We have seen a rapid unwinding of some amazing trends which had emerged across different asset classes this week. It seems investors will continue to exercise caution in the near term until we get further clarity from the Fed at next week’s FOMC meeting. QE uncertainty along with the World Bank cutting its growth forecast for China to 7.7% (from 8.4%) saw Asia get off to a subdued start. As a result, it has been one-way traffic in Asia, with equities slumping further in a sell-off led by Japan. The Nikkei has declined over 5%, while China has also returned to trade on a negative note with the Shanghai Composite losing over 3%. Yen strength has been the order of the day, and USD/JPY has printed a low of ¥93.95, its lowest level since April 4.
With the BoJ not delivering any further stimulus at this week’s meeting, investors have been nervous about buying dips in USD/JPY. Yen strength generally has an adverse effect on Japanese equities and this is what’s dragging the Nikkei lower. We are likely to start hearing rhetoric from Japanese officials soon enough should the current selling frenzy continue. After all the hard work officials have put in, they are unlikely to just sit on their hands and watch it become undone.
Australia has seen some volatility today with local jobs numbers grabbing the headlines. The ASX 200 dropped as low as 4659, before recovering to 4700 as the banks came back to life. AUD/USD experienced some volatility on the back of the jobs numbers, but has since remained steady at around $0.946. The unemployment rate remains at 5.5% versus expectations of a mild rise to 5.6%. Full-time employment was down 5300, while part-time employment rose 6400. The participation rate fell slightly to 65.3%. The market seems to have been positioned for a disappointing reading, which would have driven rate cut expectations higher. As a result, this put a dampener on equities, while AUD/USD temporarily gained. Expectations for a rate cut were at 54% earlier in the week on the back of the China data, but have since dropped to 34%. This is lending the AUD some support today.
EUR/USD continued to edge higher as it now looks to establish itself above $1.33. The pair is trending higher in the near term, and has printed a high of 1.337 in Asia. The lack of an adverse result from Germany’s constitutional court ruling perhaps contributed towards the euros gains. We are currently calling European markets significantly weaker, with losses of around 1% expected at the open. The ECB’s monthly report will be released today and perhaps this might finally see some volatility in the single currency which has been steadily rising. US dollar weakness was the main theme overnight, as QE repricing remained in full swing. In the US we had the federal budget balance which showed a wider-than-expected deficit. Next week sees the June FOMC meeting, (the six month economic forum meeting in fact). This could finally be the trigger point for some stability in the markets. There is quite a bit of data to look out for in the US today, with retail sales and unemployment claims on the wires. Any signs of strength in the data will ramp up talk of tapering and support a USD/JPY recovery which would be welcomed by the market.
The ASX 200 finished 0.5% lower after having been down as much as 1.3% earlier. The cash index broke through the 200-day moving average yesterday at 4744 and looked set to erase all its gains for the year so far. We started off the year at 4649 and following the better-than-expected jobs numbers, headed to 4659, 10 points away from last year’s closing level. It really has been a case of up the stairs, down the elevator for the local market. Some of the consumer names lost significant ground after jobs data came in better than expected. Harvey Norman is nearly 3% lower and Myer has shed 1.8%. The resource names are actually leading the declines today, with BHP losing 2.5% and RIO 2%. Gold miners haven’t been able to benefit from the firmer gold price, with Newcrest down well over 3%. The big banks have bounced back strongly after a poor showing in the morning with CBA now up 1.3%, while Westpac was over 2% higher. Meanwhile Suncorp was down 1.6% despite selling its non-core loan book to Goldman Sachs for $1.6 billion. Analysts feel the move is positive as it reduces uncertainty around earnings outlook and its excess capital position. As a result, SUN might find some support once investors deal with the near term shock of the loss on sale.