Eyes on China and the US

The theme of the week has been the lacklustre levels of liquidity due to the 4 July holiday in the US which resulted in many investors watching the action from the sidelines. As a result most major equities markets have been fairly stagnant, allowing them to hold onto their gains from late last week/early this week.

However, it is concerning the coordinated action of three major central banks to ease policy didn’t lead to material rally in risk assets. Clearly, investors want more decisive and aggressive action from policy makers to stimulate global growth, even though it was the second time the PBoC has eased policy in a month. With regards to the ECB, the market was disappointed that the bank didn’t announce more liquidity easing measures along with the rate cuts – which was reflected by a massive EUR sell-off. Hence, indices may be capped until more aggressive easing is announced, or at least thought to be on the way.

Accordingly, there will be a lot of focus on NFP data out the US, which investors will use to gauge whether the Fed will move to stimulate the economy. We don’t think the Fed is going to engage in QE3 which may disappoint the market down the track, but in the short-term we will be closely monitoring data out of the US to provide an insight into the US economy. Current data suggests the US should muddle along for the rest of year, even without QE3. However, upside may be limited by the uncertainty surrounding global growth.

Furthermore, the apparent failure of policy easing from Beijing to spur gains for indices (historically it has led to gains) removes another potential reason for investors to rally – although more aggressive easing may still spur a rally. Thus, with reasons to rally quickly disappearing at the same time as evidence of global economic woes build, a sell-off seems more likely at this point.

Nonetheless, there are numerous data releases which may upset price action, in particular the slew of data out of China next week. The first big release is inflation figures which shouldn’t have moved to dramatically, but if they are much higher than expected it may limit further easing from Beijing. Later in the week, GDP data out of Beijing may be a game changer. If the GDP data is significantly worse than expected it may dispel the notion that Beijing has the will and ability to prevent a hard landing which, in turn, may prove very detrimental for risk assets.

Источник: Forex.com

06.07.2012