Asian bourses were mixed overnight with the Nikkei leading losses (unofficially closes down 3.72% at 13,261.82) while China rallied on better than expected Official Manufacturing PMI (50.8 vs 50.0 survey and 50.6 prior).
The events in Turkey over the weekend were quite dramatic. A small neighbourhood protest over a park in the center of town erupted into mass protests mostly due to very harsh police reaction and total dismissal of protestors’ concerns by the PM. Now it is more about dissatisfaction with the government among broad sections of society who have not voted for them. It will take some time before things settle. The Turkish market, especially rates, will be very difficult today. From a 1.8960 high Friday USDTRY prints above 1.9001 on thin trade.
The China official manufacturing PMI increased to 50.8 in May, up from 50.6 in April, and much higher than the consensus expectation of 50.0. Our Chinese economist Jun Ma thinks this bullish official PMI, which uses a much larger sample than the HSBC PMI (3000 vs 400 firms), indicates a higher probability than just a week ago that the economy is stabilizing from the recent inventory destocking. Looking forward, Jun expects economic activity to stabilize and then recover in the remainder of this year on a moderation of the destocking cycle, a gradual (albeit
slower-than-expected) pass-through of social financing growth to the real economy, and a pick-up in real estate investment. He expects GDP growth in Q2 to be 7.7% yoy (same as in Q1), and recover to 7.8% in Q3 and 8.2% in Q4.
In weekend news flow, comments by Draghi in a speech prepared for the IMF Conference to be held in Shanghai today have had some attention. He defending the OMT programme and noted that, “virtually all economic agents, including corporations, banks and households, were benefitting from the calm that had returned to financial markets since August 2012,”
He added that OMTs are designed to keep government bond yields just below ‘panic’ levels, not to bring them down to levels that would somehow help government solvency. These comments come ahead of a court hearing which will hear objections to the OMT on June 11-12, to be held in Germany’s Constitutional Court in Karlsruhe.
AUD was the leader in G10 FX trading to a high of .9642 in early London after opening roughly 50 pips higher from Friday?s close. The combination of the better official China PMI data released on Saturday, an FT story that “China’s powerful stockpiling agency has purchased base metals on the international market for the first time since prices crashed during the global financial crisis, as Beijing takes advantage of the recent price slide”, and another weekend of strong housing auctions in Sydney and Melbourne all helping AUD.
EUR seems to be holding up ok but that is hardly surprising given the blow-up in the EM space. Trading here remains neutral at these levels and believes it will remain at the mercy of the general USD strength ahead of the ECB later this week. In regards to the JPY we remain neutral for now although local retail speculative longs seem stretched and there might be sizable long-liquidation interest below 100ish. We also saw a mixture of names selling kiwi on Friday. With a light data calendar in New Zealand this week, the kiwi will take its lead from the USD direction and in sympathy to AUD. Next support on the downside at 0.7900 then 0.7800.
USDAsia continues to find solid 2 way interest despite the general EM sell off. Exporter interest to sell dollars was particularly notable in KRW and INR while custodians, importers and offshore specs were better buyers USD. Data wise in Indonesia inflation came in at 5.47% yoy vs 5.60% expected. The April Trade Bal -$1.6bn vs +$0.05bn expected, the surplus in March proved to be very short lived. EX -9.1%, IM -3.68%. IDR spot remains dislocated and we have yet to see the anticipated offshore hedging scramble, there have been a few equity/credit guys coming to hedge in the NDFs and a few macro playing the loftier end of the curve. Overall though, client flows were again light in Asia and it feels like Fast Money is close to home in terms of Asian risk while RM is hardly concerned by the moves in USD Asia yet.
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