The S&P 500 may have printed a new all-time high, but no one in Asia seems that interested. The fact that only 6% of all S&P 500 stocks on the index closed at or near a 52-week high, shows that the breakout was relatively half-hearted. It’s also worth pointing out that the number of stocks trading above the longer-term 200-day moving average (at 78%) is still below what we saw on the first day of the year. Still, when there is no real clear catalyst for the market and confusion sets in, it’s a good idea to do what has worked over the medium-term and buy US stocks and European debt.
Asia has been fairly subdued today, despite the warm lead from Wall Street, and while a number of traders are starting to look more closely at the ever-changing dynamic in the Ukraine, Japan has been the central focus for macro traders today. China is never far away however, with further weakness in equities, while onshore CNY has been smashed today; pushing through the 6.17 level and talk on the floors is around massive intervention from the PBoC.
USD/JPY has found good sellers today and could stay in focus ahead of speeches in US trade from Fed members Stein, Kocherlakota, Evans and Plosser. Naturally the focus will be around how much the weaker data was attributed to weather. The downside moves seen in USD/JPY were not down to the Japan’s data dump, which covered pretty much every part of the economy and on the whole were good numbers. At the heart of the drop were the January national CPI figures, which at 1.3% (ex-food) were bang in-line and didnt change from the prior month. The more forward looking Tokyo February inflation numbers grew slightly quicker at 0.8%, however industrial production was the star growing at 10.6%!
The JPY finding buyers in Asia
Why the JPY has strengthened is a touch confusing, especially as the USD didn’t really flinched against other currencies, so we can’t simply pin-point it to safe haven flows. Some are talking about comments from BoJ member Shirai, who detailed that it may take some time to achieve the 2% inflation target. Clearly the bond market doesn’t think so, with the market expecting 2.26% inflation on average over the next five years. Others attribute the move to the pair closing below the daily ichimoku cloud, which has seen a number a number of technical traders take short positions. Perhaps news that Russian troops are poised to cross the border is also causing JPY strength.
All eyes fall on China official manufacturing PMI print, which is released on Saturday and naturally this means the classic China hedges – AUD, KRW and TWD have gapping risks on Monday. The market expects the manufacturing PMI to hit 50.1, just above the 50 level which separates contraction from expansion, and given we’ve seen the index above 50 since September 2012, a contraction could be taken fairly badly by the market. It was interesting to see the PBoC drain $60 billion from the markets yesterday, which was actually much less than expected, and rates still fell and the cynic in me questions whether the PBoC know more about this PMI print and are bracing the market for a weak number.
In Australia, the ASX 200 has closed the month on a flat note. There was been some modest buying off the intra-day low; however there’s probably an element of window dressing as we close out a strong year. The index is up 4.3% for the month, which puts it the best performance since July (when it rallied 5.2%). We head into March knowing that on paper the ASX performs fairly well, averaging 1.4% over the last decade, although last year the index lost 2.7%. It is the last day of earnings season, so a major catalyst is dissipating as the summer comes to a close, and it has to be said that it has been a strong season.
While the market has had a chance to go through the results and see how the land lies for future earnings, fund managers will be dissecting the results in more depth to work out exactly which ones deserve to be in longer-term model portfolios.
Inflation in focus in Europe
In Europe there is plenty for macro-focused traders, with the various equity markets likely to close the week with a positive open, although I get the feeling a pullback could be in store. The EUR takes centre stage, with Eurozone CPI estimates taking the limelight. The market expects a print of 0.7%, although a number of economists feel there are downside risks to this consensus print. We saw both the M3 money supply out yesterday running at a slightly faster pace; however the growth predominantly came from overnight deposits and credit growth barely moved.
The German inflation rate (again out overnight) fell to 1.2% year-on-year. This leaves Europe in a difficult spot as not only does it put downside risks in today’s Eurozone print, but for Peripheral Europe to be competitive they need a lower inflation rate than that of its German partners. Still, an in-line print today may still cause selling in the EUR, however I don’t see the ECB cutting the refinancing rate unless the EONIA (money market) rate jumps higher. Cutting the refinancing rate will not create inflation; that needs to come from higher energy prices, which contributes around 20% of the ECB’s inflation basket.As long as the ECB’s balance sheet is contracting while the Fed’s is expanding it’s hard to see the EUR/USD falling too far from here.
Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets