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FX markets and global equities consolidate, Weak Chinese import data kills commodity recovery story, German ZEW set to decline

- Investors left wondering about upside potential as China’s trade data showed that the world’s second biggest economy is no longer the global growth driver it used to be
- Chinese weaker read suggests current recovery rally has limited upside scope
- NZDUSD heading towards bearish target at 0.6586 in traders’ sights
- AUDUSD traders will be focused on 0.7220 support, while 0.7380 will cap upside 
- Fiscal and monetary measures taken by Chinese policy makers will stabilize domestic demand, allowing imports to improve, eventually lifting regional trading partners  
- EUR/USD is holding ground between 1.13 and 1.14 as investors await the US inflation report due on Wednesday. We remain bearish on the EURUSD and we target the pair to head back towards 1.1200
- Germany - there are growing reasons to worry, as economic conditions decline, even though Germany remains the most competitive European economy
-  The ZEW economic sentiment indicator is expected to print in lower than prior figure released at 67.5 in September
After rallying for the last two weeks, global equity markets falter as doubt rises. Most Asian equity indices are now back to their pre-NFPs levels and investors are now wondering whether there is still some upside potential as China’s trade data proved that the world’s second biggest economy is not the global growth driver it used to be. Imports continue to fall dramatically with a contraction of 17.7%y/y in yuan term versus 16.5% expected and 14.3% in August. However, exports came in slightly better-than-expected, printing at -1.1%y/y versus -7.4% median forecast and -6.1% in the previous month. In the rest of the world, equity returns were already mixed yesterday with half of European indices trading in negative ground. In Wall Street, stocks were trading slightly higher in thin liquidity conditions but energy and materials stocks felt the heat from the collapse in commodity prices. This morning, metals are pairing losses: gold is down -0.68%, silver -0.60%, palladium -0.05% and platinum -1.13. Copper slides -0.90%, aluminum -0.95%, while iron ore is down -1.83%.
***Peter Rosenstreich, Head of Market Strategy: Disappointing Chinese trade data has taken the wind out of the dominant risk recovery story. China trade surplus was solid, yet weak imports raised concerned that the engine of economic growth remains in first gear. The weak import read again highlights that the domestic economic situation remains fragile. On the topline, trade surpluses expanded to $60.3bn in September against concerns for a tightening to $48.2bn. China’s imports collapsed 20.4% in September, lower than the expected fall of 16.0% and following the deterioration of 13.8% in August. Imports into China from ASEAN dropped 26.6% and imports from Japan dropped 19.3%. However, exports came in slightly better falling only  -3.7% y/y against expectations for a contraction of -6.0% y/y. The negative reaction was clear in commodity currencies. China is Australia and New Zealand’s largest export destination by far, therefore the weaker read suggests that the current recovery rally has limited upside scope. NZDUSD dropped from 0.6715 to 0.6657 with the bearish target of 0.6586 in traders’ sights. Traders ignored the NAB business confidence, which increased to 5 in September against a 1 in August, to focus on the weaker China results. AUDUSD declined from 0.7364 to 0.7294 on the soft Chinese import numbers. AUDUSD traders will now be focused on the 0.7220 support (38% Fibo retracement from Sept rally), while 0.7380 will cap the upside.  That said, taking a midterm view the measure taken (fiscal and monetary actions) by Chinese policy makers will stabilize domestic demand, allowing imports to improve. Eventually lifting regional trading partners.”***
Asian regional equity markets are mostly trading in negative territory on Chinese data. The Japanese Nikkei fell 1.06%, while the broader Topix index slid -0.79%. In mainland China, stocks are holding ground on encouraging Chinese exports figures with the Shanghai Composite up 0.11%, while the Shenzhen Composite rose 0.91%. In Australia, the S&P/ASX fell -0.57%, in New Zealand stocks are up 0.23%, while in South Korea the Kospi index edged down -0.13%.
Commodity currencies erased partially previous gains - AUD/USD down 0.56%, NZD/USD down 0.48%, while the Canadian dollar fell 0.34% against the dollar - driven by lower crude oil prices. AUD/USD has been unable to break the strong resistance standing at around $0.74. On the downside, the pair will find support at 0.7165 (low from October 8th), then 0.6937 (low from September 29th).
In Europe, equity futures are trading without direction, swinging back and forth between positive and negative gains. The Footsie edges down -0.02; the DAX is up 0.34%, while the SMI edges up 0.16%. In France, the CAC 40 falls -0.21%. Overall in Europe, equities edged down -0.19%.
***Yann Quelenn, Market Analyst: “German economic conditions are declining. The ZEW, economic sentiment indicator, is likely to reveal the truth behind this statement today. Data is expected to print lower than the previous figure of 67.5 in September.
Earlier this morning, the final inflation data for September was released and is now back to zero. The decline in energy prices has weighed on the CPI. The fundamentals remain positive nonetheless, as Germany has been able to run a budget surplus for the past three years. However the current Volkswagen issue is becoming increasingly serious. As of now there are approximately 500’000 Americans VW owners whose cars are now illegal to drive. In addition, German exports fell 5.2% in August as the overall German car industry, which includes a non-negligible number of suppliers are hit by this scam. There are growing reasons to worry.
Nevertheless, Germany remains the most competitive European economy. From our point of view, Germany is the only European country capable of controlling its debt-to-GDP ratio, which remains below 80%. Other European countries struggle with the inability to debase the currency and see their debt growing. We remain bearish on the EURUSD and we target the pair to head back towards 1.1200.”***
EUR/USD is holding ground between 1.13 and 1.14 as investors await the US inflation report due on Wednesday. A support can be found at 1.1327 (Fib 38.2% on August-September debasement), while on the upside, the 1.14 threshold is the closest resistance. A stronger one can be found at 1.15 (psychological threshold).
Today traders will be watching inflation figures from Sweden and the UK; German ZEW expectations; central banker speech: Bullard from the Fed, Haldane from the BoE and Wheeler from RBNZ.

Tuesday, 13 Oct, 2015 / 8:03

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