The way I see the state of play is that this is a global demand issue. Although this has been the case for some time, it is now fully in the market’s crosshairs. Korea’s export numbers (-14.7%) epitomised this view and China’s exports numbers (out next week) will do too.
I feel it is wrong to put the downturn in markets on an increased concern that China’s economy is slowing down, we know that they are dictating that. It is more that the policy initiatives seem engineered on a daily basis and the plans seem to lack a cohesive, well thought-out process. On Monday, there was great confusion about whether the China Stability Fund would continue being put to use to buy stocks to stabilise markets, or whether the authorities would simply cut the negativity around what was being said about markets at the source. Yesterday we heard the focus was moving away from further currency devaluation and focusing on how to mitigate capital outflows. This was to take place by advising banks trading CNY forward contracts to put 20% of recent sales into a domestic bank account that cannot be used for a year.
By way of example, there have been estimates that China may have used a staggering $200 billion of its FX reserves to offset the capital outflows in the last few weeks. This in itself warrants further monetary easing to offset the tightening of financial conditions. To turn this ship around, China has to announce something sizeable soon. In the market’s eyes, they have to get ahead of the curve.
We can then focus on the plethora of very average manufacturing numbers around the world yesterday and overnight (for us here in the Antipodeans). Taiwan (with the index at 46.1), Japan, China, Europe, UK and US have all announced manufacturing data generally lower than forecast. The US ISM manufacturing (at 51.1 vs 52.5) was the lowest read since May 2013 and the sub-indices were hardly inspiring. Let’s see if tonight’s US ADP private payrolls (200,000 jobs expected) can see the labour market offset some of the negativity around manufacturing.
We even saw Canadian quarterly growth (annualised) contract 0.5% and therefore fall back into a technical recession. This is clearly not a good lead in for today’s Australia’s Q2 GDP, which after yesterday’s Q2 balance of payments has to carry downside risks to the 0.4% quarter-on-quarter consensus. There are a number of inputs that should aid growth, but a growth number of 0.1% to 0.2% would not be a surprise and there will be traders who even expect a negative print. Watch the calls for an October rate cut from the Reserve Bank of Australia ramp up on this development.
All of these factors have culminated in a real risk off tone and another spike higher in implied volatility in commodity, bond and equity markets. US equities have been savaged, with 99.8% of all S&P 500 companies falling on the day (not including the dual listed companies). US treasuries have caught a bid, as has gold, while in the FX market the JPY is the place to be. Specifically, short AUD/JPY is a trade I have been happy to point out as a compelling hedge against the macro concerns and this trade remains a core view. AUD/USD is eyeing a move below the 70 handle despite looking grossly oversold. Rallies are to be sold in my opinion.
The ASX 200 is facing an ugly open with the index likely to test 5015, a fall of 1.6%. Last week’s low of 4928 is clearly the bear’s initial target, but with sentiment shot to pieces and markets trending lower, the bias is clearly skewed to short positions. There will be opportunities to be long, but this is a trader’s market and with such little clarity around global growth and whether there will be an impact on earnings, being nimble is an absolute must.
BHP’s American Depository Receipts (ADR) is indicative of an open around $24.28 (-1.5%). After rallying 15.5% off last week’s low of $22.41, BHP will be eyeing a move into the 50% retracement of this move. Naturally, when you see WTI oil down 6% from yesterday’s equity cash market close, you know energy names will struggle. Copper has fallen 1.6% in this same time – again, this needs to be priced into stocks.
Japan was smashed 3.8% yesterday and looks destined for lower levels today; this won’t be helped by the stronger JPY. China faces its last day of trade before closing its markets until the end of the week for the Victory Day commemorations, so price action in the mainland markets will be very interesting. One suspects that the Chinese authorities will want to go into the market holiday on a positive note.
This is a time of capital preservation if one’s bias is to be long. However, with markets seeing such aggressive moves, you generally get large dislocations in markets, and this provides opportunity.