Stability in Asia equity markets on China data

Market Brief

Stability in Asia Equity Markets

Asia 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. However, recent trade data from other regional partners such as South Korea has not been so optomistic. 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 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 verse 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 in coming into effect downside risk are increasing.

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 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 equity markets are a function of miss-management of currency policy and regulators miss-steps rather than new signs of deep China 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 (feds third mandate) we suspect that the probably of a March rate hike has decline significantly. With the US economic calendar thin this week, the lack of supplementary data supporting the Feds 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.

Trade will be watching EU industrial production and US beige book.

Currency Tech

EURUSD
R 2: 1.1387
R 1: 1.1095
CURRENT: 1.0896
S 1: 1.0458
S 2: 1.0000

GBPUSD
R 2: 1.5529
R 1: 1.5242
CURRENT: 1.4520
S 1: 1.4321
S 2: 1.3657

USDJPY
R 2: 125.86
R 1: 123.76
CURRENT: 117.30
S 1: 115.57
S 2: 105.23

USDCHF
R 2: 1.0676
R 1: 1.0328
CURRENT: 0.9976
S 1: 0.9786
S 2: 0.9476

• S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot