There are plenty of reasons that should push equities lower, but equities continue trending higher.
Both European and American stocks closed last week with gains, and futures hint at a positive start to the week despite China’s announcement of a modest 5% growth target.
But the 5% growth target raises concerns about the amount of stimulus that the Chinese will put on the table, and the possible continuation of the government crackdown. The Chinese officials said that they don’t want a disorderly growth in real estate – which is a major ingredient for the Chinese growth. Plus, the local governments could borrow and spend less, even though the Chinese as a whole increased their fiscal deficit projection.
This means that China is on its way for more centralization of the power around Xi Jinping and less freedom for local entities. Combined with Xi’s fight against euphoric growth and the West’s limitation on investment and technology exports to China, we shall see investors reluctant to return to Chinese equities.
China’s modest 5% growth target weigh on energy and commodity prices. Iron ore and copper futures are down, and US crude’s 100-DMA resistance, around the $80pb level, will likely remain strong.
On this week’s agenda
Fed talk
Federal Reserve (Fed) Chair Jerome Powell will deliver his semi-annual testimony before the Senate this week, and he will certainly reiterate that the Fed is not yet done with its fight against inflation, that the labour market remains particularly strong, that a soft landing is possible, yet the Fed won’t hesitate to sacrifice growth to abate inflation as soon as possible.
Looking at the latest set of data, the U-turn of easing inflation and last month’s blowout jobs figures, we don’t expect to hear anything less than hawkish from Mr. Powell. But it’s always possible that a word like ‘disinflation’ slips out of his mouth, and that we get a boost on risk.
US jobs
The US economy is expected to have added around 200’000 jobs, with the possibility of a negative surprise after last month’s above half a million read. Unemployment is seen steady around 3.4% – a more than 50-year low, while average earnings are seen going up from 3.4% to 3.7% over the year. Nothing encouraging for the Fed doves. But who cares?
RBA, BoC, BoJ
The Reserve Bank of Australia (RBA), the Bank of Canada (BoC) and the Bank of Japan (BoJ) will be announcing their latest policy verdicts this week and among them, only the RBA is expected to hike the rates by another 25bp despite last week’s surprise softening in latest inflation and growth numbers.
More than 40% of the companies in the ASX 200 posted negative earnings surprise last quarter, up from 28% a year ago. The latest figures from macro and micro fronts raise questions about how far the RBA could go in terms of rate hikes.
On the currency front, since the end of February, the AUDUSD slipped into the bearish consolidation zone, but the pair has been following the 100-DMA slightly to the upside, as the Chinese reopening sustains iron ore prices – except for today, of course, as China’s 5% growth target hasn’t been a boon for energy and commodity stocks.
China could still rescue the Aussie from falling further, but the Chinese winds could hardly reverse the negative trend in AUDUSD as the Fed-supported US dollar is certainly not done its positive push yet.
