Disappointing Data Weigh On Equities, But Leaves Dollar Uninspired

A string of soft data in Asia and Europe has helped underpin the dollar, but choppy range trading persists. While Asian shares still rallied, helped by the biggest rally in Taiwan in almost two-years on the back of reports that China is studying a link between Taipei and Shanghai, while European shares are trading heavy. US shares are trading off in Europe as well.

There are three highlights from Asia. First, the HSBC (LONDON:HSBA) flash manufacturing PMI fell to a 12-month low of 49.2 in April from 49.6. The Bloomberg consensus call for an unchanged reported. New orders fell to 49.2 from 49.8. The disappointment was not sufficient to derail the rally in Chinese shares (Shanghai gained almost 0.4%, and Shenzhen was up 1%). Partly, many investors anticipate additional stimulative measures that will be bullish for stocks.

Second, Japan's manufacturing PMI fell below the 50 boom/bust level for the first time since last May. The 49.7 reading, down from 50.3 in March is the third consecutive decline. The recent rise US bond yields (longest streak since February may end today) and talk of Japanese pension funds buying dollars helped lift the greenback above the JPY120 level for the first time since April 14. The JPY120.20-40 area offers initial resistance.

Third, a softer Australian business confidence survey and dovish comments by an RBNZ official saw the antipodeans move lower. RBNZ Assistant Governor McDermott not only ruled out interest rate increases but also indicated that if price pressures fall further, it would consider cutting rates. The New Zealand dollar had rallied from $0.7200 near the ides of March to test $0.7740 area this week. It finished poorly in North America yesterday, with a potential shooting star pattern, and follow through selling today, has it testing the $0.7550 area. A convincing break of $0.7540 could spur another cent decline. Recall that the net speculative position in the CME futures market has been net long the Kiwi since the start of the month.

Turning to Europe, the disappointing data theme continued. The euro area flash PMI was weaker than expected, and UK retail sales unexpectedly fell in March. Owing to weaker German and French reports the eurozone flash manufacturing slipped to 51.9 from 52.2. The consensus had expected a small gain. It is the first decline since last November. The services PMI eased to 53.7 from 54.2.

While the data are disappointing, they are not very significant in themselves. The composite reading stands at 53.5 from 54.0. This is above the Q1 average. Growth forecasts of around 0.4% for Q2 are unlikely to change.

UK data was more disappointing. March retail sales fell 0.5%. The Bloomberg consensus expected a 0.4% increase. The main culprit was a decline in fuel sales. The 6.2% decline is the largest in three years. Excluding petrol, retail sales rose 0.2%. The market had expected a 0.5% increase. Department store sales were weaker though clothing and household goods sales were higher.

Sterling remains elevated, straddling the $1.50 area, after bouncing off support ahead of $1.4950. There appears to be some squaring of short positions as the month-end draws near ahead of the May 7 election. Technically, sales in the $1.5060-80 area look attractive if one expects increased volatility as the election draws near.

The euro fell in response to the weaker data, but found good bids ahead of $1.0660. There is a slight glimmer of hope in the Greek drama, and Greek bonds have are extending yesterday’s rally. The talk is that the official creditors are shifting their tactics toward concentrating on a few actionable reforms rather than broad demands. They are also open the restructuring Greece’s debt within the monetary union, which is essentially what they previously (circa 2012) suggested after Greece reached a primary budget surplus.

Lastly, we note that the Swiss franc is paring some of yesterday's losses that had been spurred by the SNB's decision to reduce the exemptions to the negative deposit rate. It has nearly recoup nearly half of its losses against the euro (~CHF1.0330) but a little less against the dollar. The 50% retracement for the greenback is seen near CHF0.9610.