China returns and disappoints
The Mainland Chinese markets have been closed for national week from 1 October to 7 October, and the MSCI Asia Pacific index gained 6.4% during this time. The better-than-expected PMI numbers and the range of new policies announced, from easing property down payments to lowering the tax rate on new car purchases, helped boost H-shares 10.5%. This gave rise to high expectations that the Chinese markets would rally as they played catch up to the rest of the region. This does not look to be the case in the first half of the Mainland Chinese trading session, and it has disappointed markets in the region.
White is Shanghai Composite, yellow is FTSE China A50, green is Hang Seng China Enterprise Index, purple CSI 300
In overnight trade, we saw some of the trends supporting this week’s strong equity market gains start to reverse. After weakening since the disappointing non-farm payrolls numbers, the US dollar index gained 0.1% overnight. Oil prices also slipped as US oil inventories were worse than previously expected.
US dollar weakness and better-than-expected Chinese data were the two main drivers of the rally this week, both of which were net positive for commodities. Indeed, two of the hardest hit commodity currencies in Asia – the Indonesian rupiah and Malaysian ringgit– have both rallied 4.1% and 3.1% this week respectively. The Aussie dollar and Kiwi dollar have similarly seen strong gains this week, rising 1.6% and 1.4% respectively.
And yet, those trends seem to have run their course in Asian trade today. Markets seemed to have been holding their breath until they saw how the Chinese markets opened. But when they started heading down after the open, that was the signal to start selling off. Particularly, all the main Asian commodity related currencies (AUD, NZD, IDR, MYR) began to noticeably weaken.
The Aussie dollar rallied above $0.72, its highest level since its big rally around the September Fed meeting. But it was just trading sideways ahead of the Chinese open, and that seemed to be the impetus for it to start heading down again. Based on its recent trading range, the Aussie now looks likely to head back to $0.70.
White AUD/USD, yellow NZD/USD, green USD/IDR, purple USD/MYR
ASX
The ASX looked buoyant ahead of the open on the back of good leads out of the US and Europe. The index managed to rally up to 5250 early in the session, its highest level since 31 September. While it did dip below that, it managed to keep above 5200 despite the poor Chinese open, which noticeably affected all other Asian equity markets.
Despite the 2% drop in WTI, the energy sector continued its recent run of strong performances. The energy sector rose 1.4%, as many investors clearly believe we may have reached the turning point in the energy market and now is the time to start picking up energy stocks at cheap valuations. Origin (ASX:ORG) and Santos (ASX:STO) are two of the best energy companies to withstand the oil downturn and both are at historically cheap valuations. Given that, it’s no surprise that they have both seen heavy buying today, with Santos rising 8.5% and Origin rising 3.8%. However, with Iranian oil still yet to hit the market in early 2016, it does seem like this recent bout of optimism is somewhat jumping the gun.
The boost to commodities from an improved China outlook and US dollar weakness continued to help the materials sector on the ASX today as it outperformed all the other sectors. The materials sector was up 1.7%, but BHP’s recent demerger South 32 continued to rally, rising 7% today. South 32 also holds a lot of appeal for counter-cyclical investors. It has low gearing and when it touched $1.30 last Friday, it was cheap enough for longer-term investors to start piling in. BHP Billiton Ltd (NYSE:BHP) rose 3.1% and Rio Tinto PLC (NYSE:RIO) rose 1.8%, but investors are very nervous about the iron ore price outlook, with Gina Rinehart’s Roy Hill mine set to start shipping cargo on 21 October providing massive new supply to the market.
Ahead of the European open, we are calling the FTSE 6345 +9, DAX 9980 +10, CAC 4678 +11, IBEX 10193 +23, MIB 22092 +85