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Mixed results - APAC brief 25 Jan

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Sentiment weaker; but ASX to rise: SPI Futures are indicating an 11-point gain at the outset for the ASX200 this morning. It's perhaps a surprising result, given overnight activity. The chorus of pundits calling an economic slowdown grew louder, backed up by weak data and some unfavourable headlines. The Australian Dollar is better reflecting the dynamic: it's fallen through the 0.7100 level to eye support at 0.7040. Perhaps the weaker A-Dollar is behind some of the expected lift in Aussie stocks – along with a trifle greater optimism for the fortunes of Aussie banks after NAB’s rate hike yesterday. Whatever way in which we start the day today though, it will occur within the context that pessimism about global increased just a little bit in the last 24 hours.

Australian employment: Australian employment data portrayed a mixed picture of the Australian labour market yesterday. The headlines were attractive. The unemployment rate fell to a very solid 5.0%, supported by jobs growth of 21k in the month of December. Digging deeper however, and the outlook is slightly less rosy. The fall in the unemployment rate was primarily due to a decline in the participation rate, and perhaps worse still, the data showed a -3k contraction in full time jobs. Nothing to panic about, by any means. But it does highlight a level of spare capacity in the economy, and further slack in the labour market. It suggests an economy still some way off meaningful wages growth and inflation for which the RBA is waiting.

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Australian Dollar and rates: Markets ran with the positive headline number, regardless of the fine print, happy enough with seeing a jobs market nominally at full employment. The Australian Dollar lifted, supported by an increase in Aussie bond yields, and a slight unwinding of rate cut bets by the RBA in 2019. It all proved rather short-lived however, following the announcement that NAB would be increasing its standard variable mortgage rate, in line with its Big 4 peers. The Aussie Dollar fell through feeble support at 0.7120 on this news, as traders factored in the likely negative consequences that higher rates will have on highly leveraged households, and therefore future domestic consumption.

Asian equity indices: The ASX responded positively to the NAB news however, with traders welcoming the implications for earnings growth in one of the market's mostly heavily weighted constituents. It was a positive day overall for the ASX200, which managed to add 0.4 per cent for the session to close at 5865. The modest upside developed within what was a rudderless day for Asian equities. China Bulls are attempting to squeeze as much from the optimism surrounding trade talks and new PBOC stimulus. While Japanese equity markets were controlled by the Bears for the day, after Japanese PMI numbers crept closer to the contractionary zone, as the trade war continues to bite Japan's export heavy-economy.

Global PMI data: It was a day for PMI Manufacturing figures across the global economy. Comparable data was released right across Asia, Europe and the US overnight. Though there were upside surprises, the data, which is considered a strong forward-looking indicator for global growth, was mostly disappointing. Indeed, the US and French number were better than forecast. But the big concern is the marked decrease – into contraction territory – of the German numbers, which apparently contributed significantly to a big miss in the overall European Manufacturing PMI figure. It supports the growing notion that Europe's economy, if not that of the rest of the world, is trending toward a downturn.

ECBs increasing dovishness: This fear (more-or-less) was explicitly enforced by European Central Bank President Mario Draghi last night, following that central bank’s monetary policy meeting. Markets were pricing in a very dovish Draghi, but the price action suggests that he may have “out-doved’ market participants expectations. He emphasized carefully that risks to the European economy have “moved to the downside”. The Euro tumbled below 1.13, breaking trend, and German Bunds rallied in response, with the yield on the 10 Year Bund dipping to 0.17 per cent. Rate hikes from the ECB have continued to be taken off the table now, falling to an implied probability of 25 per cent that the bank will hike at all this year.

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Wall Street’s mixed day: There's an hour left in trade for Wall Street and US stocks are heading for a mixed-to-slightly-lower session. The NASDAQ is up based on better than expected earnings from US chipmakers. But the sentiment was controlled by (misinterpreted) comments from Trump trade-war ambassador Wilbur Ross that the US and China are "miles and miles" away from a trade pact. The S&P is dancing with that crucial level again at 2630 - a developing pivot point between bullishness and bearishness. It's still a risk-off day, however. US Treasuries have caught a bid on haven appeal, and the US Dollar and Japanese Yen are up courtesy of the nervousness in the market. It's probably not a make or break day; just further confirmation that the recovery might be due for a pullback.

Written by Kyle Rodda - IG Australia

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