Markets Having A Bit Of A Gamble On China’s Improvement

Asian markets seem to be reacting positively to improved sentiment around China and less US dollar strength. The Chinese PMIs seemed to have eased fears that the economy would collapse while the US nonfarm payrolls (NFP) numbers have pushed back the likely date of a rate rise by the Fed into 2016. This has seen a weakening in the US dollar, particularly benefitting commodities priced in US dollars and commodity exporters like Indonesia whose currency rallied 2.3% today. The drop in the US Baker Hughes (NYSE:BHI) oil rig count to its lowest level in five years on Friday was also a boost for oil and oil-exporters.

There looks to be a beginning of a ‘China is not doomed’ rally in Hong Kong, which bodes well for the reopening of the mainland stock markets on 8 October. The improved NBS and Caixin PMIs released last Friday seemed to have eased concerns that China was spiralling into financial collapse. The delayed response to China’s monetary easing and fiscal spending plans finally seems to be showing up in the data. But the recent catalyst that has driven up a number of stocks in Hong Kong is the announcement to cut taxes on car purchases, lower the down payment on home loans, and support the Macau economy.

These policy changes have been a particular boost to the auto, property and casino sectors in the Hang Seng and Hang Seng China Enterprise Index (HSCEI). Macau related casino stocks surged more than 10% in both Friday and Monday’s trade due to news that China would do more to support Macau’s economy. China’s anti-graft campaign have hit the former Portuguese entrepot’s economy hard. There is also a huge new Cotai ferry terminal that is due to be finished in 2016, which will help boost tourist numbers. The news similarly saw ASX-listed Crown Ltd (ASX:CWN) rise 9.8% over the past three days.

The Hang Seng Index was up 0.3% earlier in the day with casino stocks continuing to see strong gains closely followed by energy stocks. The HSCEI was up 0.7% with consumer staples and consumer discretionary sectors both rising over 3%.

Japan’s markets have seen a boost on the improved outlook for the Chinese economy as well. Fishing, agriculture and forestry related stocks all rallied strongly on the TOPIX today, perhaps indicating some high expectations around the signing of the Trans-Pacific Partnership (TPP) agreement today.

The TPP is highly beneficial for Japanese Prime Minister Shinzo Abe’s Third Arrow program of productivity increases. It provides him with a fulcrum from which to push back against Japan’s entrenched interest groups that have held back reform. Abe has made some major wins against Japan’s famously over-protected agricultural sector, although he’s set for some difficulty in getting these passed.

The Nikkei 225 has surged past the key level of 18,000, rising 1.5%, with telcos and energy seeing the strongest performances.

ASX

The ASX continued to have another strong day rising 0.6%. The weaker US dollar and improving Chinese economic conditions helped the materials sector outperform all the others on the index rising 1.5%. Resources stocks also saw some of the biggest gains, with Fortescue Metals Group Ltd (ASX:FMG) rising 5.6% and South32 Ltd (ASX:S32) rising 3.6%.

Oil’s good performance also helped boost energy stocks, with the sector rising 0.7%. Worley Parsons Ltd (OTC:WYGPY) saw some of the biggest gains of the day rising 8%, and AWE Ltd (ASX:AWE) also performed well rising 3.6%.

The banks also supported the index with a strong showing rising 1.1%.

The Reserve Bank of Australia (RBA) left rates unchanged at its meeting today as was widely expected. The statement itself was also mostly unchanged. The most significant change was the RBA acknowledging that housing regulations are starting to have an effect:

“Regulatory measures are helping to contain risks that may arise from the housing market.”

Despite every economist surveyed stating their expectations for rates to be left on hold, the Aussie dollar rallied 0.5% off the release. Although ongoing concerns about the Australian economy continued with the trade deficit widening to $3.1 billion ahead of estimates for $2.4 billion.

Ahead of the European open we are calling the FTSE 100 6325 +27, DAX 9859 +45, CAC 40 4638 +22, IBEX 35 10035 +30, FTSE MIB 22045 +65