After going nowhere for the past week, last night Chinese equities opened with a bid tone and traded in the green all day long, resulting in the Shanghai composite ending the week with a gain of 2.2%, on what is gradually becoming a replica of US low volume levitation (to be expected after a third of market participants have now exited the market). The reason for the overnight sentiment: Bloomberg reported that the China Securities finance Corp, the local plunge protection team, is seeking access to an extra 2 trillion yuan, for a total of CNY5 trillion with which to prop up stocks. In other words, the gradual nationalization of the Chinese stock market first observed here weeks ago, is no longer gradual, which is ironic considering the following two headlines hit just moments ago:
What is appropriate liquidity? Just enough to prevent any selling.. of stocks that is. Because whatever you do don't look at commodities, where copper just dropped to a new 6 year low, as aluminum declined 0.5%, nickel down 0.6%, zinc drops 0.9%, lead loses 0.7%. All very “healthy” indicators of where the Chinese economy is headed.
Elsewhere in Asia, Japanese equities shrugged off a weak opening and morning session to end with modest gains. Earnings optimism associated with a weakening JPY was an oft written about topic. SoftBank rose as it joined the list of companies planning share buybacks. Toshiba was booted from the JPX- Nikkei 400 Index stemming from their accounting fraud. The stock was up .5% The BOJ left monetary policy unchanged, as expected. Gov. Kuroda's comments were consistent with previous views although he did say that a U.S. rate hike did not pose a risk to Japan. In fact, as long as the BOJ is printing, the thinking goes that nothing poses a risk to Japan.
The big Asia loser was Australia as the four large banks continued to be hit hard on capital ratio concern. ANZ, which raised A$3b in capital finished the week down 7.8%. UBS wrote that more capital will be needed.
Which brings us to today's main event, the July non-farm payrolls – once again the “most important ever” as the number will cement whether the Fed hikes this year or punts once again to the next year, and which consensus expects to print +225K although the whisper range is very wide: based on this week's ADP report, NFP may easily slide under 200K, while if using the non-mfg PMI as an indicator, a 300K+ print is in the cards. At the end of the day, it will be all in the hands of the BLS' X-13ARIMA seasonal adjusters, and whatever goalseeked NFP print the labor department has been “strongly hinted” is the right one.
The bigger issue is whether today good news will be good news (and bad will be bad) in a sign of the upcoming start of rate normalization, or whether a terrible print will send stocks soaring as the case of a September (or December) rate hike is killed once and for all. But the real data point to watch is not the monthly change in payrolls, nor the unemployment rate, but the average hourly wage growth, expected at 0.2%, up from 0.0%, and which in the ECI is any indication, is about to plummet which also would put the Fed on indefinite standby mode.
So ahead of today's nonfarm payrolls report the price action has been relatively subdued with European equities lingering moderately in the red (Euro Stoxx: -0.3%) mostly in sympathy with the weak U.S. close. Disappointing Industrial Production reports from Germany and France also dampened the mood.
On a sector breakdown European media names including ITV and Mediaset have been weighed upon by Viacom disappointing earnings yesterday, with selling otherwise relatively broad-based. Elsewhere, price action in fixed income markets has been particularly muted with volumes in the bund particularly light, with T-Notes range bound ahead of the non-farm payroll report.
US equity futures are down slightly at this moment, perhaps still digesting yesterday's dramatic rout if not so much in the broader market, then certainly in various “story” and media stocks, as the “day the content died” still reverberates around trading floors.
In FX, the Asia-Pacific session saw AUD the best performing currency underpinned by the latest quarterly SOMP from the RBA . The bank cut GDP forecasts which was widely expected, however revised higher inflation expectations and more importantly continued to signal a neutral policy stance. NZD initially fell after Fonterra cut their milk pay-out forecast by a wider than expected amount, however the currency recovered as Fonterra stated that it will provide support to farmers by an additional NZD 0.50/kg. Elsewhere, the BoJ kept monetary policy steady at a JPY 80trl annual rise in monetary base, as expected.
