European Majors Rose As China PMI Lifted Sentiments

Manufacturing data from China released over the weekend lifted market sentiments as the week starts and sent Asian equities generally higher. The official manufacturing PMI improved to a seven-month high of 50.6 in November. While the figure was slightly below expectation of 50.8, it does suggest that recovery is gathering pace mildly.

Separately the HSBC manufacturing PMI was revised up to 50.5, confirming the highest reading in more than a year. European majors are generally higher against dollar on risk appetite. But selling in the Japanese yen was somewhat muted. Also, Australian dollar fails to participate on today's risk rally so far on expectation of RBA rate cut tomorrow.

We retain our forecast that the RBA would lower the cash rate by -25 bps to 3% in December. The key reason for the rate cut was to stimulate non-mining domestic economic growth in light of potential slowdown of mining investment.

While the macroeconomic environment (e.g. the strong-than-expected employment growth and upbeat data from China) since the last meeting might not warrant an overwhelming support for rate cut, it was offset by the downgrade of more forward-looking mining investment intentions and a sharp decline in businesses conditions. Moreover, it would be more appropriate for the RBA to cut rate in December rather than pausing for three more months until the next meeting in March.

In Europe, it's reported that Greece will unveil the details of the bond buy-back package today, ahead of another EU finance minister meeting. Under the plan, Greece will target to lower its overall debt by a net EUR 20b, through spending EUR 10b from EFSF to buy back bonds with EUR 30b face value from the markets. It's believed that the price offered to bond holders would vary depending on the bonds, instead of being at a uniform rate. The program should be completed before December 13 for Greece to receive the next tranche of bailout fund.

In Germany, Chancellor Merkel was asked if haircut of Greek debt is a way out of the situation of unsustainable debt, austerity and recession. She responded by saying that "when Greece one day again manages with its revenue, without taking on new debt, then we have to look anew at the situation and reevaluate." But "that won't be before 2014-2015 if all goes as planned." The comments were take as a sign that Merkel is finally softening her stance on debt forgiveness and should analysts even said that's the end of denial as many expected that there would be an eventual debt write-down.

Latest CFTC data showed that EUR net shorts dropped sharply to 66.7k contracts on November 27, comparing to prior week's 91.4k. And the figure is relatively closer to September's low of 50.3k. Yen net shorts jumped to 2012 high of 79.5k. Sterling positions maintained net long at 10.3k and it was nearly flat a week ago. Australia dollar net longs jumped further to 76.8k, also closer to 2012 high of 89.6k made in September than 33.4k recent low in October. Canadian dollar net longs, however, were relatively unchanged at 62.4k.

On the data front, New Zealand terms of trade dropped more than expected by -3.2% qoq in Q3. Australian retail sales was flat mom in October comparing to expectation of 0.4% mom rise. Japan capital spending rose 2.2% in Q3 comparing to consensus of 4.4%. Swiss retail sales and SVME PMI will be released later in European session, with Eurozone PMI manufacturing revision. But the bigger market mover would be UK PMI manufacturing which is expected to improve slightly to 48 but stayed below 50 in November. US ISM manufacturing will be featured later today and is expected to be relatively unchanged at 51.5 in November.