The turnaround mid-session in the S&P 500 overnight seems to have coincided with some stabilisation in markets globally. Asian markets tentatively pushed into positive territory today, but it is hard to escape the feeling that this is just pause on the way down. The Shanghai Composite opened down, but after a few hours of trade had joined other markets in the green (red for them). Although late in the session sentiment did seem to be cooling as the Nikkei 225 briefly dipped into negative territory and the yen began to push back toward the 116 handle.
- The temporary bounce in sentiment we are seeing globally has taken the pressure off a lot of asset classes. No more so than the Hong Kong dollar, which was straining at its upper bounds around 7.83, but has returned to trade back around 7.81. Unfortunately, this bout of selling in equities is unlikely to have ended today nor has the depreciation pressure on the CNY, which has been spilling over into HKD speculation.
- Weak data and also the seasonal requirements ahead of the Chinese New Year holiday, which begins on 8 February, have prompted the largest injection of liquidity through open market operations by the PBOC in three years. This resulted in a net injection of CNY 315 billion this week, but, coupled with the PBOC’s other lending tools, roughly CNY 1 trillion was added this week.
- Unfortunately, the feedback loop we are seeing in China of capital outflows -> declines in FX reserves -> tightening of the monetary system -> growing deflationary pressures -> easing of monetary conditions -> CNY depreciation -> more capital outflows is unlikely to end anytime soon. Given such a scenario, one can see why a one-off 10-15% devaluation of the CNY could be compelling. Certainly, the quelling of short-selling speculation in the offshore CNY has removed some short term pressure, but further depreciation of the CNY is inevitable. Particularly, when one looks at the amount of FX Reserves that are being lost. An IMF research paper in 2014 looking at FX reserve adequacy, used the ratio of FX reserves to M2 money supply and concluded that “the upper end of a prudent range for reserve holdings is typically set at 20 percent”. As one can see, China crossed this level of “prudence” in 2014 and its ratio now sits at 15.2%.
The People’s Bank of China has also been keen to emphasise that management of the CNY would now be in reference to a basket of currencies rather than exclusively to the US dollar. While the CNY has depreciated 6% since the start of August 2015, the CNY basket has only depreciated 4.9%.
Aussie data today will only have fueled speculation that the RBA may be forced into another rate cut in 2016. If you didn’t realise the steam was coming out of the local housing market already, today’s HIA new-home sales data made it painfully clear. New home sales saw their third month-on-month decline in a row in November, but the drop was even starker in year-on-year terms, which saw new home sales decline by 5.2%. If history is any guide, get set to see new home sales decline by 20% or more by February 2016.
The ANZ job ads data for December further supports the ABS data showing a moderation in job growth in December. Job ads grew at only 0.4% in year-on-year terms, their slowest level seen since July. China concerns were the primary driver for the selloff in the Aussie dollar in January, but this deterioration we are seeing in the Aussie economic data are likely to restrain any major bounces in the currency even if we do see volatility declining in the markets.
- ASX: The ASX has led the crowd in Asia today gaining strongly from the open. Strong buying in the banks drove gains early in the session, however as sentiment waned just before the close 3 out of the Big Four banks dropped into the red. Ongoing Asia-exposure concerns continued to see ANZ perform the worst on the index losing a further 1.6%.
- Positivity in the consumer space continues to roll on today. The recent announcements by (AX:WOW) and (N:WES) have continued to provide upward momentum to their stock prices, while (AX:JBH) and (N:MTS) have also continued their recent gains from the demise of competitors (Dick Smith and Masters, respectively).
Ahead of the European open we are calling the: