The euphoria seen on many trading floors yesterday has petered out, but the overriding feeling of ‘not as bad as feared’ is in play.
The big theme in Asia today has been the 4.9% move in oil futures with traders feeling vulnerable at being under exposed with a strong focus on the meeting in Doha between Saudi and Russia. The noise around potential production cuts is hugely elevated; if we don’t see a cohesive response in a month or so, the speculators will no doubt start to ramp up short positions again. Still, the moves in oil, base metals and bulks seem to putting a bid in S&P futures and if the US market was to open now, we’d expect it to open 1.4% higher. Our European equity calls are also modestly higher and a certain calm has crept over the financial landscape – a fate the investment community would certainly welcome. This could be a period to catch one’s breath before the next big increase in volatility.
Asian markets had a fairly unconvincing open, diverging somewhat from oil and S&P futures, but a flat CNY ‘fix’ and sensational China credit data has helped set the stage for a move higher in the Nikkei. Stability in the CNY is the order of the day and we should expect this to continue for this week. Chinese credit numbers went one better with some absolutely crazy financing numbers, aggregate finance ballooned to CNY3.42 trillion, although this was largely a result of seasonal effects. M2 money supply has pushed to a commendable 14% and commercial banks are lending credit at a rate of knots. A 2.9% move in Chinese mainland equity markets has been driven by banks and industrials, although one can again expect a barrage of negative views that credit won’t always solve the key issues and that deep structural reform is the only lasting solution.
Aussie earnings continue to roll in thick and fast and the headline numbers look pretty solid. Of the 32% of corporates reported, 57% have beaten EPS, while an impressive 67% have beaten on sales. CSL has been the client favourite today and there seems something in the result for both the bulls and bears; this comes across strongly in the price action, with the healthcare giant trading in a $6.50 range! On the current 23x multiple, one can expect it to continue to trade in the multi-month range of $100 to $108.
Copper and iron ore futures have also moved higher in Asia and this has continued to support the AUD, with further good flows into AUD/JPY. Short EUR/AUD and GBP/AUD is also looking quite compelling and today’s Reserve Bank minutes will only confirm the idea that the AUD is quite attractive to offshore centres like Japan. GBP/AUD looks set to test the A$2.00 level again. Unlike in late January, I feel a break is more likely than not on a re-test. UK January CPI (expected to tick up to 0.3% from 0.2%) could be a catalyst here, while in Europe, we get the ZEW survey of analysts’ expectations. Volatility remains key for the AUD’s appeal and if we can continue to see the VIX and FX implied volatility fall then the AUD and NZD should outperform. Saying that the NZD has been smashed today after New Zealand Q1 22 bp inflation expectations fell 22 basis points to 1.64%.
Ahead of the open we are calling the FTSE 5850 +26, DAX 9268 +62, CAC 4138 +23