Asia was in wait-and-see mode today ahead of the Fed meeting, which will be announced in the latter stages of the US session. Trade across all parts of the capitals markets has seemed eerily quiet, although the general feeling has been mildly risk-off.
The Japanese market is down 0.4% and USD/JPY continues to find sellers with the pair trading five pips shy of the overnight low of 97.00. Recall on Monday when we felt the path of least resistance was lower this week; with the BoJ and MoF sidelined during ‘Golden Week’, the usual verbal support has been missing, while the market continues to position for a more dovish Fed. Our longer-term positive bias remains, and although we see short-term risks to the downside, we feel tactical long positions around the base-line of the ichimoku cloud (currently 96.26) make sense, with potential stops below the April 16 low of 95.80, although the risk is that the pair doesn’t trade there.
Chinese data has been in focus today, and once again the global growth story remains a growing issue. Chinese equities have been closed, although the CME copper price has dropped modestly to $3.17 per pound. The official PMI print followed the weakness seen in the HSBC release (which tracks the smaller businesses in China) at 50.6, just below consensus at 50.7. The new orders sub-component grew at a slower pace at 51.7, although still remains above the classic boom/bust level of 50.0, while output is OK at 52.6. Interestingly, Nomura came out with a note shortly after the print detailing that the April PMI data played into its view that Chinese GDP should print 7.5% in Q2, and trend down to 7.2% in Q4. Looking at the forex reaction, and AUD/USD didn’t really flinch; clearly traders are more focused on the USD side of the equation and the upcoming Fed meeting.
Chinese exports are released next Wednesday and many will have seen South Korea’s lower-than-expected April export print at 0.4% (consensus was for +2%) and now feel the Chinese export print could also be soft. Korean exports are usually the first to be announced, and given its economy is of a similar make-up as China’s, the lower demand from offshore could certainly have ramifications in China’s upcoming trade balance.
After yesterday’s strong showing from the banks, which took the ASX 200 to the highest level since 2008, traders were subdued and clearly this was evident with 33% less volume going through the market than yesterday. Traders continue to focus on the yielding names, although Telstra stood out and poked its head above $5.00. Westpac has been the star of the show today in the financial space, with a few traders taking profits on ANZ and aligning themselves with Westpac before Friday’s 1H earnings announcement. As things stand, analysts are expecting cash earnings of $3.417 billion, however it seems logical that the expected 86 cent dividend could be the most watched metric, and if it comes in-line it will represent an 80% payout ratio.
With most of Europe closed for Labour Day, the FTSE should be relatively calm. US futures haven’t really moved at all during the Asian session, and thus we’d expect most asset classes to trade in a tight range ahead of the Federal Reserve meeting. It will be also be interesting to see how the ISM manufacturing print fares given expectations are for a slower pace of expansion at 50.6 (from 51.3), with the analysts’ calls ranging from 53.0 to 49.0. Recall last month when we saw the more forward-looking new orders sub-component drop from 57.8 to 51.4; if this trend continues then the market will increase conviction that the Fed could ramp up the pace of its bond buying from the current pace of $85 billion a month. The ADP private sector payrolls could also be of interest with traders looking for 150,000 jobs to be created, down slightly from 158,000 in March.
As we detailed yesterday, EUR/USD looks supported, predominantly driven by positioning ahead of the Fed meeting. Of course Deutsche’s capital raising to support its balance sheet won’t have hurt the EUR either, given there may be an increased perception that other banks may look to do a similar thing, and in theory this could reduce funding risks and over the longer-term provide scope for increased lending. Interestingly, EUR/USD has printed a bullish monthly reversal, having traded below the March low and going on to close at 1.3168, just above the March high at 1.3134. This could signal a sustained move higher over the medium term, although for this to happen we will need the April data series to continue to deteriorate from the March weakness. The ECB announcing non-standard measures, such as a UK styled funding for lending scheme or lower collateral requirements, could also help the EUR.
On the earnings side, the big name is Merck, with expectations of Q1 adjusted EPS at 79 cents, on revenue of $11.11 billion.