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    IronFX Daily Commentary | Asian equity markets mostly in the green | 15/02/2016

    15.02.2016, 10am

    • Asian equity markets mostly in the green Asian equity markets rallied today, with the only exception being China’s Shanghai Composite 300, which closed somewhat below its opening mark after a week off. Japan’s Nikkei 225 jumped by more than 7%, but given that overnight data showed that the Japanese economy contracted by more than expected in Q4, we see the possibility that the bounce could be short-lived. The jump may have come as a result of PM Shinzo Abe’s comments that excessive volatility in FX is undesirable and that Tokyo ‘would intervene where necessary’ to influence such moves. The stock market rise curbed the demand for safe-haven assets, such as the yen, the euro and gold. We believe that the positive sentiment is likely to carry over into the EU markets, which could recover some of their recent losses. Nevertheless, with no evidence that concerns over the global economy have dissipated, we will treat the recovery with caution.

    • China’s exports and imports continue to fall China’s exports and imports continued to disappoint as they fell by much more than expected in January. The trade surplus increased, but only because imports fell faster than exports. This suggests that the depreciation of the yuan has done very little to boost the competitiveness of Chinese exports since August. In an interview over the weekend, the PBoC Governor said that there is no basis for continued yuan depreciation. Indeed the yuan’s fixing today was sharply higher than usual, which makes us believe that the PBoC may need to act again in an attempt to revive the Chinese economy, perhaps in the form of additional rate cuts or reductions in banks’ reserve requirements.

    • Today’s highlights: During the European day, we get the trade balances from Eurozone and Norway, but no forecast is available for either.

    • Markets will remain closed in the US and Canada due to public holidays.

    • We have only one speaker on Monday’s agenda: ECB President Mario Draghi will speak before the European parliament.

    • As for the rest of the week, on Tuesday, during the Asian morning, the RBA releases the minutes of its February meeting. At this meeting, the Bank remained on hold but signaled a strong easing bias, which would depend on incoming data. The Bank also acknowledged the global turmoil and the risks that poses to domestic conditions. RBA Governor Stevens said on Friday that whether the recent turbulence has affected aggregate demand in Australia cannot be answered yet. Thus, in the minutes we will look on whether this view is shared among all council members.

    • During the European day, the main event will be the UK CPI for January. The forecast is for a slight acceleration in the headline figure, but a minor slowdown in the core reading, which reflects energy-related base effects. The decline in gasoline prices in January was less than it was last year, which could provide a temporary boost to inflation due to the CPI calculation. In the minutes of the latest BoE meeting, officials judged that CPI inflation is likely to remain below 1% until the end of the year, as a result of the recent fall in commodity prices. Therefore, we believe that a minor rise in the inflation rate due to base effects may be not be enough to boost inflation expectations, as it may be viewed as temporary.

    • From Germany, the ZEW survey for February is forecast to show a decline in both the current situation and the expectations indices. The persistent negative sentiment over global growth and may have weighed on the optimism of German businesses. This could put the common currency under renewed selling pressure.

    • On Wednesday, we get the UK employment report for December. The unemployment rate is forecast to have declined for the sixth consecutive month, but average weekly earnings are expected to have slowed somewhat. Although the decline in the jobless rate continues to point a tightening labour market, we believe that investors will pay more attention on wages. Further slowdown in wages may hit inflation expectations and could prove negative for the pound.

    • In the US, the Fed releases the minutes of its January 26-27 meeting. At this meeting, the Committee refrained from raising interest rates as was widely expected, while in the statement accompanying the decision, officials noted that they are monitoring international developments and how those may affect the US economy. Since the meeting, the uncertainty surrounding financial markets has increased and concerned comments from several Fed members, including Chair Yellen, have eliminated any market expectations for a March hike. Therefore, we believe that the minutes are likely to be viewed as outdated and the reaction in USD could stay muted.

    • On Thursday, Australia’s unemployment rate is expected to have remained unchanged in January, while the net change in employment is expected to have increased. In his recent speech before the parliament, RBA Governor Stevens said that the labor market improved more than expected, but it remains to be seen whether that strength would continue. As a result, further improvement in Australia’s labor market may push back market expectations for a rate cut by the RBA in March. This could prove AUD-positive.

    • From China, we get the CPI and PPI data for January. The CPI is expected to have accelerated, while the PPI rate is expected to have fallen at a slower pace than previously. The indicators will be watched closely, as low inflation in China is one of the main causes of global deflationary pressures. Any signs of a soft reading could put more pressure on the PBoC to introduce further stimulus and may bring AUD and NZD under renewed selling interest.

    • On Friday, the main event will be the US CPI data for January. The CPI figure is expected to have accelerated significantly, partly due to energy-related base effects in the CPI calculation. Given that the Fed has implicitly signalled that rate hikes are currently on hold while policy makers assess the impact of the international turmoil on the US economy, any acceleration in the inflation data could bring forward some expectations for near-term hikes. We expect that even a strong acceleration in inflation would be insufficient to revive market hopes for a March hike, but it may be enough to increase the odds for April or May. This could cause the greenback to regain some of its lost glamour.

    • From Canada, the CPI data for January are forecast to show that inflation accelerated further and is now very close to the BoC target. The expected rise could mainly reflect energy-related base effects and upward price pressures from a weakening CAD. This could support the Loonie a bit.

    • The European council will also meet, and amongst the main points of discussion will be the UK in/out referendum and the draft deal proposed by the EU to British PM Cameron. The meeting will be closely watched as a proxy for the likelihood of a “Brexit”. A non-agreement between the EU and the UK could dramatically increase the chances for a Brexit and bring GBP under renewed selling interest.


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