Global Markets Overview – 12/2/13

The week of the AUD

With 21 trading days remaining in the calendar year, 2013 is looking like being the strongest year in terms of fund inflows since 2006, and could be the biggest market gain since 2009. With dividend returns hitting the books in ten days, it is highly possible that the ASX will finish the year positively.

However, this week is going to be very interesting for the AUD, with China and local data all set to push and pull the currency in several directions.

On the local front the statement from the RBA tomorrow is likely to be the biggest mover.

The expectations of a 25 basis-point rate cut are near zero and are unlikely to move at all in the next 12 weeks. What we will be watching for is whether the board will continue to bluff the AUD down.

So far it has had little effect with the recent fall in the AUD more to do with USD strength from investors' front running the Fed on tapering than anything the board has done. The market is also acutely aware of the Australian housing market.

It was reported in the local press that Saturday November 30 was a record for the number of houses sold in Sydney, with an auction clearance rate of 80.4% (roughly 725 homes) in one day. Melbourne is also not far off with a clearance rate of 74.5%, with 1300 homes going under the hammer over the weekend.

This will certainly feature in the statement preceding the rates decision tomorrow, and any words around housing will drive the AUD higher.

What is also likely to feature in trade today is the release of the official PMI data from China on the weekend, which came in at 51.4 and was ahead of estimates; it remains at an 18-month high which was first registered in October.

There are several interesting inferences that can be drawn from the China PMI data. Manufacturing in the country continues to stabilise even as demand from key markets such as the US and Europe slow and government intervention is ramping up.

The fact that manufacturing is also holding up in the face of central government headwinds suggests the recent 60 point plan can be rolled out a little harder, without the concern of impacting the 'bottom end' of the GDP range that Premier Li Keqiang set out in October.

I suspect the recent crackdown on shadow banking and the increase in regulation on state-owned banks will continue over the coming months as the country continues to monitor overcapacity in all areas of manufacturing. The manufacturing figures from the weekend I believe give the central government further room to intervene.

This is likely to push the repurchasing rate higher still, and considering the average rate in November was 4.54% compared to the beginning of the year (approximately 3.56%), I suspect December will be higher still. The increase in lending will have an organic effect on output in China as credit affordability starts to push businesses out of the market.

This sounds negative from an Australian point of view, as less credit means lower consumption of imported goods required for manufacturing (i.e. iron ore, copper building materials etc.). I have no doubt there will be months and even quarters in the next two years where this will cause market reactions as blunt regulation leavers are just that - blunt.

However, two factors give me reasons for slight optimism to counter any crackdown, and they are the changes to the housing act for farmers and the GDP 'bottom line' comments.

The changes to the housing regulation act will mean urbanisation can accelerate, which in turn will mobilise the labour market and therefore see the rise of the middle class continuing. This will see China over the next decade becoming a consumption nation rather than an export nation, which will mean consumption of goods from external sources (i.e. Australia), will be sustained.

On a more short-dated view, the GDP figure is key, as a fall below 7% is 'unacceptable' from a central government perspective. A GDP figure below 7% will mean employment could be under threat and the 'national psyche' could not contemplate a figure below this level.

This means that if there is any sign in the short term that China is slowing too fast, the central government will relax its money tightening policies and will ramp up production to 'return the economy to an acceptable level'.

I understand analysts around the world will question China's ability to do this and/or the effect a program of this nature could have on its so called 'credit bubble' and China's possible hard landing. However, I believe the government will do whatever it needs to maintain the status quo, which again will have a benefit for Australian exporters even if it comes with country specific risks.

Ahead of the Australian open

Ahead of the open the ASX 200 looks like starting the month in the red, off only seven points to 5312. Although the PMI was positive for the likes of BHP, RIO etc., most had positioned themselves for a positive read on Friday; a rally in the stocks from the China data could already be factored in.

The release of the final HSBC PMI data at 12:45 AEDT could actually drag on Asia considering the slightly weaker print from the flash release last Monday; again the AUD is the place to watch for market reactions to this release.

I am aware that the building approvals data is being released today and it is an affecter of the AUD, however its extreme volatility means it is not followed as closely as data released tomorrow.

[Kick off your trading day with our newsletter]

More from IBT Markets:

Follow us on Facebook

Follow us on Twitter

Subscribe to get this delivered to your inbox daily