Article / 06 January 2016 at 0:47 GMT

Morning Report APAC: China intervenes in equities, oil slide rolls on

APAC Sales Trading Desk / Saxo Capital Markets
Singapore


  • Saudi-Iranian tensions overshadow crude oil production and prices
  • The Mid-East tension has made gold attractive and silver has also found support
  • Beijing's market intervention has helped support equities
  • The AUD could fall to $0.7170; its next target would then be $0.7000

 

By Saxo APAC Sales Trading

Economic data of the day (Singapore Time)

0830: TWD – CPI YoY (Exp. 0.40%, Prev. 0.53%), WTI YoY (Prev. -7.75%)
0945: CNY – Caixin China PMI Composite (Prev. 50.5), PMI Services (Prev. 51.2)
1800: EUR  – Eurozone PPI MoM December (Exp. -0.2%, Prev. -0.3%), YoY (Exp. -3.2%, Prev. -3.1%)
2015: USD – ADP Employment Rate (Exp. 198k, Prev. 217k)
2015: USD – Trade Balance (Exp. $-44.00bn, Prev. $-43.89B)
2200: USD – ISM Non-Manufacturing Composite (Exp. 56.0, Prev. 55.9)
2300: USD – Factory Orders (Exp. -0.2%, Prev. 1.5%), ex Transportation (Prev. 0.2%)
2300: USD – Durable goods Orders (Prev. 0.0%), Ex Transportation (Prev. -0.1%)
0300 on Thursday: USD – Fed Releases Minutes from Dec 15-16 FOMC meeting


Overnight news

  •  Japan: Bank of Japan Kuroda said in an interview that  BOJ is “well able to reach the 2% price stability target with the currency policy”, however there are many risks and “If it was necessary, we are prepared at anytime to add sufficient monetary easing”.
  • Sweden: Sweden’s Riksbank’s executive board has “taken the decision required to be able to instantly intervene on the foreign exchange market if necessary, as a complementary monetary policy measure, to safeguard the rise in inflation.”


Foreign exchange

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The USD was bid yesterday against all G10 currencies, with EUR and CHF the biggest underperformer down 0.7%. After holding well for all of December at major resistance at the 200 day moving average at 1.1045, hedge funds and real money were active sellers in the past two sessions, pushing the EUR back down to 1.0750. We now trade at the bottom of the Ichimoku cloud. A break below 1.0750 could push the EUR back to the next support at 1.0600.

The USDCHF has finally broken parity again since the big drop at the beginning of December and trades above the 50d MA. The momentum is clearly on the upside but we need to break above 1.0160 to see the previous highs of the currency pair.


The AUD is attempting again to break the 100d MA at $0.7170. A confirmed break today would be significant and the next target will then be $0.7000.


With the pressure seen on oil, USDCAD continues to trade extremely bid and is attempting to break the psychological level of 1.4000. As said above, it’s just a psychological level and it will be broken soon.

In emerging markets, the focus is still on China and the fixing moving higher for the past month and especially during the first 2 trading days of the year. With the USD bid globally, we should expect the fixing to remain elevated and the consequence of this being a continued tight funding onshore which should more pressure on PBOC to cut RRR and USDCNH to remain extremely bid. We trade at levels last seen in 2010 and it seems there is room to go much higher especially that a lot of banks in Taiwan went back into structured products in October-December in CNH to get some carry by basically selling USD calls. More panic could be seen in this market with no major sellers on top.

The first consequence of this is a big interest from hedge funds to buy USD against Asian currencies such as Korean won, which is seeing outflows in the equity and bond markets and USDKRW is now trading back at 1190, close to break the psychological level of 1200. If KRW moves like its peers in Asia, don’t expect to see aggressive BOK selling of the USDKRW. Besides, JPYKRW has been rallying back to 10, which is satisfactory to the authorities.
USDSGD is also trading on a bid tone and seems on its way to break soon the highs of 2015 soon.

Another consequence of the selling off of CNY is seen in Brazil where China is the biggest trading partner and USDBRL is now trading back again above 4.0000 and should remain bid.


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The USDJPY is still trading below the Ichimoku cloud at 120.80 which is not the big resistance and is triggering a lot of interest in the market to buy downside options in USDJPY. Expect the vols to remain bid with such interests from hedge funds.

We are also seeing a lot of interest from investors in buying downside in the EUR and upside in USDCHF


Rates

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The December vehicle sales data in the US was disappointing and is creating interests in steepeners  in the US curve with the 2 year and 5 year UST down 2 bps while the 10 yr yield was higher by 1 bps. We have ISM non-manufacturing tonight in the US and durable goods, which should get more indication on the US economy. Any negative surprise would continue to push the curve steeper. We know have a 50% chance of rate hike priced in in the March meeting.

In Europe, continued ECB bond buying, swapped issuance should continue to support rates. Swapped issuance is when the issuer of the bond wishes to swap their fixed payment (coupon) into floating, which is achieved via receiving fixed in swaps outright and driving swap spreads tighter

Commodities 

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Equities

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After an intervention in the Chinese equity market from authorities to support the market, global equities remained flat overnight but didn’t recover from the previous day selloff.

Among shares moving on corporate news, Apple sank to its lowest level in more than 14 months and weighed on the technology group after the Nikkei Asian Review reported the company would reduce the output of its latest iPhones by about 30% in the first quarter of 2016. Apple supplier Skyworks Solutions Inc. lost 6 percent to its lowest in nearly a year.

General Motors fell 2.6% to a three-month low after December sales disappointed. The fallout hit parts maker Delphi Automotive Plc and Goodyear Tire & Rubber Co., which dropped more than 2.7%. Dealer AutoNation Inc. lost 3.3% and fell to its lowest point since September 29.

President Obama gave a very emotional speech yesterday about guns and a package of actions to expand background checks. But the direct effect of that was a rally in gunmaker shares on speculation that sales of firearms would rise. Smith & Wesson (SWHC US) gained 11% to a record high of $25.86 and Sturm Ruger (RGR US) added 6.8% to reach a five-month high at $65.54. US gun sales have surged in recent years any time the threat of new restrictions has made the news, normally in the aftermath of mass shootings.

Credit

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The intervention in the Chinese equity markets helped CDS recover from their rally the previous day and dropped 2 basis points.  

Indonesia saw a rally in bonds yesterday and in the currency from a renewed interest from real money to invest in the country at the start of the year.


Company/Country News

Hong Kong

  • Vanke (2202) announced on the Hong Kong Stock Exchange that its H-shares will resume trading from January 6, at 9am, while its A-shares will remain suspended. We contacted the company and the resumption of H-share trading is a HKeX and SFC requirement, while for the A-share, it is required by Shenzhen Stock Exchange to continue its trading suspension due to the pending release of a potential major asset restructuring plan. MS thinks the H-share price may be under pressure upon resumption due to its strong performance before the suspension and increased uncertainty due to Baoneng's bid for Vanke. Currently, Baoneng owns 24.3% of Vanke, surpassing CR Group of 15.3% and Vanke management of 4.14%.
  • Great Wall Motor's (2333) December sales increased 24% YoY and 6% MoM to 95,729 units. SUV sales increased 29% YoY and 7% MoM to 78,989 units. MS believes GWM's high exposure (~90%) to sales of vehicles with engine sizes ≤1.6L makes it one of the largest beneficiaries of the purchase tax cut on such vehicles. Its improving inventory level and new model launches bode well for sales growth in 2016.
  • Geely's (175) December sales decreased 2% YoY but increased 4% MoM, mainly due to a higher base in December 2014. Geely's sales volume in 2015 reached 509,863 units, which is 13% higher than its 2015 full year sales target of 450,000 units. Geely set its 2016 sales volume target at 600,000 units, representing 18% YoY growth (vs. 22% YoY growth in 2015). However, given that the tax cut will have full-year impact in 2016, vs. only one quarter impact in 2015, and sales of Geely's new SUV models (NL-3 and NL-4) to be launched in 2016 are expected to benefit from strong SUV demand in China, MS believes this target will not be difficult for it to beat. MS raises PT from HK$3.75 to $HK4.50.
  • Evergrande (3333) bought back 65.4m Shrs for HK$429m Tuesday. Shrs repurchased represented 57% of Tuesday’s trading volume, according to Bloomberg calculation. Co. has bought back 287.6m shrs since Dec. 17.
  • Peak Sport (1968 HK): 3Q 2016 sales fair orders at low-teens growth. Basketball and running footwear were best seller products, co. says in a filing to Hong Kong stock exchange.
  • China Railway Construction (1186 HK): Wins bids for 20.6bn yuan projects.
  • Molycorp Inc., the bankrupt rare-earths miner, received bids for assets that exceed the company’s own estimate of its value, according to people with knowledge of the matter. Aluminum Corp of China (2600) offered to pay more than $700 million for Molycorp’s non-U.S. assets, said the people, who asked not to be identified because the process is private. Shenghe Resources Holdings Co., a rare-earths miner and processor based in Chengdu, China, and lithium miner Galaxy Resources Ltd., based in West Perth, Australia, also made offers that exceeded the company’s appraised value range, which tops out at $443 million, the people said. US private equity firm Carlyle Group LP also has held talks about a possible bid, the people said.

Japan

  • Asahi (2502): Beer unit to announce its 2016 business plan at 14:00
  • Ono Pharma (4528): To develop a diagnostic test to identify patients who would benefit from the Opdivo cancer drug, increasing efficiency of treatment and lowering costs.
  • Bridgestone (5108): Announced the expansion of its passenger tire plant in North Carolina.
  • Renesas (6723), Sony (6758): The Innovation Network Corp of Japan is considering selling its stake in Renesas to Sony.
  • Nissan (7201): December US sales rose 19% YoY vs. cons +16%.
  • Toyota (7203): December US sales rose 11% YoY vs. cons +12%.
  • Honda (7267): December US sales rose 9.9% YoY vs. cons +10%.
  • MHI (7011): MHI, Mit Corp (8058), and 3 other shipbuilders reached an agreement to turn over their stake in Ecovix-Engevix Construcoes Oceanicas to  Jackson Empreendimentos. Brazil investments likely accounted for ¥10bn in losses for MHI in FY14.
  • Takata (7312): The head of the Japan Auto Manufacturers Associations told reporters that there are no discussions on a rescue of Takata or spreading the payment of recall costs over multiple years.
  • MUFG (8306): Set up a "Fintech" unit to research and develop new financial technologies, with offices in both Tokyo and Silicon Valley.

Corporate moves

  • Comforia Residential REIT (3282): To raise Y8.31bn in public shr sale; to use proceeds for property acquisitions.
  • Murata Mfg (6981): Targets a 30% dividend payout in three years thanks to strong demand for high-performance smartphone components.
  • Fuji Corp (7605): Seeks to raise ¥ 1.45bn in share sale; plans to move listing to TSE2 from Jasdaq.

Source: MS

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 Precious metals including gold and silver have attracted buyer interest following the rise in tensions between Iran and Saudi Arabia. Photo: iStock

 

– Edited by Robert Ryan


This report was compiled by the Saxo APAC Sales trading team in Singapore – the home of social trading. Follow the team on @SaxoStrats or post your comment below to engage with Saxo Bank's social trading platform. Follow us on @SaxoStrats on Twitter

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