Beijing gives up, Fed officials send mixed signals

Market Brief

It’s a major blowback for investors who counted on China’s government to shore mainland equity market up. After spending about $200bn buying shares to support a falling stock market, the government realised it is not worth the efforts as the Shanghai Composite is still down 38% since its June peak. Beijing will focus on finding and punishing those suspected of “destabilising the market” for now on, leaving naked investors who were betting that the government’s support will drive mainland equity markets higher. As a result, Asian regional equity markets are broadly lower this morning with the Shanghai Composite down 1.50% and the Shenzhen down 2.82%.

Elsewhere in Asia, the Nikkei falls 1.28% in Tokyo and the broader Topix index is down 0.82% as Japan’s industrial production contracted by -0.6%m/m in July versus +0.1% median forecast and +1.1% in June. On a year-over-year basis, the gauge is still up 0.2% while market analysts expected an increase of 0.8%. Vehicle production fell -5.9%y/y in July compared to -5.3% the previous month, housing starts grew 7.4%y/y over the same period while analysts were looking for an increase of 11%. Finally, construction orders contracted 4% in July, after a figure of +15.4% in June. USD/JPY was grinding lower in Tokyo as mixed comments from Fed officials highlighted their divergence of opinion about the timing of the first rate hike since 2006. However, the dollar found the strong support lying at 121.14 (Fib 50% on June - August) and is trading higher since then, back above the 121 threshold.

In Australia, TD securities inflation report indicates that inflation remained roughly stable in August with the monthly gauge printing at 01% versus 0.2% in June while on a year-over-year basis, inflation climbed 1.7%, compared to a figure of 1.6% previous month. Private sector credit contracted 0.6%m/m in July versus 5.9% median forecast and previous month. AUD/USD was therefore treading water in Tokyo and is currently trading slightly above the 0.71 threshold. We remain cautious with the Aussie as the RBA will release its interest rate decision tomorrow (we expect no move) while, on the other hand, Fed officials keep sending mixed signals about the effect of Chinese turmoil on the US economy and especially the inflation outlook.

In Europe, equity futures are broadly lower on Shanghai lead. In Germany, the DAX retreats 0.88%, French CAC -1.13%, SMI -0.95%, Footsie +0.29% and the Euro Stoxx 50 -0.85%. EUR/USD is stuck below the 1.1262 threshold (Fibo 50% on July-August rally) and has been proved unable at breaking it to the upside. On the downside, the previous support lying at 1.1155 (Fibo 61.8%) will continue to support the euro in absence of a strong catalyst.

Today traders will be watching retail sales and CPI from Italy; inflation report from the Eurozone; trade balance from South Africa; Dallas Fed manufacturing activity from the US; interest rate decision from Australia Central Bank early tomorrow morning.