5 Things Traders are Watching Next Week
1. The Japanese yen has been on a tear. Our proprietary JPY Activity Index has been
applied to a Weekly chart in the
screenshot below. Notice how the yen’s recent activity has represented its most
sustained period of gains since January 2014. Also notice how these gains have
come on the heels of the most intense selling pressure during August and September
since Q1 2014 and Q4 2013. Some traders may have noticed how “Mr Yen”
Sakakibara talked the yen higher recently, questioning whether the former MoF
mandarin still has some sway. After
being rangebound between April and July, the yen has awakened.
Japanese data released this week
were not pretty. The Domestic Corporate Goods Price Index moderated to +3.5%
y/y in September and was off 0.1% m/m and many traders are questioning the
efficacy of Abenomics. Isn’t it about time for a supplementary Japanese
government budget too? Industrial production worsened sharply in August and
Tokyo condominium sales remained rough. Recent capital flows data have shown a
big rotation by Japanese investors into foreign fixed income from foreign
equities while foreigners dumped Japanese equities and nearly halved their
purchases of Japanese equities.
Various Japanese data are due
next week but the markets are likely to focus on September’s trade balance the
most.
2. Oil remain in a state of freefall.
During periods of heightened geopolitical risk (think Iraq, Ukraine, and
[insert your favourite global hotspot
here]), the markets expect bigger and better prints out of the energy
markets. Alas, they have no such luck at present. There are quite a few factors
at play here that bear attention. OPEC is said to be as divisive as ever. Recent comments out of Saudi Arabia have done
little to support prices. The US’s shale energy revolution is alive and well,
with many estimates suggesting the US is capable of becoming the world’s largest
oil producer. The US dollar appreciated
sharply between July and early October, making it more expensive for countries to
sell their own currencies for dollars to buy oil.
Additionally, Congressional
midterms are coming up in the US, and wouldn’t it be great for Democrats to
point to lower gasoline and home heating prices as voters head to the polls? Moreover, there are geopolitics at play in the
markets. Energy exporters like Russia
and Venezuela are feeling some economic pain as a result of the depreciation in
prices, perhaps a welcome byproduct for foreign policy directed at ongoing
Russian tensions with Ukraine.
Take a peek at our Brent crude Daily chart below. We identified the
$84 handle as a downside target weeks ago and eye the $81 handle as another possibility.
Ditto with the WTI Daily chart below. We identified the
$82 handle as a downside target weeks ago, and the $76-77 area is another area
of possible technical exhaustion.
3. The big C word: Correction. Global equity markets are in a state of
mishmash. Let’s focus on the US for now. After the Dow’s recent High of 17,350, the Dow would have to get down to
15,615 to be in an official correction mode.
NASDAQ peaked around the same
time at 4,610, rendering 4,149 the level for a technical correction – below
which we traded this week. Likewise, after a brief dalliance above the
psychologically-important 2,000 level, the 1817 area remains a formal
correction level for the S&P –
and we’re not too far from there now.
We could reproduce a boring
popular mainstream equities index here, but you can find that on lesser blogs. There
are many sectors we could spotlight, but with the Ebola hysteria near
full-swing, investors have been dumping airlines shares en masse. It’s no
surprise that the Weekly Dow Jones Airlines Index looks like the screenshot
below. Will the global equities pullback continue?
4. From big C to…another big C: China. Remember the good ol’ days when China would store up their
economic data and release it on weekends whenever they pleased? Those episodes
are happening with less frequency nowadays, which means the statistical juggernaut
in Beijing is hard at work to deliver some premium numbers next week.
This week, we learned the
September Chinese trade balance came in below consensus at US$ 31.0 billion
with exports up 15.3% y/y and imports up 7% y/y. Likewise, September CPI growth
decelerated to +1.6% y/y and PPI moved from -1.2% y/y in August to -1.8% y/y in
September. If the world’s manufacturing growth engine is experiencing deflation
in its factory gate chain, how does that bode for global disinflation?
Next week, Beijing will share
September retail sales data on Tuesday with a pullback to +11.7% y/y expected.
September industrial production are also due and could climb to +7.5% y/y and
Q3 GDP data are expected at +1.8% q/q and +7.2% y/y. October HSBC manufacturing PMI data are
expected on Thursday and last month’s print at 50.2 could give way to slip
below the boom-or-bust 50.0 level, denoting contraction.
Looking at the Monthly USD/CNY chart below, we can’t help but
think that some big Chinese money knows their technicals extremely well.
Traders are especially attuned to
China now given the country’s vast accumulation of bad loans with the property
and corporate sectors looking very feeble. Bank of China is planning to issue
US$ 6.5 billion in new shares to international investors to bolster its capital
base, likely a necessity given the amount of leverage that Chinese banks have
piled on. The markets are also paying
close attention to Chinese foreign reserves as their decline in the third
quarter was the largest on record.
5. The Eurozone
periphery is back at it. Credit
spreads in Greece, Portugal, Italy, and Spain widened this week as investors
speculated the Eurozone’s increasingly fragile economic recovery may have run
its course. Greek 10-year government debt is now yielding around 9%, a level that may test its commitment to the troika or and jeopardise its return to the credit markets. This
latest round of peripheral credit woes will again challenge Germany’s steely
commitment to austerity, whereas France, Italy, and other member states will
seek room to expand fiscal spending.
European Union leaders will convene a summit next week in which they
will face the grim reality that the European Central Bank’s latest monetary
policy accommodation may not suffice to turn around an otherwise impotent
economy. Ironically, it was just weeks ago that investors were piling in to Eurozone
peripheral assets, pushing prices to levels deemed unsustainable. A worsening in
asset prices and increases in credit default swap rates will have many traders
considering yesteryear’s crisis.
