Global Markets Overview - 4/1/14

PMI Tuesday

There are over 20 different countries releasing manufacturing PMI data today. The most notable will be: (in timeline order) Japan, China, France, Germany and the US.

Looking to the two Asian drivers, China is going to be seen one way, despite an expansion or contraction read. The expectation of stimulus is building; a contraction read will only reinforce the call by several central figures that domestic demand is falling and stabilisation is required. If the read does show expansion, it is likely to be so marginal that it could be seen as flat lining and the threat of contraction in the coming requires more action; -in short this means stimulus measure.

The spot iron ore market suggests that stimulus may already be underway. Yesterday's Dalian futures moved +2.6% from Friday's close. The spot price advanced 4.01% to US$116.80 a tonne, which was its largest one-day gain since the August recovery last year; it is now ten cents shy of a full retracement of the March collapse.

Expect to see more announcements over the coming months about accelerated releases of pre-set measures to stabilise demand, accelerate work preparation and work construction of key state investment projects coupled with the a more timely allocation of the state budget. I think the actions of the PBoC suggest that physical fiscal stimulus is very unlikely, but it does look like other policy options to help with coordinated actions are in play, with the moves in the FX market and the yield curve of the debt market.

Japan's Tankan report will also be an interesting input for additional stimulus options. The CPI data on Friday show signs of stagnation, and with sales tax increases due this month, inflation excluding food and energy is expected to fall in the coming quarter. With industrial production tanking down 2.3% on yesterday's read, Japan needs to see output gapping up. Signs the outlook for manufacturing is falling will prompt moves in the JPY, as any signs the market believes Abenomics and the BoJ are under pressure to do more may see further pressure on the local currency.

Overnight the Fed clarified its language communications once more, with Janet Yellen mopping up her clarification of a 'considerable amount of time' to resort to the language of her predecessor with 'some time', removing the prospect that rates will rise in Q1 of 2015. Fed policy will remain as record low levels to sustain the current trajectory are unlikely to change even if data-dependant mantras are impacted to the upside (unemployment and inflation).

This saw the USD bid against neutral and hawkish central bank currencies heading to the exit. The GPB, NZD and the AUD all enjoyed bidding overnight as the USD lost ground.

The AUD is now back at the mid November 2013 level, and with the RBA unlikely to move on rates today, it's the statement that will drive the currency. If the RBA remains focused on the low rate environment and its effects on local non-mining demand, and the east coast housing market we could see increasing heat in the AUD. There will be no stopping traders bidding the AUD to 93 cents if this is the case.

Most technical analysts see the AUD heading to $0.9405 and today the fundamental may be doubly supportive. The AUD has four days to find its range and even with the release of the non-farm payrolls on Friday, it is unlikely to move the USD much, considering the statements from Janet Yellen last night that employment is only one part of the Fed's mantra. Inflation is still very low.

Ahead of the Australian Open

We are currently calling the market up four points on the 10am bell (AEDT) to 5398. However, the futures from both the US and Asia look very flat, suggesting most are watching the data today before reinstating trades for the new quarter.

Overnight BHP lost ground in London despite the fact it closed in the green on its Australian listing, with iron ore jumping up as much as it did and its ADR pointing to a quarter of one percent rise today; any signs of stimulus will be met with excitement and could see the stock strengthening post a bad PMI print. The place to watch will be the Dalian September futures for guides as to how strong the infrastructure stimulus will be.

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