China growth fears and debt bubble spook market

The early part of last week was very much defined by a series of shortfalls in the US economic data, once again raising questions over just how much sense there was in proceeding with the task of tapering the QE program. This certainly served to unsettle the dollar, sending the dollar index down to fresh lows for the year, but the stance revealed in the Fed’s meeting minutes left little doubt in the minds of traders that it was indeed full steam ahead as the US pushed towards a more hawkish stance over monetary policy. Emerging markets may have priced in the consequences of this by now, but the dollar found some overdue support.

USD/JPY

The pair showed weakness for the first half of the week as the downbeat US economic data flowed out, but the BoJ meeting minutes helped cap any downside. There’s an acknowledgement that the Japanese stimulus measures may have to run for a while longer than planned and as a result the Yen weakened once again. The core fundamentals remain that the Yen is poised for further selling in the months ahead after its recent hiatus but so long as the US economy continues to improve then it’s difficult not to see why this won’t be the case. Expect Japanese inflation data this Thursday to be under scrutiny to see if stimulus measures are helping out here.

AUD/USD

The RBC will be pleased that the Aussie dollar is back below 0.9000, although even at current levels it’s probably still looking a shade on the toppy side for some. For Australian growth to meet expectations this year, it’s critical that the local currency remains under pressure. Obviously there’s two ways of cutting this but with inflation and house prices upbeat, the desire to cut interest rates locally isn’t very strong. On the flipside however, so long as the US Fed can remain committed to the process of tightening its own monetary policy then the relative merits of the greenback should keep the Aussie in check. However with no key Australian economic releases due this week, traders are going to be left feeling their way in the dark and if there’s any belief that the sell-off is overdone, another rebound could follow.

Asian equities

Markets across the region had a choppy week of trade, not helped by another worrying number out of China. The HSBC/Markit flash manufacturing PMI reading for February fell short of expectations coming it at just 48.3. This shows contraction is very much the dominant theme and aside from any new stimulus measures that the Chinese government may attempt to deploy, it doesn’t detract from the looming credit bubble that is building in the world’s second largest economy. The Nikkei followed its usual form of rising whenever the Yen fell, and assuming there’s more weakness to be seen for JPY then it’s easy to see this trend becoming established. Fundamentals are however in short supply as we move towards the month end so it could be a case of waiting for the official PMI reading from China at the weekend before any real calls can be made as to whee markets go next.

Geopolitical situations to watch

The Chinese economy is arguably heading into a difficult phase as the growth runs out. Next week’s NPC meeting may offer more insights as to how the government intend to manage their way out of the situation and official word ahead of this seems unlikely.

The state of affairs in Ukraine remains a cause for concern and any action by Moscow could certainly serve to inject uncertainty into markets across the globe.

Key economic releases

Japanese inflation data is due on Thursday, whilst the official Chinese manufacturing PMI release is expected on Saturday. This is forecast to scrape in just above the break-even 50 mark, although the trend does now appear to be firmly established.

Market holidays

No major market holidays this week.