With the US closed for Martin Luther King Day, the focus has been firmly on China and the ever-changing dynamics in its economy.
The focus will now shift somewhat back on the US, with eleven S&P 500 companies due to report; four of which are Dow components. Dow futures will therefore by in focus given IBM, Verizon, Johnson and Johnson and Travellers will announce Q4 earnings and their combined weighting on the market is just over 16%. Price-weighted markets tend to have less significance in terms of catalysts for other futures markets (apart from the Nikkei) , and the likes of FTSE, Eurostoxx and SPI futures will tend to gravitate more to moves in the S&P 500. Still, expect earnings to play an increasing role in sentiment and so far, things haven’t been brilliant.
The PBoC seems to have calmed markets – for now
Asia has got off on a positive footing, with China trying its best to improve communications with markets to try and invoke an increased degree of confidence. Yesterday’s moves (announced after Asia closed) to offer short-term liquidity to the commercial banks through its Standing Lending Facility (SLF), while effectively offering a liquidity ‘put’ to the smaller end of the Chinese financial world (in case the repo markets continued to push higher) is clearly having strong ramifications. There have been the usual liquidity operations from the PBoC through seven-day and 21 day repo’s as well and the markets have responded, with the seven day repo down 106 basis points. What seems clear here is the PBoC has spoken out to markets, effectively detailing its intent to keep money market rates at just the right level to keep policy fairly restrictive, while maintaining ample liquidity into Lunar New Year.
The mainland China markets have done nicely, with reasonable gains also seen in the Hang Seng. US futures have moved higher upon re-opening, with the 1.5% gain in the Nikkei helping. The AUD/USD and ASX 200 reacted positively too, with the Aussie index pushing up 0.7%. Gains have been most prevalent in the industrial space, while the materials space continues to struggle, especially iron ore names.
Chinese growth is one of a number of issues which hugely divides market participants, and while market consensus is that we see growth average 7.45% this year, the spread is 170 basis points, with Deutsche calling for 8.6% and Societe Generale 6.9%. Both these calls were made recently as well. The future of Aussie interest rates and price action also divide opinion, although price action is feeding more and more into the bear argument. It’s important to look at steel prices and total social funding, which over the years have been good leading indicators. But the trend in all of these is down and whether or not this is down to seasonality, it’s interesting to see our clients have been modestly better buyers of FMG today.
Better buying in BHP and Fortescue Metals
Buying behind BHP and FMG could be due to a number of miners report production numbers over the next week or so, with BHP firmly in the spotlight tomorrow. BHP sources around 30% of its revenue from China, although the market will have its initial sights on domestic issues around Olympic Dam and the March quarter outage. At the last production report we saw BHP increase full-year iron ore guidance, and whether this materialises again is obviously yet to be seen and this is of interest as the miner is expected to source around 53% of its full-year EBIT from this commodity. A greater tilt towards iron ore would lower the diversification and move it in closer alignment to RIO. We shall see tomorrow morning (AEDT).
China seems to have been the catalyst for a nice move up in US futures, and from here it looks as though European markets are going to find good buyers on open. The major economic release is the German ZEW survey of analyst’s expectations and sentiment, with both expected to show continued improvement. Look for the FTSE to test the May 2013 high of 6875 and given the market is not significantly overbought at present, I see no reason why the index can’t push through this resistance level in the short-term.