- With the US economic calendar thin this week, the lack of supplementary data supporting the Fed’s gradual path will keep USD weaker
- The 4Q15 earnings season unofficially began this week, with expectations very low as EPS is expected to fall 5% and earnings growth to be negative again
- The USD & JPY came under selling pressure as risk appetite returned helped by a slight rise in crude prices for the first time in eight days
- Much maligned AUD and NZD lead the G10 leaders higher with AUDUSD, solid supply can be seen at 0.7070 which will slow AUD bullish momentum
- Equity trading and China economic outlook will start to decouple while expectation for global contagion will fade
- We foresee much higher oil prices in a few years
Asian regional equity indices were broadly higher with the exception of China. European stock futures are pointing to a higher open. After an extend period of contraction, China’s December trade data was stronger than expected with exports and imports declining less than anticipated and showing signs of improvement. While the numbers were not outstanding they were encouraging enough to support sentiment. From Japan November industrial machinery orders increased +2.8% y/y to Y309.635 bln. The Nikkei rose 2.88%, Hang Seng 1.73%, while the Shanghai Composite fell another -2.45%. The USD & JPY came under selling pressure as risk appetite returned. Much maligned AUD and NZD lead the G10 leaders higher. In the regional EM currency space KRW, MYR and IDR were the big gainers verses safe haven currencies. USDCNY fixing virtually unchanged at 6.563. AUDUSD rallied from 0.6980 to 0.7049 as investors unwound extended shorts in the crosses. Solid supply can be seen at 0.7070, which will slow AUD bullish momentum. Also helping the commodity-linked currencies was the slight rise in crude prices off it 12 year low for the first time in 8 days. Brent crude front month is precariously lingering around $31.00 (WTI $30.70 after falling below $30 intraday), yet with legislation to end a 40-year-old ban on exporting U.S. crude coming into effect downside risk are increasing.
***Yann Quelenn, market analyst: “The WTI crude has for the first time since December 2003 broken down the 30 dollar level in a context of oil oversupply and fear concerning the true state of China's economy. The major slowdown that China is facing is increasing the risk sentiment on the commodities prices. Indeed, China imports and consumes a lot of commodities and the current yuan devaluation is especially made to support national exporters and therefore maintain Chinese competitivity. As a result, markets are also pricing in a reduction in Chinese demand.
The OPEC announced in December that their production would not be lowered in order to reign in world excess surplus to more than one million barrel a day. The first collateral victims is the US whose shale industry is suffering. Plus the count of US drilling rigs is falling. In the week ending January 8 the count was 664, down by 34 from the previous weeks’ rig count, which is very far away from the highest count of 2,031 rugs in 2008. We nonetheless believe that the current oil price is due to geopolitical actions. For example, it is clear that there is a willingness to impact Russia as its economy is clearly linked to oil prices. Yet the demand for petrol is still growing year after year and at some point will get back to the excess supply. In the longer term, in a few years, we foresee much higher oil prices.”***
China’s trade balance widened more than expected as exports were down -1.4% (-8.0% exp), while imports fell -7.6% (-11.0% exp). Clearly the trade surplus of $60.09bln, is not outstanding but still a positive light in a very dark place.
Interestingly, import volumes of major commodities increased in December on soft prices. Elsewhere, China December vehicle sales rose 15.4% y/y, passenger vehicles 18.3%. We continued to suspect that weakness in China's equity markets are a function of miss-management of currency policy and regulator slip-ups rather than new signs of deep economic troubles. Equity trading and China economic outlook will start to decouple while expectation for global contagion will fade.
With increased volatility the short end of the US yields curves has steady declined. US 2 years yields are now lower than the Fed raise inters rates in December. With evidence that two FOMC member (including NY Fed board ) did not vote for a rate hike combined with global markets disruption (Fed’s third mandate) we suspect that the probability of a March rate hike has decline significantly. With the US economic calendar thin this week, the lack of supplementary data supporting the Fed’s gradual path will keep USD weaker. Finally, 4Q15 earnings season unofficially began this week, with expectations very low as EPS in expected to fall 5% and earnings growth to be negative again.