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Weekly Market Review 31/08-06/09/2015

It’s All about China, China, China

Over the past few weeks, markets have reacted with obvious nervous trepidation as global equity markets are being roiled by China’s economic situation. Almost daily, the news that has come out of China—the world’s second largest economy—has been anything but pretty. The evidence continues to build toward a crescendo that China is now facing a major impasse. Even the fast and furious efforts of Beijing and the Chinese central bank can’t break through it. Nor can they assuage nervous investors who hastily ditched equities and jumped on a flight to safety. In the week ahead, markets will briefly turn their focus away from China and look to Europe and the United States. The two major events on this week’s economic calendar are Thursday’s European Central Bank decision and Friday’s U.S. Non-farms Payroll figures.

ECB Decision Time

Markets will be keen to see what impact China’s woes may be having on the rest of the world.  And what markets are really anxious to see is the response to China’s slowdown by the major central banks. On Thursday, we will get our answer from one, arguably the second most important in the world, the European Central Bank. Naturally, the big question is will the ECB decide to cut interest rates even below the current 0.05%?

The ECB’s council must take into consideration two major factors: Greece and China. Greece may have been pushed to the sidelines in China’s wake, but it never could be a case of out of sight, out of mind. Indeed, while the Greek government managed to make a very crucial payment to the ECB only last week, potential trouble lurks. In September, Greeks will once again go to the polls. While the Syriza party believes it will be re-elected, there is a great deal of uncertainty.  That uncertainty hinges on whether or not the elected party will accept the latest (very unpopular) terms of the ECB/IMF bailout package. In the case of China, Mario Draghi and the ECB may feel that continuing on with a loose monetary policy is the right course of action. Or perhaps, the ECB may want to take action beyond that. We will only learn of the ECB’s outlook when Super Mario holds his customary press conference afterward.

NFP Takes a Backseat

Then on Friday, the private sector new jobs figures are to be released in the US. Now, though China’s economic calamity shouldn’t have an impact, per se, the numbers will still be critical for the Fed. The Federal Reserve is tasked with ensuring full employment and price stability. So far, the US economy is marching steadily toward those goals. In the absence of China, the Fed could likely argue that a tighter policy was warranted. But, of course, in the here and now, it is all about China. For the NFP in the short term, however, investors will want to see upwards of 200K new jobs for August. Anything below that will disappoint and could spark another sell-off in equities. If the figures are better than expected, however that would generally support the case for a bullish Dollar.

Down to Business

The bottom line is that China will drive sentiment in the week ahead. If the situation there does not soon abate, markets could be looking at a week dominated by a stronger Dollar (given a positive NFP). Then, too, the Japanese Yen would likely be pushed higher as safe haven demand increases proportionately to investors’ fears.

On the plate

Eurozone Core Inflation (Monday) - If Eurozone core inflation rises more than 1% it will be seen as Euro positive.

RBA Rate Decision(Tuesday) – If the RBA decides to slash its benchmark rate amid the china fallout the Aussie could be hit hard. However it might be enough for the RBA to simply drop a hint on a future rate cut for the Aussie to be hit.

Australian GDP Growth(Wednesday) – In the aftermath of the RBA rate decision investors will  be keen to see how weakness in china radiates on the Australian economy and adjust their Aussie outlook accordingly.

ECB Rate Decision(Thursday)- If Mario Draghi suggests more easing is in the making amid woes in china, the Euro could be hit.

Nonfarm Payrolls(Friday)- If the NFP figure is above 200k the dollar may ahead for another bullish round against its riskier peers the Euro , the sterling and the Aussie.

Chart of the Week – S&P500

snp 500

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