FX5: China Sees Red, UK Jobs Disappoint

Wednesday 20 April: Five things the markets are talking about

Are things beginning to cool down stateside? Yesterday’s data showed that U.S housing starts fell more than expected in March (-8.8% to their lowest level since last October) and permits for future construction hit a one-year low (-7.7%). Nevertheless, the disappointing data could not dent regional bourses rise, but it certainly has some investors thinking. Currently, U.S equity markets continue to trade at or near new highs of the year.

So far this week, range-bound crude oil prices and a dovish Fed was happily encouraging risk – driving up emerging markets and ‘bruising’ the mighty dollar.

However, market dynamics have changed a tad in the overnight session – the yen and the dollar are on the rise as equities and crude prices retreat.

Market price action is relatively muted, with traders and investors wary of taking on new positions ahead of tomorrow’s European Central Bank meeting.

1. China equities see red

The rallying global stock market has been supported over the past eight weeks by signs of stabilization in China’s economy and oil prices.

The overnight pullback in Shanghai shares, which jumped in March by the most in 11-months, comes as the People’s Bank of China (PBoC) signals a “reduced appetite for monetary easing.”

Comments from PBoC chief economist Ma Jun contributed to the investor caution reaction as he called on the government to “curb lending practices and prevent company leverage ratios from overheating.” Other reports noted Chinese companies sought cash to help pay their tax burdens.

At one point, the Shanghai Composite managed to print a three-week low, below 2,950 with a decline of over 3%, but rallied to close out shy of -2%.

2. Oil prices retreat

Oil price dynamics again are leading global risk sentiment. The strike by Kuwaiti oil workers, which will end today, is weighing on prices (WTI $40.10, Brent $42.81). The workers union has decided to cancel their strike after three-days of output disruption.

Kuwait is OPEC’s fourth-largest producer and is expected to boost output back to an average of +3m barrels a day by week’s end. Output was +1.5m barrels a day yesterday compared with +1.1m on Sunday.

The three-day cut in production had more than offset the disappointment in Doha (no consensus on a global production cut by OPEC and non-OPEC members) on the weekend.

Again the market has to deal with supply glut trumping market fundamentals.

3. Kuroda’s remarks briefly support Yen

The yen is seeing some good two-way action as we head to the open stateside. It did rally to new intraday highs, below the psychological ¥108 handle (¥107.97), for the first time in three-days outright after the Bank of Japan’s (BoJ) Governor Kuroda said, “monetary easing is not a promise of a weaker currency or stronger equities.”

The yen (¥109.10) is trying to climb across the board as the market continues to weigh whether the BoJ will introduce further policy measures to support growth and inflation at next week’s monetary policy meeting (April 27-28). Also aiding yen thus far is lower oil prices – it provides a heightened sense of risk aversion.

From a fixed income aspect, Japan’s JGBs with maturities of five-years and up again print new record low yields. This suggests that dealers are anticipating more action from the BoJ next week.

4. UK claims/wages highlights muted income and jobs growth

Data this morning revealed that U.K jobless claims rose for first time in four-months (+6.7k in March vs. expectations for a fall of -10.4k) and hourly earnings printed their lowest level in nearly two-years (wages excluding bonuses rose 2.2% annually). The unemployment rate for February was unchanged at +5.1%.

Sterling briefly fell on the release to around £1.4350, while EUR/GBP edges up to trade last at €0.7910.

With risk ‘premium’ costs falling, expect the market to continue to search for lagging currency pairs. Many will naturally focus on sterling as it has been beaten up on Brexit talk for some time. The pound optimist would argue that it might take persistently bad news to keep GBP near current outright levels (latest Brexit poll ORB poll- 52% for staying in EU; 43% for leaving).

5. Germany to stick to growth forecasts

Chancellor Merkel’s government expects economic expansion to continue this year and next. It’s to be supported by a strong domestic demand that will offset any setbacks in slower export growth.

Germany has kept its forecast for economic growth this year at +1.7%, the same as last year. Forward projections expect Europe’s most dominant economy to grow at +1.5% in 2017.

Germany’s Economic minister, Sigmar Gabriel, said “domestic growth forces have become more important.” He believes that Germany’s economy is therefore “more balanced” and provides at the same time positive incentives to their trading partners.

Germany has always been criticized by its eurozone trading partners for relying too much on exports and not doing enough to boost domestic demand. The perception is that a weaker EUR (€1.1372) has always benefited Germany the most. Trading partners would prefer to see German domestic demand grow as it would in theory boost German appetite for other eurozone goods.

Berlin’s latest forecast points to strong private consumption and imports helping to offset weaker growth in exports to China and other emerging economies.

The German government forecasts that export growth will slow to +2.9% this year from +5.4% in 2015, and it will rise by +3.7% in 2017.

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