We close out the month of February with a mixed picture in Asia after what has been a massive month for traders. China has been the big underperformer, with the CSI 300 trading to the lowest level since December 2014 at one stage today and the index looking like a compelling short for those brave enough.
Exhaustion has set in, but we roll into the new month with increased confidence the US is not going into recession, even though the US yield curve is hardly reflective of euphoria, inflation is looking somewhat better. There has been limited concern for the 114 pip weakening of the RMB today (the most in eight weeks) and read into this as you will, but with the G20 meeting out of the way one suspects that if the RMB ‘fix’ continues this trend this week then market volatility will ramp up. This also comes at a time when we have seen better flows into the USD, with the speculative community having paired back its USD exposure to the lowest level since July 2014. With the market pricing in a 70% chance of hike in 2016 from the Fed, it could be a good place to selectively start increasing USD exposure again.
The ASX 200 is closing out February around 2% lower (on the month) and that clearly doesn’t mask the underlining craziness seen on the trading floors. Earnings season has come and gone and on the whole it has been a fairly limp affair with 53% of corporates beating the street on earnings, and 60% on sales. On the whole, companies have missed expectations by an average of 7.2% and downgrades have generally outnumbered upgrades by just over 1.5 times, which to be fair is actually not a bad number historically! Markets have overlooked today’s 40 basis point decline in Q4 inventories and a sizeable miss to companies operating profits, despite the net effect being modest downside risks to this week’s Q4 GDP print. We still need the Q4 contribution from net exports (out tomorrow), and if this is less than 30 basis points one suspects Australia’s Q4 economic growth would be under 0.5%. There seems little concern to hold AUD’s or Australian debt, with AUD/USD trading in a 34 pips range today. For what it’s worth, the swaps market pricing in a mere 6% chance of a cut tomorrow and 41bp of cuts over the coming 12 months – this seems fair.
US futures have started to head lower, largely as a function of moves in China than anything else and traders have shied away from oil, which remains the epicentre of the markets. There is a massive amount of political and economic event risk for traders to work through and I suspect by the end of the week markets will have gone someway further to pricing in a Trump/Clinton race to the White House, US data showing the US economy muddling through and Europe showing further vulnerabilities. As things stand, Europe looks set for a weaker open and clients generally positioned on the short side, although better buying is coming in as we approach the open of the markets. GBP/USD is back on the radar with the pair targeting a move into $1.3800, while EUR/USD has also seen shorts easy to come by, with the pair breaking the December uptrend and eyeing a move into $1.0800.
Ahead of the open IG are calling the FTSE at 6065 +31, DAX 9462 -51 and CAC 4291 -23