Concerns regarding Chinese growth are looking likely to dominate capital markets this week, especially now that the Scottish issue appears to be on hiatus for the immediate future. Already, both global equities and commodities have been put on the back foot as China’s finance minister sees limited policy response to his country’s current slowdown.
The major indices in Asia are down by about -1%, while metals are slumping to multi-month lows despite the stronger dollar. The current risk-averse currency trading strategies are attributed to recent comments made by China’s Finance Minister Lou Jiwei, who indicated that Beijing will not amend economic policies despite some softening of last month’s economic indicators. Instead, Jiwei said China’s policymakers would focus on job creation and stable inflation.
All Eyes on China’s PMI
The first look at economic performance for China in September will come with this evening’s release of the HSBC flash manufacturing purchasing managers’ index. It will be a closely watched indicator, particularly as concerns about the economy are continuing to grow. China’s growth has stumbled this year as a slowdown in the housing market further weighs on domestic demand. The current surplus of weaker data from the world’s second-largest economy continues to feed market speculation that Chinese policymakers will have to further loosen both fiscal and monetary policy to promote growth. Expectations for this evening’s print are to straddle the boom-bust line of 50, down from the final August reading of 50.2. As long as China continues to play down any large-scale stimulus, it will dampen investor sentiment and ensure cautious trading strategies will dominate. For now, the yuan continues to trade in a directionless manner though the People’s Bank of China weakened it via its daily reference rate. The currency is down -1.5% against the dollar this year, with most of the losses being recorded within the first half of the year.
Euro Peripheries Underperform
Not surprisingly, last weekend’s Group of 20 summit in Australia yielded little of interest. In the end, a G-20 communiqué pledged to proceed with measures that aim to raise collective members’ gross domestic product by an additional +1.8% through 2018. Members also promised to “identify a series of additional measures” to meet their growth aspirations. Few were surprised to see European Central Bank (ECB) member and head of German Bundesbank Jens Weidmann express hesitation with the latest central bank measures. He noted that the ECB’s policy response has gone beyond “encouraging banks to make loans and amounted to pumping money directly into the real economy.”
So far this morning, eurozone government bond yields have opened generally lower ahead of ECB President Mario Draghi’s testimony. He kickstarts this week testifying on monetary policy before the European Parliament’s Economic and Monetary Committee in Brussels. Eurozone periphery spreads continue to underperform led by Spain (amid Catalonia concerns). Investors should be expecting a pickup in further volatility for peripheral product given the uncertainty and timing of when government bond purchases will be included in the existing purchases. The eurozone bond market requires political backing, especially from Weidmann and company. Nevertheless, Draghi will insist that his voting members will most likely want to see December’s long-term refinancing operation results before committing to adding product to the bank’s balance sheet. The market can expect the ECB to talk about quantitative easing (QE), but it will not be rushing into QE until it has mitigated “credit” proof.
Options to Curtail EUR’s Demise
The 18-member single currency is committed to a tightly contained range. The market continues to run into some resistance just north of €1.2870-75 with leveraged and real money sellers on the offer. While touted bids once again appear south of €1.2840-45, speculative accounts are said to be active on the buy-side. Market whispers have large options appearing throughout this week, rumored to total +€11B, if true, there is a strong possibility that the EUR’s range will be very much contained.
Whatever happens, the market will miss the Scots. Their national sovereignty debate brought back some much needed volume and volatility to the forex space. In a matter of 10 days, the pound has been trading robustly within the £1.6052-£1.6645 range. Maybe the Catalonia’s call for independence will shake things up a tad?
For the remainder of this week, investors will be focusing on flash manufacturing data from France and Germany. The Germans will also release their latest Ifo business climate results — the market will be interested to see if activity picked up. Meanwhile Down Under, traders will be listening to Reserve Bank of Australia Governor Glenn Stevens speak at the Melbourne Economic Forum. The week will end with U.S. durable goods orders and weekly jobless claims on Thursday.