[email protected]: China in focus; ASX treading water

The information of stocks that lost in prices are displayed on an electronic board inside the n Securities Exchange, operated by ASX Ltd., in Sydney, , on Friday, July 24, 2015. The n dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg MARKETS. 7 JUNE 2011. AFR PIC BY PETER BRAIG. STOCK EXCHANGE, SYDNEY, STOCKS. GENERIC PIC. ASX. STOCKMARKET. MARKET.
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Stock information is displayed on an electronic board inside the n Securities Exchange, operated by ASX Ltd., in Sydney, , on Friday, July 24, 2015. The n dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg

We are staring at a fairly flat start for n and Japanese equities indices on open this morning, although China is the market to watch and another day of reasonably heavy selling may impact sentiment across the region to an extent. The long and short of it

1. China: The CSI 300 is the market showing the moves at the moment closing -1.3% yesterday, and breadth which has actually been poor really since around September is now really starting to deteriorate. The aspect of poor breadth and participation was actually the point from Chinese authorities last Thursday, who have been concerned with the equity market continually heading higher on very low participation, with a handful of large index weighted stocks putting in all the points. Take the far broader Shanghai Composite index for example, where we can see within its 1420 index members, 90% of the gains in 2017 have been driven by the top 10 index weightings. So, it’s no surprise to see authorities target these names as part of their commitment to the quality of their growth and the question is whether further downside in Chinese mainland equities continue in the session ahead and will there be a spillover into Hong Kong and potentially even Japan, Korea and .

2. Japan: The Nikkei 225, in itself, is interesting as there is a growing positive feel to owning the JPY in 2018. For the most part of 2016 and 2017 one would really only buy JPY in times of panic and heightened risk aversion and given its status as a dominant ‘funding’ currency, traders used this as a vehicle to be paid as part of the carry trade and the hunt for yield. 2018 is shaping up as a very interesting year for Japan and while the argument among macro traders is around future actions from the Federal Reserve and ECB, the Bank of Japan should also command close attention. We’ve seen a number of views that the central bank are looking at the potential costs from buying up most of the ETF market and a decent chuck of outstanding government debt. However, now the conversation has moved to whether the bank should look to ‘fine-tune’ its current policy of targeting the yield curve (under ‘yield-curve control’). This has come alive from comments from BoJ board member Hitoshi Suzuki, with the market dissecting his comments and feeling that interest rates could rise well before the bank reach its 2% inflation target.

Keep in mind that the Nikkei news publication only recently reported that spending plans from Japanese corporates were up 15.8% yoy and the biggest increase since 1990.

One other debate being had in Japan centres on whether Haruhiko Kuroda will be reappointed as BoJ governor when his term comes up for renewal in April. Of course, Japan doesn’t have a new president like the US, where Donald Trump was keen to make his mark and Federal Reserve. Shinzo Abe has been a longtime advocate of Kuroda, but whether he is reappointed should get more focus in the coming months. There is a view he could even be superseded by Etsuro Honda, who is about as dovish as they come in the Japanese central bank, which is a huge feat in itself!

3. Yen: So the JPY has found buyers in the overnight session and notably against the CAD, which is being weighed down by a 1.2% fall in US crude. USD/JPY is the pair to weigh on the Nikkei 225 on open though, and price is now oscillating around ??111 and a break here should see price test support into ??110.71. Keep in mind price traded above Friday’s high and looks ominously like it will close below Friday’s low – a bearish outside day reversal, which in effect suggests a continuation of the bearish trend. AUD/JPY is the key pair on my radar, as the must watch FX pair today, as this is your key barometer is of all things risk and technically looks like a strong shorting idea. Price has also printed a bearish outside day, with sellers have fading the pair into the five-day moving average and this would give a heightened probability of a continuation of the strong trend lower since September.

So if I were paying vulnerabilities in the AUD for 2018, short AUD/JPY and long EUR/AUD looks favoured trades.

4. Energy: As mentioned the moves in crude have resonated in FX markets (with selling of CAD and RUB), but we have seen the S&P 500 energy space lower by 0.9% and this sort of move seems likely in the ASX 200 on open as well. Traders have been buyers of US crude over Brent of late, but that trade has reversed a touch overnight and maybe that’s a reflection of the recent increase in the US rig count, or EIA statistics that show US production is running at 9.66 million BDP or just traders hedging exposures ahead of Thursday OPEC meeting, we are seeing US crude under pressure here, while Brent is holding in well.

5. Wall Street: US equities, more broadly, have held in well despite pathetic volumes, while there have been little change in fixed income or credit markets and we see Aussie SPI futures tracking a mere three points lower at 5988. Commodity markets are not helping sentiment here, with spot iron ore closing -1% at $67.27, while Dalian futures markets are hardly inspiring with iron ore, steel and coking coals trading lower by -1.8%, -0.1% and -1.9% respectively. Copper is also -1.2% and if we look at BHP’s ADR it suggests the miner will open 1.3% lower.

6. ASX: So a tougher day at the office for energy and materials, which has been a good hunting ground for equity appreciation of late and given we have seen both the ASHR ETF (China CSI 300 ETF) and EEM ETF (Emerging Market ETF) tracking lower by more than 1% and moves in key commodities it suggests an elevated risk of a drift lower in the ASX 200 after the open, or at least limited reasons for it to rally.

7. What’s on today: In terms of event risk, soon to be departing New York Fed president Bill Dudley speaks at 11:00 aedt (on the subject of the US economy: 10 years after the crisis), while the new man at the helm of the Fed, Jerome Powell, is set for his confirmation hearing in front of the Senate Banking Committee at 01:45 aedt and the market doesn’t know as much about Powell’s view on the economy and policy as they would like – so plenty to explore here.

8. Market watch:

SPI futures down 6 points or 0.1% to 5985

AUD -0.1% to 76.07 US cents

On Wall St: Dow +0.1%, S&P 500 flat, Nasdaq -0.1%

In New York, BHP -1.7% Rio -1%

In Europe: Stoxx 50 -0.5%, FTSE -0.4%, CAC -0.6%, DAX -0.5%

Spot gold +0.5% to $US1295.16 an ounce

Brent crude -0.4% to $US63.61 a barrel

US oil -1.3% to $US58.16 a barrel

Iron ore – 1% to $US67.27 a bonne

Dalian iron ore -1.8% to 501.5 yuan

Steam coal +1.4% to $US95.05, Met coal -0.3% to $US190.00

LME aluminium +0.1% to $US2135 a tonne

LME copper -0.9% to $US6942 a tonne

10-year bond yield: US 2.33%, Germany 0.34%, 2.52%

This column was produced in commercial partnership between Fairfax Media and IG

The information of stocks that lost in prices are displayed on an electronic board inside the n Securities Exchange, operated by ASX Ltd., in Sydney, , on Friday, July 24, 2015. The n dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg MARKETS. 7 JUNE 2011. AFR PIC BY PETER BRAIG. STOCK EXCHANGE, SYDNEY, STOCKS. GENERIC PIC. ASX. STOCKMARKET. MARKET.
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Stock information is displayed on an electronic board inside the n Securities Exchange, operated by ASX Ltd., in Sydney, , on Friday, July 24, 2015. The n dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg

We are staring at a fairly flat start for n and Japanese equities indices on open this morning, although China is the market to watch and another day of reasonably heavy selling may impact sentiment across the region to an extent. The long and short of it

1. China: The CSI 300 is the market showing the moves at the moment closing -1.3% yesterday, and breadth which has actually been poor really since around September is now really starting to deteriorate. The aspect of poor breadth and participation was actually the point from Chinese authorities last Thursday, who have been concerned with the equity market continually heading higher on very low participation, with a handful of large index weighted stocks putting in all the points. Take the far broader Shanghai Composite index for example, where we can see within its 1420 index members, 90% of the gains in 2017 have been driven by the top 10 index weightings. So, it’s no surprise to see authorities target these names as part of their commitment to the quality of their growth and the question is whether further downside in Chinese mainland equities continue in the session ahead and will there be a spillover into Hong Kong and potentially even Japan, Korea and .

2. Japan: The Nikkei 225, in itself, is interesting as there is a growing positive feel to owning the JPY in 2018. For the most part of 2016 and 2017 one would really only buy JPY in times of panic and heightened risk aversion and given its status as a dominant ‘funding’ currency, traders used this as a vehicle to be paid as part of the carry trade and the hunt for yield. 2018 is shaping up as a very interesting year for Japan and while the argument among macro traders is around future actions from the Federal Reserve and ECB, the Bank of Japan should also command close attention. We’ve seen a number of views that the central bank are looking at the potential costs from buying up most of the ETF market and a decent chuck of outstanding government debt. However, now the conversation has moved to whether the bank should look to ‘fine-tune’ its current policy of targeting the yield curve (under ‘yield-curve control’). This has come alive from comments from BoJ board member Hitoshi Suzuki, with the market dissecting his comments and feeling that interest rates could rise well before the bank reach its 2% inflation target.

Keep in mind that the Nikkei news publication only recently reported that spending plans from Japanese corporates were up 15.8% yoy and the biggest increase since 1990.

One other debate being had in Japan centres on whether Haruhiko Kuroda will be reappointed as BoJ governor when his term comes up for renewal in April. Of course, Japan doesn’t have a new president like the US, where Donald Trump was keen to make his mark and Federal Reserve. Shinzo Abe has been a longtime advocate of Kuroda, but whether he is reappointed should get more focus in the coming months. There is a view he could even be superseded by Etsuro Honda, who is about as dovish as they come in the Japanese central bank, which is a huge feat in itself!

3. Yen: So the JPY has found buyers in the overnight session and notably against the CAD, which is being weighed down by a 1.2% fall in US crude. USD/JPY is the pair to weigh on the Nikkei 225 on open though, and price is now oscillating around ??111 and a break here should see price test support into ??110.71. Keep in mind price traded above Friday’s high and looks ominously like it will close below Friday’s low – a bearish outside day reversal, which in effect suggests a continuation of the bearish trend. AUD/JPY is the key pair on my radar, as the must watch FX pair today, as this is your key barometer is of all things risk and technically looks like a strong shorting idea. Price has also printed a bearish outside day, with sellers have fading the pair into the five-day moving average and this would give a heightened probability of a continuation of the strong trend lower since September.

So if I were paying vulnerabilities in the AUD for 2018, short AUD/JPY and long EUR/AUD looks favoured trades.

4. Energy: As mentioned the moves in crude have resonated in FX markets (with selling of CAD and RUB), but we have seen the S&P 500 energy space lower by 0.9% and this sort of move seems likely in the ASX 200 on open as well. Traders have been buyers of US crude over Brent of late, but that trade has reversed a touch overnight and maybe that’s a reflection of the recent increase in the US rig count, or EIA statistics that show US production is running at 9.66 million BDP or just traders hedging exposures ahead of Thursday OPEC meeting, we are seeing US crude under pressure here, while Brent is holding in well.

5. Wall Street: US equities, more broadly, have held in well despite pathetic volumes, while there have been little change in fixed income or credit markets and we see Aussie SPI futures tracking a mere three points lower at 5988. Commodity markets are not helping sentiment here, with spot iron ore closing -1% at $67.27, while Dalian futures markets are hardly inspiring with iron ore, steel and coking coals trading lower by -1.8%, -0.1% and -1.9% respectively. Copper is also -1.2% and if we look at BHP’s ADR it suggests the miner will open 1.3% lower.

6. ASX: So a tougher day at the office for energy and materials, which has been a good hunting ground for equity appreciation of late and given we have seen both the ASHR ETF (China CSI 300 ETF) and EEM ETF (Emerging Market ETF) tracking lower by more than 1% and moves in key commodities it suggests an elevated risk of a drift lower in the ASX 200 after the open, or at least limited reasons for it to rally.

7. What’s on today: In terms of event risk, soon to be departing New York Fed president Bill Dudley speaks at 11:00 aedt (on the subject of the US economy: 10 years after the crisis), while the new man at the helm of the Fed, Jerome Powell, is set for his confirmation hearing in front of the Senate Banking Committee at 01:45 aedt and the market doesn’t know as much about Powell’s view on the economy and policy as they would like – so plenty to explore here.

8. Market watch:

SPI futures down 6 points or 0.1% to 5985

AUD -0.1% to 76.07 US cents

On Wall St: Dow +0.1%, S&P 500 flat, Nasdaq -0.1%

In New York, BHP -1.7% Rio -1%

In Europe: Stoxx 50 -0.5%, FTSE -0.4%, CAC -0.6%, DAX -0.5%

Spot gold +0.5% to $US1295.16 an ounce

Brent crude -0.4% to $US63.61 a barrel

US oil -1.3% to $US58.16 a barrel

Iron ore – 1% to $US67.27 a bonne

Dalian iron ore -1.8% to 501.5 yuan

Steam coal +1.4% to $US95.05, Met coal -0.3% to $US190.00

LME aluminium +0.1% to $US2135 a tonne

LME copper -0.9% to $US6942 a tonne

10-year bond yield: US 2.33%, Germany 0.34%, 2.52%

This column was produced in commercial partnership between Fairfax Media and IG