Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Investors digest China stimulus
It’s been a busy start to the week for Asian markets with plenty to digest from the weekend. Global markets remain a turbulent environment with plenty of changes to navigate through the course. The three recurring themes this year are issues around the US recovery, China growth and Greece. So far, all three themes have not disappointed and continue to present curve balls. Friday was a day of selling across the equities space with the Greece issue rearing its ugly head again. This saw Greek 10-year yields spike, while equities dropped significantly. Greece’s negotiations with creditors don’t seem to be progressing particularly well as some ministers opposed to certain policies that had previously been agreed upon. This stoked concerns that Greece may not be able to obtain additional funding on time with a potential Grexit on the cards. The deadline for a deal is reported to be May 11 but investors were hoping a deal would be done at the European finance ministers meeting. Investors will now be wondering how much longer Greece can throw sentiment around before the worst is fully priced in. With most of the region seeing signs of bottoming in data, I feel it’s not long before investors focus on the fundamentals and pay less attention to the Greece risk. In the past, the euro reacted instantly to developments in Greece but this time round it’s actually remained steady. EUR/USD is just holding on to the 1.0800 handle and judging by the price action, it won’t be long before the investment community grows less and less concerned about what Greece does. Ahead of the European open we are calling the major bourses firmer with equities on course to recover some of Friday’s losses.
China key to Q2
The big news from the weekend was a 1% RRR cut by China to 18.5%, as the economy continues to struggle and an announcement around tighter regulation. This move is estimated to release around 1.2-1.3 trillion yuan into the system. Chinese index futures slumped heavily on Friday following the regulatory announcement, only to recover on news of the RRR cut. While the highlight is more stimulus, China’s Securities Regulatory Commission announced a margin trading business ban from using umbrella trusts and added it would allow fund managers to lend shares to short sellers. Although officials subsequently said the move is not meant to encourage short selling and merely a move to improve stability/development, many investors thought it was a move to cool equities. The balancing effect of the regulatory change and RRR cut has been quite interesting and resulted in markets being thrown around a bit. It’s clear officials are looking to stimulate the underlying economy as opposed to merely inflating stocks. Perhaps the slight improvement in property prices data from the weekend offers a glimmer of hope that things are improving and we are close to seeing a bottom. Regardless, analysts are expecting further RRR cuts as officials will struggle to defend this year’s growth target. How China progresses this quarter will be key for emerging markets and the Australian economy.
Big week for the AUD and ASX 200
The local market has barely flinched today and equities have extended losses despite the news coming out of China. We are now nearly 3% away from the recent highs near 6,000 and the stronger AUD is complicating the situation even further. Concerns around the iron ore sector remain apparent with Arrium the latest to report some disappointing/concerning results. The banks and other yield plays have also been on the back foot as it increasingly seems the RBA is in no rush to cut. There are a few key releases locally this week that will help shape up rate expectations heading into the May meeting. On the calendar this week we have RBA Governor Glen Stevens speaking in the US and this will be followed up by monetary policy meeting minutes. Remember these minutes are from the April meeting where the RBA surprisingly kept rates on hold. This is likely to throw the AUD around a bit then on Wednesday we receive Q1 CPI data. There is potential for the AUD to extend its gains to $0.7938 which is where the March highs kick in. While the pair is showing signs of indecision at the moment, I would be sceptical about shorting at these levels due to upside risk in data and stimulus action from China.