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Crude oil reaches 6-1/2-year low and drag equity markets lower, Japan’s 3Q GDP increased

- The Japanese yen improved marginally against the US dollar with USD/JPY returning briefly to 123.05. 
- Japan is avoiding technical recession and it clearly shows that there is a growing inflation momentum in Japan
- We believe that this leaves some room to the Bank of Japan even though we do not believe that more stimulus will be added at its next meeting 
- In China, exports contracted for the fifth straight month and came in below consensus, showing that China’s main growth driver is declining, building downward pressure on the renminbi. The People’s Bank of China set the USD/CNY mid-rate at 6.4078, the highest level since August
- AUD/USD slip further in the Asian session amid commodity sell-off, currently taking a breather at around 0.7230 but is strongly biased to the downside with next strong support  at 0.7159, while on the upside, a resistance can be found at 0.7385
 
Crude oil printed fell to a fresh 6-1/2-year low in the US session yesterday as OPEC’s decision weighs. West Texas Intermediate reached $37.50 a barrel, while Brent crude fell to $40.60, the lowest level since February 2009 for both of them. Crude oil is down almost 30% over 2015 after dropping roughly 50% in 2014.
 
The atmosphere is gloomy is Asia as crude oil rout weighs. Japanese shares were down roughly 1% in spite of better than expected GDP figures, while in Hong Kong the Hang Seng lost 1.64%, down to 21,839. Mainland Chinese shares took the biggest hit among Asian regional equity markets with the Shanghai and Shenzhen Composite falling 1.89% and 1.78% respectively. In Taiwan, the Taiex slid 1.31%, while in Singapore shares were down 0.94%.
 
Released earlier this morning, Japanese GDP came in above expectations, printing at 0.3%q/q (seasonally adjusted) versus 0.0% median forecast and -0.2% previous estimates. However, the picture is not that bright as the GDP deflator missed expectations and eased to 1.8%y/y vs. 2% consensus and previous estimate, highlighting once against Japan’s struggle with inflation. As a result, the Japanese yen improved marginally against the US dollar with USD/JPY returning briefly to 123.05. Overall, the pair continues to trade sideways between 122.24 and 123.76 for the last month.
 
***Yann Quelenn, Market Analyst: “Against all odds, Japan’s gross domestic product rose at a 1% annualized rate vs 0.2% expected and way above the preliminary reading of -0.8%. As a result, Japan is avoiding technical recession, which consists of two consecutive quarters of economic contraction. It turns out that corporate capital spending, as well as consumption were better-than-expected and drove GDP higher. The major information out of those prints is that the GDP deflator was released and still remains at a decent level, even though below last quarter, at 1.8% y/y vs 2% y/y. It clearly shows that there is a growing inflation momentum in Japan. This could have some consequences as this now leaves some room for the Bank of Japan. However, we do not believe that more stimulus would be added at the next BoJ meeting. For the time being, all eyes will then be focused on the Tankan report, due out next Monday. Yet, we should not forget Japan's massive debt or aging population. Inflation is the key and would help to reduce the burden of debt.”***
 
In China, exports contracted for the fifth straight month and came in below consensus, falling -3.7%y/y versus -2.9%y/y expected (both in yuan terms). On the other hand, imports shrank less than expected, contracting -5.6%y/y versus -11.3% median forecast, easing to some extent worries concerning the strength of the domestic demand. All in all, data showed that China’s main growth driver is declining, building downward pressure on the renminbi. The People’s Bank of China set the USD/CNY mid-rate at 6.4078, the highest level since August. 
 
In Australia, business confidence improved marginally in November, edging higher to 5 compared with an upwardly revised reading of 3 in the previous month. Business conditions remained stable in November, printing at 10. AUD/USD slipped further in the Asian session, losing 0.50% overnight after a fall of 0.95% in the European session amid commodity sell-off. Besides the collapse of crude oil prices, iron ore fell to record low in early December before recovering slightly afterwards. The Aussie dollar is currently taking a breather at around 0.7230 but is strongly biased to the downside. The next strong support can be found at 0.7159 (low from November 23rd), while on the upside, a resistance can be found at 0.7385 (high from December 4th).
 
Today traders will be watching Halifax house prices, industrial production and manufacturing production from the United Kingdom; industrial production from Turkey; current account balance and manufacturing production from South Africa; NFID small business optimism and JOLTS opening from the US; housing starts and building permits from Canada; GDP preliminary estimates from the euro zone.

Tuesday, 08 Dec, 2015 / 10:50

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