FTSE 6116 0
DAX 7793 +4
CAC 3663 +5
MIB 15210 -45
IBEX 7701 +1
Asia is off to a disappointing start to the week, with China issues swiftly moving to the forefront of markets’ concerns. It has been hard to ignore spiking interbank rates in China, and while most of the world remained pinned on the Fed last week, equities in China slumped on credit crunch fears. While at first it looked like officials were going to ignore the spike in repo rates, there are some reports suggesting China might be looking to fine tune monetary policy, which might stabilise interbank rates and restore confidence in markets there. The official statement from the PBOC didn’t quite address the issue and instead focused on maintaining steady and appropriate growth going forward.
This is certainly not good enough for many analysts and as a result we have seen a couple of downgrades for China. Goldman Sachs has downgraded China’s 2013 growth to 7.4% (from 7.8%) and 2014 to 7.7% (from 8.4%). Meanwhile, UBS has downgraded China’s 2013 GDP growth to 7.5%. This has been enough to sound the alarm bells in Asia and the Shanghai Composite is down 3%, while the Hang Seng is 1.6% lower. Japan started the session on a positive note, charging over 1% higher, but has since pulled back in-line with the rest of the region.
Over the weekend, Japan’s ruling LDP won the Tokyo Metropolitan election in a landslide victory and strengthened its position in the region. This is a clear sign that the Japanese population is on board with Abenomics. However, this proved inadequate to keep Japan’s recovery on track and the Nikkei has now shed 0.6%. We are keeping a close eye on USD/JPY which has managed to print a high of ¥98.70 in Asia and looks like it is poised for a near-term move higher.
European markets are facing a relatively mixed open, and judging by the recent unwinding of the single currency, the region’s woes might be returning. The MIB is pointing to a much weaker open and we suspect that is to do with the 109 points worth of dividends set to come out. Last week the IMF said it is preparing to halt Greece payments unless a €3 to €4 billion shortfall is plugged, and we suspect this will gather momentum this week. Later today we have the German Ifo business climate reading due out, and after manufacturing PMI disappointed last week, traders will be looking for a strong reading otherwise it could be another round of selling.
The Greek index was over 6% lower on Friday, while EUR/USD has dropped to a low of $1.3089 today. The USD continues to march higher against the majors. The dollar index is now trading around 82.55 and we feel this will be a critical week, particularly with several Fed members set to hit the wires. While most of the speakers this week are non-voters, any indications or clarity regarding the Fed’s view always deserves some attention in this market environment. New York Fed President William Dudley will speak on the labour market, while Jeremy Stein will comment on monetary policy. Other Fed members on the wires will be Mr Fischer, Mr Lockhart, Mr Lacker, Mrs Pianalto and Mr Williams. While most of these speakers are non-voters this year, any further hawkish rhetoric will be an excuse for the USD to continue its run. Having cleared 82, we feel the DXY could be lining up for a run back towards May highs in the 84 region.
The ASX 200 has declined 1.2% and printed a low of 4662, right near the low from the past couple of weeks of 4659. China issues have shaken up the materials space, with iron ore and gold names hit particularly hard. BHP Billiton has dropped 3%, while Fortescue Metals (FMG) has lost over 4%. FMG is trading below $3 and fast approaching its lows in September last year of $2.81 when iron ore hit around $87 per tonne range. The miner announced the final piece of the King’s development project today, awarding Leighton Holdings the $1.3 billion final development project. In the gold space, Newcrest has shed nearly 7% and is now well under $10, while Troy is among the worst performers with a 17% drop. The banks are trying desperately to hold the fort, however the selling across the board is even drowning out the yield-hunters that have sustained the banks for so many months; all four are in the red. AMP is languishing today, down 11% after issuing a profit warning as their insurance arm hurts them. With the end of financial year approaching, selling for tax purposes will also weigh on the market and the likelihood of another down week is well on the cards.