Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
Asia is off to a tough start to the week with China being the main source of concern. After a fairly strong open, equities in China swiftly gave up ground as investors responded to further signs of strain in China’s property market. New home prices growth slowed to 6.7% on-year from 7.7%, while prices also cooled in Beijing and Shanghai. Essentially growth in house prices for some of the major cities dropped to the lowest levels since 2012.
Additionally a new set of governing rules for interbank business aimed at curbing the flow of funds from commercial banks to the shadow banking system were announced. The change in rules was announced by the PBoC, the SAFE and three regulators and some analysts actually feel they were not as aggressive as initially expected. Perhaps some investors feel a cap will be imposed at some stage. Either way, these two developments are not good for commodities and the rest of the risk space.
Iron ore leads commodity weakness
Iron ore futures have continued to slump in Asia with the Dalian futures testing the 700 mark. This has been devastating to the materials sector today where we are seeing some hefty losses. Panic certainly seems to have set in for all things iron ore at the moment. However, it is important to note that Chinese steel production is running at record rates with most steel production actually being exported. As a result these fears are likely to be more shadow-banking related. In fact, the current price for the futures translates to a price of around US$114.08/t for iron ore.
While materials are struggling in Australia and Shanghai, property stocks are weighing on the Hang Seng after the disappointing property price data. Additionally the new lending rules for commercial banks have seen financials trade heavy in Shanghai as well. Equities are flat in India after a big move on Friday on the back of the election results. There are growing calls by analysts for a new bull market in India after the most decisive election victory in 30 years. The new government has been deemed pro-investment and growth as opposed to the fragmented economic policies we’ve seen in the past. How long this run in India can last remains questionable, though given the challenges emerging markets are facing in the near term. For now perhaps chasing prices higher isn’t the best strategy and I would prefer to buy the dips in Indian equities.
Eyeing the euro for shorts
Looking ahead to European trade, we are calling the major bourses modestly higher apart from Italy’s MIB which has a big dividend coming out. A whopping 315.45 points comes out of the market and this is likely to distort price action. The MIB actually outperformed the region on Friday as investors chased stocks that are about to pay dividends. It will be a big week for the single currency with plenty of events on the economic calendar. The European Parliamentary elections will be in focus this week and the vote will be telling of how the European population feels the current leadership has dealt with the crisis. Austerity versus growth remains the key argument and pressure to act is growing with the ECB recently flagging the possibility of June stimulus. There is a high probability we’ll see increasing anti-European parties protesting heading into the elections.
At the same time we’ll have to watch Ukraine closely with presidential elections on May 25. Any tension on the ground could see pressure on the single currency mount. Apart from political issues, we have manufacturing and services PMIs along with a German monthly report. While I am bearish on the euro, I would prefer to sell rallies in EUR/USD particularly into the previous uptrend line as opposed to chasing the price lower from these levels.