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Ugly Start In Asia

Published 11/08/2017, 09:36 am
Updated 19/05/2020, 06:45 pm

Originally published by IG Markets

It's shaping up for a rather ugly start in Asia, with the S&P/ASX 200 eyeing an open below the 5700 level, while the Nikkei 225 is clearly going to build on yesterday’s losses, with an open closer to 19,400 and around 1.6% lower.

Korean assets, such as the won and KOSPI are also in focus and it’s hard to see buyers here, but if we do it could be somewhat of a leading indicator and provide stability for other markets – a big ‘if’ under the circumstances.

China should also join the negative in with a close to the trading week, and once again we should find the H-shares and Hang Seng in Hong Kong underperforming and it’s amazing to think that mainland China has been labelled a “safe-haven”, with strategists pointing to strong relative currency, stable economy and elevated ‘real’ bond yields. A focus will also be on the CNY fixing this morning, where see another stronger day for the CNY.

SPI futures were trading close to 5700 when the S&P/ASX 200 officially closed, so if we use this as our guide we can see the Aussie futures index trading some 67 points or 1.2% lower. It’s not a great day if you are reporting earnings numbers, such as Rea Group (AX:REA) or providing a trading update such as National Australia Bank (AX:NAB), as its times like this when macro absolutely dominates bottom-up issues. Although that said, NAB's update will obviously certainly garner attention from shareholders and investors. As I write, futures are trading close to the lows of the session (5629), which is never a great sign and suggests that the bid in the ASX 200 could somewhat on the light side. With such uncertainty why buy today, when there is still weekend news and a heightened risk of a gap lower in SPI and S&P futures on Monday?

If we look at the period between 02:40 AEST and 04:30 AEST some stability was seen and even brave buyers stepped in, but as soon as Donald Trump came out speaking in New Jersey, insisting that his “fire and fury” statement, “maybe wasn’t tough enough”, then risk turn lower again. There is a rhetorical war between the two nations and traders (as are most human beings) are nervous. So why buy risk asset as (such as equities or credit) when the thematic at hand isn’t going to resolve itself in the immediate short-term?

If we look around the markets we can see US small caps have unperformed (the Russell closed -1.8%), credit spreads have widened and the US 10-year treasury sitting at 2.20% and below what has been strong support at 2.21%. US ‘Real’ yields have continued to move lower across the curve and of course, this means a good bid in gold and the 6 June highs of $1295 are in the bull’s sights here, where a closing break would be unassailably bullish.

Gold is eyeing a bullish weekly reversal (i.e. price traded below last week’s low and looks destined to close above the high), and the weekly chart, as always, provides great perspective. We can also see strong demand and short covering of the ‘funding’ currencies, with yen the star of the show. NZD/JPY, CAD/JPY, EUR/JPY, GBP/JPY and AUD/JPY all look vulnerable here as the buyers are standing aside and this is arguably the best time to be short, so pick the weakest currency, which I would say is the Canadian dollar or New Zealand dollar and keep selling here.

USD/JPY has been well traded, with the exchange rate just not finding any buyers and eyeing a move into ¥109 and then ¥108.82 (the June low). This pair has to be on the radar over the next 24 hours, notably with US core CPI due at 22:30 aest and recall this data point has missed expectations in each of the last four reads. US producer price inflation (PPI) came in at -0.1% month-on-month, with the annualised rate at 1.8%. Both were well below consensus and give us no hope that consumer price inflation (CPI) is going to materially beat expectations, despite obviously looking at different inputs.

A number below 1.7% on core inflation and the market will likely lower the probability of a hike from the Fed this year down to 20-30% and will be a clear US dollar negative. That being said, a core CPI print above 1.9% could be very interesting indeed, but the trade here would to be short EUR/USD, NZD/USD or GBP/USD, as clearly being long CHF or JPY is tough in this geopolitical backdrop.

Of course, there has been an intent focus on both US crude and the CBOE Volatility Index. US crude has printed a bearish outside day reversal, with price briefly trading above $50 and closing at $48.55 (-2%) and naturally weighing on the S&P 500 energy sector down. If your preference is ETF’s (Exchange-Traded Funds), put the Energy Select Sector SPDR (NYSE:XLE) ETF on the radar as this looks ripe for a test of the July low of $63.30.

Follow through selling in today’s session and oil could be headed into the lower levels of $40. Certainly, moves in S&P 500 implied volatility have been the talk on the floors, with the VIX trading up a lazy 43% to 15.94%. As many have understood, global trend following systematic funds (called Commodity Trading Advisors or CTA’s) and risk parity funds have been max short volatility structures and we’ve seen speculative funds holding the largest ever net short position (-158,000 contracts as of last Tuesday) in VIX futures and that level of positioning has obviously been at play here. Either way, it feels like market measures of volatility can push higher here and this is just so important, not just for tactical asset allocation, but for position sizing and managing the risk in the portfolio.

Iron ore futures have held in fairly well, so this may lend some support to the iron ore plays today, but it seems logical that equity will likely be shunned all around unless in a really defensive name or gold a stock. Australian dollar sensitive stocks will find some relief that the AUD/USD rate hasn’t found any bids in this market and maintain a sub-79 level, although they will be open lower. Volatility has kicked in again, which is nice to see the market with a pulse even if the backdrop is a very concerning one.

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