A nervous Asia at the open responds with a rebound in risk appetite − thanks to China

Sweden and EU central bank meetings may not ignite activity; US jobless claims to come

MAJOR HEADLINES – PREVIOUS SESSION

• US Weekly MBA Mortgage Applications out at -2.2% vs. +7.5% prior

• US Aug. Challenger Job Cuts out at -13.8% y/y vs. -5.7% prior

• US Aug. ADP Employment Change out at -298k vs. -250k expected and revised -360k prior

• US Q2 Final Non-farm Productivity out at +6.6% vs. +6.4% previously

• US Q2 Final Unit Labour costs out at -5.9% vs. -5.8% previously

• US Jul. Factory Orders out at +1.3% vs. +2.2% expected and revised +0.9% prior

• AU Aug. AiG Performance of Service Index out at 48.0 vs. 44.1 prior

• AU Jul. Trade Balance out at –A$1556 mln vs. –A$880 mln expected and revised –A$538 mln prior

• NZ ANZ Aug. Commodity Prices out at +4.3% vs. +1.0% prior

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• Sweden Riksbank Rate Announcement (0730)

• GE Services PMI (0755)

• EU Services/Composite PMI (0800)

• UK Services PMI (0830)

• EU Euro-zone Retail Sales (0900)

• EU ECB Rate announcement (1145)

• US Weekly Initial Jobless Claims (1230)

• EU ECB Press conference (1230)

• US Vice-President Biden to speak (1230)

• US Non-manufacturing ISM (1400)

• EU ECB’s Stark to speak (1400)

Market Comments:

Currency traders were again frustrated yesterday as market direction for the USD appeared to swing with abandon and failed to break out of established ranges. Data releases generally were disappointing with Challenger job cuts out at -13.8%, the ADP employment change coming in at -298k (versus -250k expected) and factory orders only +1.3% versus 2.2% expected. Equity markets reacted with the customary pessimistic air (note the S&P drifted further below the 1,000 mark) but the reaction in currency markets was less obvious.
Markets were undecided whether to chase the weak asset=reduced risk appetite = firmer dollar or the weak data=firmer bond markets=weaker dollar correlations.

There was no such indecisiveness in gold markets as the yellow metal soared a massive 25 big figures after we broke out of the recent consolidation range. Debate still rages as to the reasons behind the move, varying from central bank divestments into gold, macro fund buying in cash and options markets to simply a complacent market used to ranges and too heavily positioned one way. Market talk suggests that volumes were still small relative to the magnitude of the move.

The minutes of the last Fed meeting did not contain anything new – low rates for some time amid a subdued inflation environment, reduced downside should see a slow return to growth but still vulnerable to shocks while the labour market remains a concern. Late in the session Fed’s Plosser appeared with some slightly hawkish comments – there is a need to ensure programs don’t spur inflation and “we have to begin” pulling back market aid and expects growth in H2. While there is clearly optimism and some stability in housing, he is still cautious about unemployment stating it was “clearly an issue”.

As Asia opened, markets picked up a story in the China Securities Journal which highlighted that China’s banking regulator has suspended approving new business for banks that have capital adequacy ratios below 9%. Officially, China banks are required to have a minimum ratio of 8% but the banking regulator has been urging them since late last year to raise the ratio to 10%. Latest data, as at June 30, showed that 3 of China’s 14 public banks had ratios below 9%. So, markets were braced for a weaker open, and got it in the Nikkei which fell 0.5%, and this helped pull USDJPY and JPY crosses lower – initially. The open of China stock markets was the reverse - opening flat and pushing higher during the morning - as local players preferred to focus on reports in mainstream State newspapers that the vice-chairman of the China Securities regulatory Commission, Liu Xinhua, said late Wednesday said the commission would promote the steady development of the country’s equity market (official support?). By lunch the Shanghai Composite was up over 3%.

For today’s session we have the rate announcements from two central banks – Sweden’s Riksbank and the ECB we no change expected from either. At the post-meeting press conference ECB chief Trichet is likely to maintain the more dovish speak of late, though there may be some mention of exit strategies given this topic may be on the agenda of the upcoming G-20 meeting. Elsewhere in Europe we hear PMI services indices from Germany, EU and UK followed by Euro-zone retail sales. Into the US session we see the weekly jobless claims data, though this is likely over-shadowed by tomorrow’s non-farm payroll and unemployment release. Non-manufacturing ISM data rounds off the session.

Published on Thu, Sep 3 2009, 07:17 GMT