China Stimulus Expectations Grow

Daily Analysis - 04/05/2015

Slowing Manufacturing Could be the Sign of Further Policy Easing

The latest manufacturing figures from China confirm the worries of policymakers at the Central Government and People’s Bank of China as officials attempt to avoid an economic hard-landing scenario. However, the weakness in macroeconomic metrics has offset many of the recent adjustments to monetary policy at a time when the economy needs more accommodation.

China Manufacturing Crumbles

The HSBC Chinese Manufacturing PMI released overnight printed in negative territory, sliding from 49.2 to 48.9 on expectations of a modest rise to 49.4. The contraction in manufacturing conditions highlights the continued struggle facing Chinese policymakers as they eagerly adjust policy to offset a slowdown in economic expansion. Nowhere is the softness in the economy more evident than the slumping revenues in gambling hub Macau which has seen casino revenue tumble 39% month over month, capping 11-straight months of declines. Bets on stimulus in the form of quantitative easing and other monetary easing measures have spurred gains in benchmark equity indices. Helping the ascent of the best performing stock market is the rapid buildup in new margin trading accounts, with over 4 million accounts opened in the fourth week of April. Stimulus bets could propel the Australian dollar higher despite an upcoming policy decision in which the RBA is expected to cut rates 25 basis points.

Saudi Advance in Yemen

Although rumors remain unconfirmed and denied by the Saudi Government, there have been reports of Saudi Arabian Special Forces deployed in Aden to assist local loyalist militias with halting and reversing the Houthi advance. The mission is purportedly underway to run the rebels out of the international airport in Aden which would likely be a strategic base of operations for a wider ground incursion in the future. Aside from the Yemen hostilities driving the risk premiums in energy prices higher, the seizure last week of a Marshall Island’s flagged commercial vessel in the Strait of Hormuz by Iranian Revolutionary Guards could be construed as a sign of growing aggression in the Persian Gulf. One of the most strategic seaborne oil routes could be at risk if anxieties about a potential closure continue to rise with Iran’s assertiveness. As a result, oil prices continue to trend higher, testing multi-month highs.

No Greece Breakthrough

The optimism of replacing firebrand Finance Minister Varoufakis as lead negotiator with Greece’s creditors failed to see a deal reached over the weekend as very large looming payments lie ahead of Greece. The latest round of negotiations have not managed to close the gap between sides as Greece desperately seeks to close a deal in May considering the increased ECB restrictions hampering the ability to fight off insolvency in the region. Although the Greek Government has been eagerly pointing to the existing liquidity problems as rationale for speeding up the negotiation process, Europe seems fixated on the reform packages being offered by Athens. Any whiff of noncompliance or intransigence could signal the end of talks with creditors leaving the table and letting Greece fail. Euro Area regional equity benchmarks fell last week as the rout in sovereign debt accompanying Mario Draghi’s quantitative easing program bled over into stocks.

WTI Crude Oil Equidistant Channel Technical Pattern

Oil prices continue to ignore the fundamental oversupply problems, with prices reflecting the growing geopolitical uncertainty of the Persian Gulf. The decelerating decline in the United States rig count and no demonstrable change in output is seeing prices rise in conjunction with the upcoming driving season. Stronger demand could boost prices in the near-term in spite of the continued build in crude oil inventories reported last week. The equidistant channel formation setting up in WTI crude oil prices has a bullish bias, with the near-term uptrend intact. Until the unemployment numbers on Friday, no major developments are likely to upset the prevailing trend, unless politically driven. The predominant strategy in this scenario is initiation of long positions from the lower channel line to be closed at the upper channel line. Any move outside the channel could be indicative of a breakout trade to be accompanied by increased momentum and volume.