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EU Market Outlook - Speculation Rife Over China faltering

Last updated 9/10/2012 2:02 AM EST (GMT -5) 0 Comments - Add your comment

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Andrew Taylor

Market Strategist, GFT

Follow @ATaylor_GFT

Top Headlines

o    China continues to weigh on Asian markets

o    Strong Fed stimulus action is being priced into markets

o    EU risk events keep trading subdued

Market Moves

o    AUD weighed on CH data; EUR/USD kept in tight range

o    ASX2 00 sold off on weak trade data from CH

o    Gold, Silver, Oil and copper hold gains from QE3 expectations

Asian equity markets were bobbing along on its usual Monday inaction with the only move appearing on open to account for Fridays catch up play. That was until midday when China released its Trade Balance figures for August which showed a decent miss in its Import number, illustrating that demand from within the world’s second largest economy was continuing to wane.

Asia Watch

Speculation on the future of Chinas growth was dealt another blow on Sunday as output figures also came in weaker than expected compounding fears that their slowing of growth is being understated. Friday’s unveiling of a $157 Billion stimulus infrastructure plan to combat the decline in internal demand shows that the Chinese authorities are more than willing to take matters into their own hands. Markets however, want to see more and as yet are not convinced that policy makers have done enough to turn the big ship around.

US Watch

Following the NFP result, markets immediately priced in the Federal Reserve going beyond extending its policy rate guidance into late 2015 to include a more substantial blast of liquidity straight from the printing presses into an asset purchase program. The next few days ahead of this week’s FOMC meeting will see markets form their own opinion and price in what they see should be the appropriate action by the Fed. The latest FOMC Minutes and Jackson Hole Comments have raised the bar quite high on stimulus expectations with the ball squarely back in the court of the Federal Reserve.

EU Watch

Markets are digesting ECB President Draghi’s bond buying extravaganza (OMT) quite well. It seems his ‘Do whatever it takes’ mantra has been a PR success as it still rings in the ears of traders just as clear as it did when he uttered them many weeks back. His targeted plan has provided a back stop for troubled economies to access funding producing some much needed certainty around a previously damaging element of failing sovereigns. This confidence has a limited shelf life and the EU Leaders need to act in unison before this ECB time buying exercise expires.

This week is full of risk events to navigate with the first worthy of note being the Dutch Election on the 12 ^th . A change to the political backdrop of any economy within the EU brings with it a high level of uncertainty especially if the outcome is too close to call. The Dutch election is likely to be split, which could potentially leave the country in limbo for months before a result is formed. If the Socialist Party were to gain the majority, concerns to whether they would continue to side up with Germany and Finland as advocates for the current rules of the fiscal compact - in affect weakening the power of the group.

On the same day the German constitutional court will hand down its decision on the legalities of the ESM. This approval by German is a key element for its strength and sustainability. Anything less than and approval will put President Draghi’s OMT in doubt over the longer term.

Outlook

European equity markets will open slightly lower today with not much expected to influence markets on the data front.  The European stimulus trade is still hovering around but may see some light profit taking ahead of the scheduled major risk events due from the Zone. This will also see rumours flying about especially on the QE3 build up but feel there has been a fair amount of easing expectations already priced in for now.

Trade Idea

Today’s trade idea stems from the perceived inaction by China to address its growth decline on a larger scale. China is obviously a little gun-shy in provided a repeat performance of the massive 2008-09 stimulus unleashing, preferring to take a more measured approach which will take longer for markets to be convinced that they are on track.

Yesterdays and today’s weak data from China should weigh on the AUD in which we will prefer to sell against the JPY. For entry, either a clean break of 80.90 or, if the trading gods are smiling – a sell on a rally towards the 81.20 level would be ideal. Stops to be placed above 81.50 looking for an initial Take Profit at 81.65 (where you would then move your stop to entry) and look to take the rest back at 80.10. There is potential for a move lower towards the 79.60/70 but the Psychological 80.00 may come into play so will err on the side of caution and bank ahead of ‘Phsycos’!

For more intraday analysis and trade ideas, follow me on twitter @ATaylor_GFT

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About The Author

Andrew Taylor's financial markets career started in 1991 in the interbank FX market,where he worked for one of the largest banks in Australia. Andrew then went on to trade on behalf of some of the biggest global banks, working across five of the world's major financial hubs: Sydney, New York, Singapore, Auckland, and Tokyo.

His more than 20 years of experience spans market borders and asset classes, covering global equities, commodities, options and futures. Andrew's wealth of trading experience and ability to communicate with traders of all levels has put him in demand as a first point of contact for clients and the media alike when seeking information and guidance.