Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Global equities have retreated with the wall of worry across major economies sending investors into a cautious mode. There are a number of key issues plaguing sentiment at the moment, including a more hawkish Fed, a struggling China economy, the Scottish referendum and potential hiccups for the ECB’s stimulus plans.
With the FOMC meeting set to take place next week as QE winds down, investors will be expecting the Fed to give more commentary, particularly around an exit plan. Some of the recent Fed commentary has suggested that the market is anticipating a much more accommodative stance than the Fed itself. This suggests the market may have to adjust to more of a median as far as the Fed funds rate is concerned. There were also growing concerns around how long we would see the US dollar and US equities continue to rally in unison.
On the European front, the Scottish referendum and speculation that neither Germany nor France was interested in providing a guarantee for the asset purchase program have been the driving factors behind the weakness. In fact, yields have started rising again which is a result of uncertainty around the ECB’s measures. ECB member Mr Liikanen actually said the scale of the program is yet to be decided on.
Pessimism grows around China data
Looking around the region, China has been under significant pressure, with a few different reasons floated for the weakness. Premier Li indicated that M2 money supply growth moderated to 12.8% for August, and given the market isn’t really expecting any aggressive stimulus from China, equities have sold off.
It’s not a secret the economy isn’t firing as well as it used to, but the government certainly doesn’t seem to be in any rush to stimulate, rather happy to focus on reforms. There is still plenty of data due out of China this week and perhaps this warrants some caution as pessimism seems to be the dominant theme around China data.
While equities have seen downside, the AUD has borne the brunt of the negative sentiment has resulted in a sharp sell-off. To put it into perspective, AUD/USD has slid from around $0.9360 on Monday to now be trading at $0.9164. We’ve seen a break of the multi-month range (at $0.9203), with the 200-day MA subsequently breached – whether the pair can close below $0.9200 will be key here. If it does, price action has the feel that the pair could trade in a new range of $0.9000 to $0.9200.
AUD hit hard in Asia
The tone seems to have been set by yesterday’s disappointing Nab business confidence/conditions reading and the poor home loans data. Additionally, iron ore prices just continue to deteriorate which is not doing the AUD any favours. In Asian trade we’ve already seen a drop of around 3% for iron ore futures. Today we’ll have Westpac consumer sentiment and then of course jobs numbers tomorrow. Locally, a sharp drop off in the Westpac consumer sentiment reading has also not helped the situation and this leaves us in an interesting spot as we head into tomorrow’s jobs numbers. The PBOC has strengthened the RMB significantly (282 pips) over the last two days and this could also be playing into AUD weakness.
Weaker start for Europe
Ahead of the European open, we are calling the major bourses weaker, with equities playing catch-up to the weakness seen in US and Asian trade. Traders will be looking to see how much longer the sterling can hold on after having enjoyed a minor recovery on the back of Mark Carney’s comments.
Concerns around the referendum are likely to continue weighing on the sterling in the near term. The UK economic calendar brings inflation report hearings, but this is unlikely to carry that much weight given Mr Carney commented on the BoE’s CPI goals and rates. However, should we hear more on Scottish independence and the currency union, then further volatility is likely. On the European calendar we have French industrial production as the highlight.