5 Things Traders are Watching Next Week, or "More Pain for Eurozone Peripherals"

 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.