Asia has dipped its toe back in the risk water, although, after a positive open the Hang Seng and CSI 300 have pulled back to the flatline. S&P 500 futures are up 0.2% at this stage, although there will be equal focus on NASDAQ 100 and Dow futures in the session ahead given Netflix and IBM report after market tomorrow, and both are important but for clearly different reasons. European equity markets will likely feed off this move in S&P futures, while crude briefly pushed back above $72, but has since pulled back in line with the moves in Chinese markets.
Chinese stocks did find a tailwind from some calming rhetoric from authorities, who have detailed that investors will be protected, and it can’t have hurt that the PBoC strengthened the CNY (through a lower USDCNY ‘fix’) after ten consecutive days of a weaker fix. Chinese CPI and PPI came out around consensus at 2.5% and 3.6% respectively, and we look forward to Q3 GDP on Friday, although the M2 money supply data (no set date) could actually be a more telling forward indicator, as this is expected to tick up to 8.3% and could solidify calls that China is easing credit conditions again. With inflation back at subdued levels, it is the leverage in the system and the debt dynamics which are the concern for supporting asset prices and not already high price pressures.
As we can see from the chart of iron ore futures, a break of RMB520 (the red line) could reflect improving local sentiment and could aid risk sentiment in Aussie assets.
(Source: Bloomberg)
In Australia, a slight uptick in ANZ Roy-Morgan weekly consumer confidence, to the highest level since May perhaps masks what could become a bigger issue; that being the feedback loop between declining real asset values (housing), falling equity prices (financials) and the mentality of asset price deflation and the linkage to a higher household savings rate, and declining consumer and business confidence. Lagging indicators, such as retail sales and GDP will follow, but it is clear that a simple overlap of the ASX 200 financial sector and national auction clearance rates shows the correlation is real and, in my opinion, auction clearance rates are the more crucial forward-looking indicator in the Australian economy, along with credit supply.

Those in the property market would argue this is a somewhat mature theme and auction sales only capture a fraction of total sales, but, to me, it is a reliable guide on semantics and the impact that declining sentiment has on rising supply. However, the market is catching on now, and as we know, economics move far slower than financial markets.
We have already seen an impact resulting in falling volumes (-40%yoy), and this will impact government revenues through the fall in stamp duty collection. Property prices are off some 6.5% in Sydney and down a touch in Melbourne, although both from what are very frothy levels. The point being, the market should increase its sensitivity to the weekly auction clearance rates and the outcome could play more of an influence in the rates and AUD. Especially, if we get to a point when the circuit breaker has to come from a change in language from the RBA and an admittance that the path of interest rates is actually symmetrical.
A trade we have looked at, which works from both a macro and technical perspective is short AUD/NZD, notable with a solid NZ CPI print in play today. We are currently seeing spot trading below the September trend support of 1.0865, but, the key is how Europe and US trade the pair and a daily close below the 1.0835 (the July spike low) would open up a move into the 1.07-handle. Let the market guide and push the trade, so waiting for the price to close through this significant low is key. Trail stops to cover should price close above the five-day EMA.

AUDUSD is a different beast, and the prospects of further short covering here keeps me eyeing higher levels to sell into, and the 0.7180/0.7200 level is where I see supply coming in. The regression channel has been on the radar for a while, and while this is not technical analysis per se, and is a statistical overview, the risk is we can push higher into the two-standard-deviation of the line of best fit (red line). The bullish crossover in the MACD and stochastic highlights this recent change in momentum.

USDJPY looks interesting here, with the pair eyeing a re-test into 112. Price sits at a key juncture, with the bulls supporting off the rising trend drawn from the April lows, while it also threatens to break the recent bear channel. So, the daily chart gives us good context and a move below 111.75 would raise the risk of a move into the 110.40 to 110.00 area. A closing break through 112.00 gives me some belief the trend lower is over, but it’s hard to be bullish until we get a close through the 5-day and the 11th October high of 112.53.

Another chart which has been in focus is that of the tightening of financial conditions in the US given the recent sell-off in risk assets and the spike in implied volatility. The below chart shows the Bloomberg US financial conditions index, which, as can be seen, fell reasonably sharply through last week. In essence, if this index holds at current levels then we could see interest rate markets price out a degree of tightening from Fed for the December meeting, which currently sits at 76%. We know the Fed does look at various financial condition’s indices, as they know the feedback loop into the economy is real. So, should these remain tighter then we could see short-end Treasuries find buyers and perhaps this could act as a headwind to the USD. 

Published by Chris Weston, Head of Research, Pepperstone