Talk of China tightening banks’ capital requirements sends risk into a tailspin, favouring JPY and USD


MAJOR HEADLINES – PREVIOUS SESSION

  • US Weekly Initial Jobless Claims out at 576k vs. 550k expected and 561k prior

  • US Weekly Continuing Claims out at 6241k vs. 6215k expected and 6239k prior

  • US Jul. Leading Indicators out at +0.6% vs. +0.7% expected and +0.7% prior

  • US Aug. Philadelphia Fed Index out at +4.2 vs. -3.3 expected and -7.5 prior

  • US Q2 Mortgage Delinquencies out at 9.24% vs. 9.12% prior

  • NZ Jul. Credit Card Spending out at -2.0% vs. -2.1% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE Flash PMI Manufacturing/Services (0728)

  • EU Flash PMI Manufacturing/Services (0758)

  • US Existing Home sales (1400)

  • US Bernanke to speak at Jackson Hole (1400)

Market Comments:

There were both positives and negatives to be gleaned from the economic data releases yesterday and as a result risk appetite and currency markets endured a volatile session. First off, Norway showed that it had bounced out of recession in Q2 with 0.3% q/q growth, well above an expected -0.3% and Q1’s -1.0%. This sent the NOK into the stratosphere, with EURNOK heading down to its lowest level since March, and probably pushed the Norges Bank a neck ahead in the two-horse race with the RBA to be the first to hike rates. This helped cement the positive sentiment that Asia had passed on following another positive day for China shares.

Next up, the UK had a disaster with public sector debt figures for July blowing all estimates out of the water.
Coming in at GBP8 bln vs. a GBP0.6 bln estimate, the huge budget deficit whacked GBP lower and was sufficiently bad to mask a steady retail sales number.

The US jobless claims number became the next fly in the ointment, rising an unexpected 15k to 576k from last week’s 561k while continuing claims were also worse than expected at 6241k from last week’s 6239k. The USD began to head back north and JPY crosses were pushing the lower end of the day’s ranges.

Enter the good news. Canada’s wholesale trade and inventories were both better than expected but it was a sharp turnaround in the Philadelphia Fed Index that gave risk appetite the final shove higher. The index registered its first positive number since September 2008 in August, coming in at +4.2 vs. -3.3 expected and -7.5 last and the rise was in tandem with the earlier Empire State Index. It was good to see both new orders and shipments rising into positive territory (4.2 and 0.6 respectively) but, in line with the earlier claims data, employment remained a stumbling block – still in negative territory but at least showing some improvement from July (-12.9 vs. -25.3). The final rallying call on Wall St came from comments by the AIG Chairman that they intend to repay all the government cash and restore shareholder value. Financials were all up on the back of this.

So, Asia was left with a buoyant Wall St, positive data and looked primed to carry it further – wrong! The Nikkei stuttered at the start and was quickly in the red with comments suggesting a weak auto sector was to blame.
News that the US was to halt its “cash for clunkers” program on Monday hit the sector hard (Japanese automakers had been seen as the major beneficiaries of the $3 bln rebate program) and this set the tone for the rest of Asia.

There was not much good news for the Australian bourse either. A 16% fall over the last three days on rental rates for Cape-size vessels was seen as evidence that China was slowing its purchases of iron ore and this hit the resource sector. In addition, Moody’s warned that Australia’s state ratings are under pressure due to falling revenues. The banking sector also struggled after Westpac announced its watch-list of worrying loans will grow and was starting to see a slowdown in the local mortgage market. The AUD struggled for any grip during the entire Asian session.

In all this morning’s melee, Shanghai shares were in the black all the time though, just this once, it was totally ignored. Talk circulated during lunch that China was planning to tighten banks’ capital requirements and this sent already-soft JPY crosses into a tailspin. Apparently a draft of a proposed change by the China Banking Regulatory Commission (CBRC) was sent to banks on August 19 requiring them to remove holdings of subordinated and hybrid debt from their supplementary capital. Banks have until August 25 to give feedback.

With no data releases in Asia it was again equity direction that determined currency moves, though this time it was not the China stock market that grabbed the attention. The data slate remains relatively barren heading into Europe and the US with German and Euro-zone PMI for Europe and existing home sales for the US. Fed chief Bernanke speaks at the Jackson Hole central banker conference on “Reflections on a year of crisis”. Given that the topic has been extensively covered and discussed in the past there is a chance that nothing new will come out. On the other hand……….keep an eye/ear open.

Have a great weekend.