South Korea Update: Look out Below

There is scope for further downside in South Korean equities. The long-term trend-line from 2012 lows in EWY was broken with a small downside gap around 55, which would imply a lower price projection around the 48 support zone.

The weekly EWY chart shows that bulls lost control near the 64 resistance area. The preceding bullish candle set-up discounted weakness on the macro level, which placed pressure on the Bank of Korea to ease policy measures. 

This thesis was short-lived, as expressed in my April 25 note on South Korea. The Chaikin Money Flow (a volume-related oscillator) turned positive around late May, which would have been a signal to buy EWY around 55 support and sell near 64 resistance.

Currently, the break lower in EWY appears oversold, as shown by the relative strength index (RSI). While this could signal near-term support around 48, a sustained counter-trend move is unlikely so long as decreasing momentum on the MACD remains. 

The Korean Won's recent decline against the Japanese Yen is also an important factor, which could strengthen support. However, a long-term downtrend remains for JPY/KRW, which keeps a bearish bias intact for EWY. 

Pressure to ease as South Korean shares advance

Slower global growth and declining inflation adds pressure on the Bank of Korea to cut interest rates. If the Korean Won depreciates due to lower rates, a boost to exports could follow, which will add further support for Korean equities.

South Korea has joined the Asian stock market rally. The top chart shows a bullish advance in the South Korea iShares ETF (EWY). A pull-back is likely, which could offer opportunity to build positions.

The recent move is supported by improving momentum as the MACD turned positive. The most recent positive inflection occurred near the 2013 bottom in EWY. The MACD histogram (blue bars) is more sensitive to price changes within the longer trend, thereby providing an early signal of an advance at the start of 2015.

The last panel offers confirmation from the Chaikin Money Flow (CMF), a volume-related oscillator. The CMF is a measure of buying pressure compared to the total volume over the past 21 days. The CMF recently turned above zero, indicating the potential start of an upward trend. Further confirmation of sustained momentum is needed if a pull-back (with declining volume) around the 66.00 resistance level nears.

For a technical view of South Korea's KOSPI index, read Nicole Elliott's 4/23 column in the South China Morning Post. Nicole identifies a potential breakout from major long-term resistance going back to 2007.

South Korea (a "closet developed-market country"), is not unique in its latest breakout. China, Japan, and Europe are trending higher on policy support. As investors cover their shorts, expect increased flows outside of the US. This will likely precede a pick up in global growth.

This should be a positive for emerging markets - a group that has evolved to track ex-US/Canada country performance (EAFE index). However, despite the recent counter-trend breakout in the emerging market ETF (EEM) relative to the S&P 500, more confirmation is needed given increasing signs of a pull-back along the long-term downtrend.

Given further confirmation in the months ahead, positive signals from international equities could imply a breakdown in the US Dollar and an advance in commodities -- all of which provide support for inflation.

Repost: What Abe wants, Abe gets. Japan's battle on the Yen

Updated from Jan. 2013: 

Aggressive measures by the BoJ and a staunch tone by PM Abe must continue to maintain pressure on the Yen. But is the recent rally enough? Japan's Economy Minister stated on Monday [Jan. 2013] that "the Yen has come to a good level....if it falls to a three-digit level it would boost import prices, weighing on the everyday life of the nation."

The market needs progress, not just rhetoric in order to play its part. PM Shinzo Abe is building up the pressure, and he has a history of speaking out about the Japanese economy, but has done little to actually show for it. Abe was elected as the 90th PM of Japan by a special session in 2006, but only served for less than a year. Perhaps now is his time to shine as he stood on a strong platform of pressuring the BoJ to tackle deflation by means of inflation with aggressive monetary stimulus and greater cooperation with the newly elected government. The monetary-fiscal cooperation interferes with the Bank's legal independence, but talks still continue amid the threat of a constitutional change to the BoJ's independence so long as the Bank abides by Abe's recommended 2% inflation target. 

So called 'Abeconomics' has a direct market effect, causing a bounce off 2012 September lows in USD/JPY to extend to its current rally. The market's reaction is welcomed as a softer Yen helps boost Japanese exports and paves the way for inflation. But will this inflation come with growth? Abe's [2013] $117bn stimulus is projected to boost GDP by about 2% while creating 600,000 jobs. Nomura estimates that the the stimulus will help deliver real annualized GDP growth of 3.5%; and with ongoing disaster recovery from the 2011 tsunami, we could see more government-led growth. Economists worry that this is a big gamble for a sustained recovery. Nikkei Business Daily cites the growing probability of large spending in rural regions and the government's ability to prioritize projects. This is why there is so much pressure on the monetary side. 

In comes Shirakawa, the current BoJ Governor. Shirakawa announced an additional $128bn as part of the Bank's monetary easing programs in the fall [2012]. Japan's total spent on asset-buying programs has now past the $1tn mark, which is quite excessive. Meanwhile, the Japanese economy is stuck in its fourth recession since 2000. Much of this downfall is due to a strong Yen which halts export growth. A sluggish global economy,  and the struggle to recoup from the 2011 tsunami disaster is added pressure on Japan. Nevertheless, the Japanese economy has continued its  constant debt buildup and fiscal woes for about 20 years now. At some point, this cannot be sustained. 

The market implications are clear. Further Yen weakness could continue so long as the BoJ abides by Abe's commands. The market needs to see progress on Abe's strategy in order for the Yen to weaken by theory. The USD/JPY shorts could pave the way for the April appointment of the next BoJ Gov, creating another profit opportunity in the pair. So far, Abe is meeting this week with monetary policy experts to begin the discussion on who will be the next BoJ Gov. Abe stated that he is looking for a "bold leader...someone who shares our views." [in comes Kuroda, current BoJ Gov.]

Challenges for Australia as China reforms point to slower growth

Despite recent signs of modest economic improvement, Australia is likely to remain on a tightrope for quite some time as the country’s mining boom slows down. Recent economic data from China shows strong improvement, but that could change as leaders are set to implement significant reform measures that could slow growth in the near-term. The market is well aware of the challenges ahead for Australia, and several important risk factors suggest that the Australian dollar is likely to remain subdued, especially as it struggles to sustain a rebound off summer lows.

China’s Third Plenum matters

A four-day, closed door meeting between China’s leaders to discuss the economic and political agenda for the next decade just concluded and expectations are high for significant reform. China must pave the way towards a market economy that will redirect credit away from inefficient state-owned-enterprises (SOEs) to much more efficient private enterprises. The new agenda should loosen the state’s control over capital allocation, which starts with reducing the limits on wealth transfers.

Continue reading at Saxo Bank's TradingFloor.com

Asia Focus: AUDUSD up on Australian CPI but pares gains in Asia

Australia's housing sector helped boost Q3 figures. Photo: Shutterstock

Australia’s third-quarter CPI report was impressive despite remaining subdued on the headline print at 2.2 percent on year from 2.4 percent in Q2, which is still at the lower range of the Reserve Bank of Australia’s target of two to three percent for annual inflation.

The market was expecting slower CPI in Q3, but the trimmed mean figure beat consensus at 2.3 percent on year. The Reserve Bank of Australia (RBA) places more weight on trimmed mean CPI, so the recent rise could sustain the RBA’s more favourable tone on the economy.

Furthermore, the Q3 Aussie CPI report showed a greater contribution from the housing group, which suggests that recent data are starting to reflect the low rate environment. The RBA is now watching the higher AUD. 

Also, top China banks tripled debt-write offs as investors fear default. The seven day repo rate rose 42 basis points in Asia which; lingering fears on banking -- China's weak-spot, was behind the sudden AUDJPY drop during the Asia session. Key China PMI data ahead on Thursday to watch for as well. 

Continue reading at Saxo Bank's TradingFloor.com

Trade Idea: Buy-the-dip opportunity in AUDUSD

US back in business, markets sell the fact

A bipartisan bill to reopen the US federal government and avert default passed in the Senate and House of Representatives and was ultimately signed by President Obama at the eleventh hour on Wednesday. US politicians repeat the same procedure year after year and the market priced in a last minute compromise as US equities advanced ahead of the initial Senate vote. However, USD declined as legislatures approved the bill — a classic “buy the rumour, sell the fact.”

Continue reading at Saxo Bank's TradingFloor.com

Aussie declines amid broad slowdown, but could stabilize

The recent slew of global PMI data suggests that business confidence is declining. The problem is not unique to Asia, and fears of a hard China landing are too premature to judge. The broad slowdown coupled with domestic concerns in Australia has placed significant weight on AUD. We could see some stabilization soon as we approach the second test of support in the AUD/USD pair, but expect some nail-biting below 0.9000.

June PMI figures shouldn't start a panic. Although China's HSBC manufacturing PMI continues to decline off  Dec-2012 highs, and move deeper into contraction territory, it does reflect the broader economic shift. Recent reports show a slight average improvement in China's service PMI's, but average manufacturing confidence is declining more strongly. Chinese data will disappoint amid the government's agenda for economic reform instead of short-term stimulus. With an inflated housing sector - as property companies now post larger losses - stimulus could further exacerbate the problem. Also the growth in credit is still ripe, with the recent spike in SHIBOR rattling the shadow banking sector. Thankfully conditions have calmed, and Chinese policy seems more structural and concerned for the long term. On the flip side, Australia is facing reality, especially with recent RBA comments shedding light on its economic vulnerability.

Australia ranked the lowest in service PMI output in June against other major countries, and the manufacturing side is not stellar. The recent moves in AUD/USD are very telling. Wednesday's batch of data sparked an early rise in the pair even amid weak Chinese PMI data, disappointing Aussie retail sales and housing prices were released. The focus was on the trade print which marked a May surplus to $670M, but the AUD rise was short lived. The pair continues its descent, struggling to recover from that significant drop off 0.9550 after the FOMC event last month. The first test of support around 0.9300 failed, and now we're below 0.9200 with a clear eye for the next test of support around 0.8500. At that point, we could see some stabilization as the pair becomes increasingly over-sold. But keep in mind that a strong rebound amid the macro strain is not likely. The market should get comfortable with these levels after the glory days of the AUD rise have now come to terms.

Even though the May trade print was good, showing a solid 4% gain in exports, comments from RBA Stevens supports a more dovish view. It's quite possible that the RBA had a rate cut on the table at the past meeting, which was longer than usual and had Steven's speaking out about the need for fiscal responsibility and assuring that the RBA would "cut rates further if necessary to support an economy transitioning from a mining boom." With that possibility, expect further weight on the pair. As weaker Chinese data lingers and the resource boom peaks at home, the RBA seems confident in the weaker AUD as sentiment fades. Moves below 0.9000 could make the board happy, but maintaining a dovish tone is needed to cap those moves.

Markets show focus on Fed after employment report

*May NFP: 175k vs 163k, downward revision by 12k for previous 2 months

*May Unemployment Rate: 7.6% vs 7.5% exp

Despite the US economy adding more jobs than expected for the month of May, the breakdown and trend are still meager. We're not out of the woods yet, and at this pace, the Fed is less likely to back down without significant labor market improvements.

There was not much excitement on the headline figures, but it does show that the trend in payrolls is broadly flat. The breakdown shows consistent gains in the service sector with low wage jobs capturing a larger share of the labor market. After looking at the employment reports from the past few months, the May report provides further proof that QE efforts are providing little help to boost employment. The Fed is clearly looking for significant improvement to break above trend in labor growth; unfortunately the monthly change in nonfarm payrolls is not enough to sustain a recovery. We will need to see consistent gains above the 200k level supported by wage growth and other economic improvements for the Fed to send a clear signal of optimism. Even so, the worry still remains that monetary stimulus has gone too far and perhaps we will need stronger fiscal policy to help speed up a recovery.

The markets believe that the Fed is less likely to ease off the pedal given recent data. FX markets were choppy with the USD given a modest boost with most pairs. Treasuries pared earlier gains as yeilds moved higher with the 10yr up 3 basis points to around 2.12% following the employment report. Yields have bounced off 1.60% support to show a firm rise for May as the bond sell-off leaves many in question. It's really all about the Fed at this point, and the summer FOMC meetings will be very important for any sway or persistence on the scale of asset purchases. Remember the weak ISM report sparked an initial safety run to treasuries, but the rise was short lived as the markets remain weary over an indecisive Fed. Stocks opened firmly in NY, giving a clear signal for the Fed to remain in action.

We still have a recovering housing market, but pay attention to 30yr mortgage rates nearing the 4% mark which could slow the recovery. Many investors are driving the demand for new homes, so the underlying picture of broader economic growth is still in question. Consumer spending is picking up, but we still have some fiscal problems looming with sequester cuts having a negative impact as well.

Canada - Hold your applause

The employment picture looks a lot better north of the border as Canada added 95k jobs in May, mostly full-time. Unemployment inched down to 7.1% with construction adding 43k jobs in May, marking a 5.8% rise y/y.

Although this is a stellar report, worries still remain about the housing bubble, especially given the rapid growth in construction jobs. Construction has been the main driver of these good headline prints, and we have to wonder about what this means for future supply of new homes as the demand side grows a little skeptic.

A report by the OECD labels Canada as the third most overvalued real estate market in the developed world - no surprise there. Look back at April 2013 building permits which shows that Canadian municipalities issuance was up by 10.5% from March due to higher construction intentions for multi-family dwellings. The total value of permits is now back above trend. Meanwhile, declines in institutional and industrial construction remain. Household debt and expenditures are troubling, yet there is more housing supply on tap. You can keep building, but home buyers are aware that prices are just too high to enter right now, and will eventually force that much needed correction in housing prices.

Rumble Down Under: Australia will soon face reality.

Raging bushfires ripped across southern Australia, soon matched with heavy rain and tornadoes. The extreme weather events of January were as heated as the political turmoil that will place the country on a shaky path full of uncertainty. Australian summers are always a bit wild, and its politics follow the same type of disorientation. The long campaign season leading up to the September election is likely to steer conversation away from critical economic matters for the sake of a popular agenda that is common on all sides of the political spectrum. Like the US, Australia will face long-term fiscal problems and will lack the right leadership necessary to grow an economy that's actually in a better condition than most. This has some near term market implications which will hopefully be a signal for responsible leadership.

 Political Uncertainty

The political turmoil began in the summer of 2010 when then Deputy PM Julia Gillard was elected unopposed as Prime Minister after the former PM Kevin Rudd lost the support of his party and resigned. Despite weathering the global economic storm of 2008 by avoiding a negative hit to GDP, Rudd's controversial policies regarding climate change and a mining tax were largely opposed by both opposition and members of his own Labor party. At this point, it was assumed that Gillard's administration was better able to correct those unpopular moves and get the job done. In the words of her right hand man Treasury Secretary Wayne Swan: returning to a budget surplus will be done "come hell or high water."

The Labor party is riddled with failed promises after implementing a complex mining tax and a continuous budget deficit. Much of this has been blamed on the high value of the Aussie dollar and external pressures on commodity prices which weighs on mining activity. Tax revenue is on the decline, but there has been little effort to get a handle on spending. PM Gillard has called an election for September 14th in order to allow more time for a healthy political debate. In what will mark the longest campaign session in Australian history, this leads many to believe that the real reason is for the Gillard administration to show economic proof in hopes of a better turnaround. While no one expects a budget surplus in time for the election, there are some hopes for a pick-up in economic activity abroad during the latter part of this year which can have a positive effect on Australian output. So far, voters are not buying it.

As the Labor party looks more unstable, polls are showing a greater preference for the current opposition leader Tony Abbott. The polls are a blow to Gillard and shows that there is a growing mistrust for the Labor party on key issues such as the mining tax, immigration policy, and the economy. Rudd is more popular than Gillard, and there is some speculation that he might be drafted to lead the party despite his expressed lack of interest to do so. Throughout all of this political turmoil, the market response has been largely muted; guidance has been provided from a mix of risk appetite and the slump in commodity prices. However, the market is not quick to lay its hand off the economic pulse.

Economic Risk

It's clear that Labor hasn't held up to its promise. The Australian economy is largely held up thanks to the limited downside during the 2008 crisis under Rudd's leadership. Housing prices are still high and haven't seen a significant correction yet. Structural issues are evident and unemployment is still elevated for the nation.

The more pressing issue that will likely stem out for a long time is the looming budget crisis. Treasury Secretary Swan revealed a collapse in tax revenues of nearly $4bn mainly due to a slowdown in mining activity. Swan stated that the government will need to raise revenue and cut expenses, but spending cuts are essentially part of an austerity agenda. "Delivering another deficit is driven by Gillard government's core values about jobs or working Australians" said Swan. The RBA has already taken measures to offset future austerity measures by cutting its official cash rate.

Hopes for a pick-up in mining activity are complicated. The latest mega-project Origin Energy's Australia Pacific LNG project amounts to a whopping $2bn development budget while also freeing up expenses by slashing 850 jobs. The fact of the matter is that costs are building up and there is a capital strike. Similar to the US, Australian shareholders are demanding dividend income. Shell's plans are on hold for its Gorgon LNG project in hopes of getting a hold on higher capex expectations. A Dec FT article warns:

"If these issues are not addressed then new investment in Australia’s LNG industry could dry up in 2017, warn industry executives and analysts, and new suppliers based in Canada, east Africa and the US will move to capture a lucrative prize: 90m tonnes of annual uncontracted Asian LNG demand. 

Australia is poised to overtake Qatar as the world’s biggest LNG exporter as seven colossal projects reach full capacity over the next five years. But the industry is also facing serious headwinds as a consequence of its rapid growth. A second wave of developments and project extensions, worth an estimated A$150bn, is at risk from rising labour costs, infrastructure bottlenecks and the strong Australian dollar." 

Tony Abbott has a plan to boost productivity by way of a major infrastructure-spending boom if elected in September. This is not the way to go as the government will just break even with a return through tax revenue. It will just swell the deficit to another low level with no long term objective of fostering sustainable business activity. But Gillard has no star plan of her own and will likely keep some form of the mining tax with no efforts to offset lower revenue with spending cuts. Australia cannot continue to rely on the sways of its offshore trading partners to dictate economic conditions at home.

The economy is still relatively stable despite these looming fiscal troubles. The recent lift in consumer sentiment could indicate more breathing room for the RBA. The rise in share prices is also welcomed. However, lower commodity prices and concern that risk taking has gotten too far could stall significant  growth. Consumers are still cautious about taking on more debt despite the pick-up in household wealth. Consumer spending and unemployment expectations have leveled out. Australian households are cautious about job prospects which is keeping the consumer on the sidelines - and businesses are taking note as well by holding onto cash.

More room for an Aussie decline, but expect a bumpy road

AUD/USD is trading along a declining channel, with a recent slump attributed to a Reuters report on chatter in global markets that a hedge fund had been liquidating positions in commodities. RBA members have also expressed concern about the effects of a high AUD. These concerns were actually brought up at the start of this year when AUD/USD traded around 1.0590, and has since declined off those levels. Concerns about an overvalued currency are also seen in New Zealand where RBNZ Gov Wheeler stated that the NZD is still too high and that the RBNZ is ready to intervene if necessary despite some signs of a stronger than expected economic rebound.

The recent decline in AUD/USD is also correlated to lower risk appetite following the latest FOMC Minutes which suggests some unease among Fed members about a scale-back in asset purchases.

Moments ago, AUD/USD was given a boost after RBA Gov Stevens expressed confidence in the current level of interest rates. He went on to state that the high AUD/USD was weighing on the economy which inspired the previous rate cuts. However, Stevens did reiterate that rate cuts are more likely than increases. The recent lift in AUD/USD might be the result of over reaction from the markets given the lower outlook by the RBA. The central bank lowered its growth and inflation forecasts and pointed to concerns that mining investment could reach a crest this year. Lower hiring demand from resource companies could also lead to a softer labor market. Additionally, the strength of the Aussie is being watched for indications of higher inflation.

The lengthy political debate and fiscal issues deserve great attention. Investors should keep an eye on Australia especially given the recent evidence of declining money flows. FT Alphaville published an insightful article which cites data from the Japanese Ministry of Finance showing that Japanese investors were selling Aussie assets at an increasing rate. Japan holds about 20% of Australia's national sovereign debt, according to FT.

What Abe wants, Abe gets? Japan's battle on the Yen.

I cringe every time I read a headline from Japan. Rounds of stimulus borrowing and spending is a big gamble for an economy that's not structurally sound, and the well orchestrated softening of the Yen is overstretched and looks ripe for some good profit taking. This means that aggressive measures by the BoJ and a staunch tone by newly elected PM Abe must continue to maintain the pressure on the Yen. But is the recent rally enough? Japan's Economy Minister stated on Monday that "the Yen has come to a good level....if it falls to a three-digit level it would boost import prices, weighing on the everyday life of the nation."

The market needs progress, not just rhetoric in order to play its part; and this could continue to play on with the coming BoJ meeting in about two weeks. PM Shinzo Abe is building up the pressure, and he has a history of speaking out about the Japanese economy, but has done little to actually show for it. Abe was elected as the 90th PM of Japan by a special session in 2006, but only served for less than a year. Perhaps now is his time to shine as he stood on a strong platform of pressuring the BoJ to tackle deflation by means of inflation with aggressive monetary stimulus and greater cooperation with the newly elected government. The monetary-fiscal cooperation interferes with the Bank's legal independence, but talks still continue amid the threat of a constitutional change to the BoJ's independence so long as the Bank abides by Abe's recommended 2% inflation target. 

So called 'Abeconomics' has a direct market effect, causing a bounce off 2012 September lows in USD/JPY to extend to its current rally. The market's reaction is welcomed as a softer Yen helps boost Japanese exports and paves the way for inflation. But will this inflation come with growth? Abe's latest $117bn stimulus is projected to boost GDP by about 2% while creating 600,000 jobs. Nomura estimates that the the stimulus will help deliver real annualized GDP growth of 3.5%; and with ongoing disaster recovery from the 2011 tsunami, we could see more government-led growth. Of course, the way to do this is through private sector growth accompanied by a sound economic structure. More supply growth by way of stimulus could face the consequence of left out demand which would do little to boost prices. Economists worry that this is a big gamble for a sustained recovery. Nikkei Business Daily cites the growing probability of large spending in rural regions and the government's ability to prioritize projects. This is why there is so much pressure on the monetary side. 

In comes Shirakawa, the current BoJ Governor. Shirakawa announced an additional $128bn as part of the Bank's monetary easing programs in the fall. Japan's total spent on asset-buying programs has now past the $1tn mark, which is quite excessive. Meanwhile, the Japanese economy is stuck in its fourth recession since 2000. Much of this downfall is due to a strong Yen which halts export growth, the sluggish global economy,  and the struggle to recoup from the 2011 tsunami disaster. Even still, the Japanese economy has continued its  constant debt buildup and fiscal woes for about 20 years now. At some point, this cannot be sustained. 

The market implications are tricky. USD/JPY has soared enough, but not yet touching that 90 mark. Abe would like to see more JPY weakness to aid in his aggressive growth strategy. However, with USD/JPY shorts back in the game, we could see some profit taking. Over the past two weeks, the USD/JPY breather has extended for longer time-frames, but has always returned with a rise to continue the the upward trend. This could indicate some positioning as traders decrease exposure to the pair ahead of a correction or just pure uncertainty. Further Yen weakness could continue so long as the BoJ abides by Abe's commands in its coming meeting. The market needs to see progress on Abe's strategy in order for the Yen to weaken by theory. Remember that Shirakawa's term as BoJ Gov is up in April, so there is the possibility for this to continue, albeit at a softer tone (assuming no sharp correction). The USD/JPY shorts could pave the way for the April appointment of the next BoJ Gov, creating another profit opportunity in the pair. So far, Abe is meeting this week with monetary policy experts to begin the discussion on who will be the next BoJ Gov. Abe stated that he is looking for a "bold leader...someone who shares our views." 

US following in Japan's footsteps? Further reading:

Charts: US debt following Japan's trajectory

Japan's debt ceiling showdown