happened, but what has not happened. The market has not responded to the soft Chinese data over the weekend. Chinese equities began softer but recovered fully and the Shanghai Composite closed on its highs. The MSCI Asia Pacific Index is snapping a two-day losing streak with a 0.5% gain.
The Australian dollar is often perceived to be influenced by developments in China. China's disappointing industrial output figures (6.0% from 6.8% in March and forecasts for 6.5%), but the Aussie's 0.25% by early European activity makes it the best performing major currency today.
Over the weekend Moody's cut Saudi Arabia's credit rating from Aa3 to A1. Bahrain's rating was also cut, while Bahrain, UAE, Kuwait and Qatar were given negative outlooks. The drop in the price of oil seemed to be the decisive factor. The market appears to have shrugged it off, perhaps on grounds that it is not really news, and, moreover, S&P thinks Saudi Arabia is a A- credit (two notches lower). Although the Saudi stock market slipped Saturday, it recovered fully today and settled at its best level in two weeks.
The European session will most likely be quiet with Swiss, German and French markets closed for Whit Monday. The euro is in a third of cent range above $1.1300. The first level of resistance is near $1.1360. The euro briefly dipped below $1.1285 before the weekend. The 50-day moving average is just above $1.1300, and the five-day average is moving below the 20-day average. A break of $1.1280 signals a test on more important support near $1.1200.
Japan reported softer than expected producer prices and the preliminary look at April machine tools, which were dismal. The main report this week is Q1 GDP, due out early Wednesday in Tokyo. Although the median forecast on Bloomberg calls for a minor gain (0.1%), we suspect the risk is on the downside. If so, it would be the second consecutive quarterly contraction (-0,3% in Q4 15).
While some might talk about recession, the fact is that there is no agreed upon definition of recession. Two consecutive quarterly contractions is not a technical definition of recession. It is a rule of thumb, and one, by the way, to which the US does not subscribe. The BOJ estimates trend growth at 0.2%. Normal variance means negative prints are likely. This is not to say the Japanese economy is strong. It is not. The point is that it will not change policy or investment decisions, as it does not really contain new information. The Abe government reportedly is working on a new fiscal package, and the BOJ revised down its growth forecasts at the end of last month.
The dollar continues to trade in roughly a JPY108-JPY109.50 trading range. It is the fifth session in the narrow range. At around 11.7%, the three-month implied volatility is in the middle of this month's range. The price action and the proximity of the weekend G7 meeting suggests that intervention, which we have argued is a low risk, is even lower now. However, many players do not seem prepared to challenge officials.