t’s been another up and down (mostly down) for stock markets around the world with US and European indices finishing the day down another 2.5-3.5%. Turmoil in Chinese markets continues to impact trading around the world. News that Chinese authorities plan to drop the circuit breakers after only four days of trading provided some initial support but talk in the afternoon that the PBOC may be planning to devalue CNY significantly sent stocks lower once again.
Personally, I think this selloff could come to a head over the next couple of trading days, with a lot of volatility and trading opportunities likely. Clearly there has been pent up selling waiting to be unleashed by the selling bans but this can ease over time. As much as China’s economy has struggled lately, it’s not doing bad enough to justify two 7% drops in four days, just as it wasn’t doing well enough to justify last spring’s massive rally. Yesterday’s quick selloff in particular seems to me like some people were just gunning to trip the breakers. By removing the breakers, market may fall further initially, but at some point they could invite bargain hunters, as was seen in the Hang Seng yesterday which finished strong.
The potential devaluation of CNY seems overblown to me as well. Nobody complained over the last year when its peg to USD drove it way higher against EUR, GBP, JPY, CAD, AUD and other currencies. The strong CNY has been a headwind and bringing it back down to a more proper level relative to its economy could be a positive and help a recovery.
So today could be another wild ride for Chinese and China sensitive markets including commodities and resource stocks/currencies ahead of the weekend inflation figures but this could also create significant opportunities for trading.
Capital flowing out of risk markets continued to find its way into defensive havens with gold and JPY remaining the havens of choice. EUR rebounded strongly as traders started to clue into the fact that for the most part, European economic data released this week has been pretty good on balance, with employment figures showing particular improvement.
Speaking of employment, north American markets could be quite active tomorrow on the US nonfarm payrolls and Canada Labour Force Survey reports. On Wednesday, I had called for an upward revision to ADP payrolls and a weaker headline number and instead got a strong headline number and no revision. I still think the ADP surprise was a catch-up move and nonfarm payrolls could come in below the 200K street estimate.
My reasoning for this is that employers may have sat on their hands in the first half of the month waiting to see if the Fed was going to raise rates or not has happened back in September. By the time the Fed made its decision the holidays hit with their normal slowdown. Here’s what happened the last time to nonfarm payrolls when the Fed started raising interest rates in June of 2004.
May 2004 308K
June 2004 74K
July 2004 33K
August 2004 132K
Sept 2004 162K
Oct 2004 345K
In other words, nonfarm payrolls growth stopped for a couple of months after the first rate hike then ramped right back up again. So a low number would not be unusual. I think we’ll see 100K for December with a possible upward revision to November, while the street is at 200K. The Fed’s party line of late has been looking at 4 increases this year and pretty much nobody is expecting a move at this month’s meeting. Therefore, I think it would take an extreme reading like above 300K or below 0 to change Fed expectations.
The street is expecting an increase of 10K jobs in December, but this could be a bit high. Both PMI reports for Canada (RBC manufacturing and Ivey) fell over month and both were in contraction territory. I suspect overall jobs fell by 10K with a slowdown in hiring on the full time side. This could be offset by a rebound in part time, it’s hard to say. I also suspect a stronger December could be offset by a potentially weak January if we get another round of oilpatch layoffs.
There’s so much potential for a lot of market action across many fronts. I almost got through without mentioning oil which continues to be impacted by concerns about weak demand and oversupply. The big moves of this week have left oil oversold and a number of other markets are starting to look overextended. This means that we could potentially see significant snap back moves in the coming days potentially creating opportunities for traders on both sides of the markets.
Gap same store sales (5.0%) below street (3.4%)
Significant announcements released overnight include:
US jobless claims 277K vs street 275K
Canada Ivey PMI 49.9 vs street 55.0 vs previous 63.6
US natural gas storage (113 BCF) vs street (95 BCF)
Germany retail sales 2.3% vs street 3.7%
Germany factory orders 2.1% vs street 1.1%
Sweden service PMI 58.0 vs previous 56.3
UK Halifax house prices 9.5% vs street 9.0%
Italy unemployment rate 11.3% vs street 11.5%
Eurozone unemployment rate 10.5% vs street 10.7%
Eurozone retail sales 1.4% vs street 2.0%
Eurozone economic conf 106.8 vs street106.0
Greece unemployment rate 24.5% as expected
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
9:30 am AEDT Australia construction PMI previous 50.9
11:30 am AEDT Australia retail sales street 0.4%
12:30 pm AEDT Japan real cash earnings previous 0.4%
4:00 pm AEDT Japan leading index street 103.9
7:00 am GMT Germany industrial production street 0.5%
7:00 am GMT Germany trade balance street €20.2B
7:45 am GMT France industrial production street 3.0%
8:30 am GMT Sweden Riksbank minutes
8:30 am GMT Sweden industrial production street 4.5%
9:00 am GMT Norway industrial production previous (3.0%)
9:30 am GMT UK trade balance street (£2.7B)
8:30 am EST US nonfarm payrolls street 200K
8:30 am EST US nonfarm revision previous 211K
8:30 am EST US payrolls 2 month net revision
8:30 am EST US private sector payrolls street 198K
8:30 am EST US unemployment rate street 5.0%
8:30 am EST US average hourly earnings street 2.8% vs previous 2.3%
8:30 am EST US participation rate previous 62.5%
8:30 am EST Canada employment change street 8K vs previous (35K)
8:30 am EST Canada full time jobs previous 36K
8:30 am EST Canada part time jobs previous (72K)
8:30 am EST Canada unemployment rate street 7.1%
11:30 am EST FOMC Williams speaking
1:00 pm EST FOMC Lacker speaking
12:30 pm AEDT Sat China consumer prices street 1.6%
12:30 pm AEDT Sat China producer prices street (5.8%)
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