Ongoing concerns about risks in the high yield debt sector and doubts over earnings into 2016 appear to have derailed US stocks on Friday. The weakness in US stocks has not breathed confidence into low volume pre-Christmas trade in Asian markets – ASX volumes were 48% below the 30-day average. The other major concern for markets has been the cumulative 1.5% weakening of the CNY over 10 consecutive days. However, the mid-point fix strengthened the CNY by 0.1% today, breaking the trend and failing to see a record consecutive 11-day weakening.
There was a fascinating immediate 0.1% drop in the DXY dollar index in the wake of the CNY fix announcement. The CNY has now weakened roughly 6% from its early-August levels. The recent steady easing that has been seen throughout November and December was clearly driven by the Peoples’ Bank of China (PBoC)’s desire to weaken the currency ahead of the Fed rate hike. Historically, the USD has by-and-large always weakened in the wake of the first rate hike of a new easing cycle, yet instead the DXY rallied 1.2% in the wake of Wednesday’s Fed decision. What is interesting is whether this USD rally was actually driven by expectations of further weakening in the CNY and corresponding Chinese buying of USD. If today’s fix does mark the short-term end of the PBoC’s Fed-related CNY easing, we may also see a significant weakening in the USD in the short term, as per previous Fed rate hiking cycles. Investors will be watching tomorrow’s fix (12:15 AEDT) very closely. If we do see another strengthening of the fix, be prepared to see some noticeable selling of the USD.
US market concerns also appear to be weighing heavily on global stocks. Many have noted the steady decline in market breadth in the S&P 500 since its May highs where over 70% of stocks were trading above their 200-day moving average. But in the post-September rebound S&P 500 market breadth has struggled to hold above the 50% level where stocks were trading in July. With Apple (O:AAPL) now in a bear market, steam looks to be coming out of the FANG (Facebook (O:FB), Apple Inc (O:AAPL), Netflix (O:NFLX), Google (O:GOOGL)) moniker as well. There is a real risk that we could see this measure drop sustainably below the 40% mark in low-volume pre-Christmas trade.
Japan
Japanese markets appear to be spitting the dummy after the full implications of the Bank of Japan’s (BoJ) minor adjustment to their monetary easing program finally dawned on them. Despite a slight increase in ETF and J-REIT purchases, the focus was very much on the increase in the maturity of Japanese government bond purchases from 7-10 years to 7-12 years. The asset program was left unchanged at annual increase of 80 trillion yen. This was driven by concerns that if the maturity of purchases was not extended, the BoJ was going to run out of government paper to purchases, rather than any real desire by the BoJ to see a significant increase in its Quantitative and Qualitative Easing (QQE) program.
Rather than fuelling expectations that there will be further easing by the BoJ, Friday’s announcement has led to increased speculation that the BoJ is tapped out in its ability to ease further. Even these relatively minor changes to QQE still resulted in Koji Ishida and Takehiro Sato joining resident hawk, Takahide Kiuchi, in voting against them. In a not dissimilar situation to the European Central Bank (ECB), these dissents are showing the increasing difficulty that both these central banks will have in substantially easing their monetary policy further.
The key thing for Japanese equities going forward is whether economic data continues to improve, negating the need for further easing. And whether volatility in equity markets begins to go down providing less safe haven demand for yen and supporting Japanese exporters.
ASX
Volumes were understandably significantly down on the ASX today with many investors away on holidays. Nonetheless, those who were trading did seem to be expressing their disappointment at still being at work by selling down 62% of shares. It was really the weaker US dollar that helped support materials and energy that stopped the index from seeing a far worse sell off. 5100 is also developing as an increasingly key level with the index closing very close to this level over the past three sessions now.
Energy stocks performed the best on the index, gaining 1%, despite the spot oil price continuing to weaken during the Asian session. Some investors were clearly willing to take a bet that the spot price won’t fall substantially from here. Santos Ltd (AX:STO) and Worley Parsons Ltd (OTC:WYGPY) saw some of the best performances in the sector.
The 2.3% cumulative two-day gain seen in the Qingdao iron ore price appeared to be supporting the big miners in the materials sector as well. News that the Chinese government is finally dealing with some of its industrial overcapacity has clearly been seen as a positive for some industrial commodities. Rio Tinto Ltd (AX:RIO) and BHP Billiton Ltd (AX:BHP) both found buyers gaining over 1%.
The support seen in the ASX towards the close was being primarily driven by buying coming back into the banks with ANZ Banking Group (AX:ANZ) and Commonwealth Bank Of Australia. (AX:CBA) both doing the best out of the Big Four.